Wall Street Is Waking Up! Shareholders Send a Message

It’s being called historic. For the first time, shareholders stood up and spoke their mind, or rather cast their vote against the pay packages granted to Citigroup’s top executives. What is most significant is that the reason for the “nay” vote was simply they didn’t earn it.

For the past decade, Citigroup has ranked among the highest in compensation for top executives, yet its performance has been ranked one of the worst among the big banks, lest we forget the government bailout of Citigroup and others in 2008. The amount of the pay is not as much an issue as the fact that it is poorly correlated with the performance of the organization.

Executive pay has been and will continue to be the focus of much debate in business unless organizations understand what they are truly reinforcing. Citigroup, big banks and most organizations waste more time and money on the way in which employees (and more specifically executives) are compensated. And, while much of traditional American businesses pay structures include bonuses and creative incentive packages, if they aren’t tied to specific performance metrics, and how they perform against those metrics, bonuses will continue to be nothing more than “a gimme.”

Even if you read my earlier blog post, “Santa Says Year-End Bonuses Aren’t for Everyone,” it bears repeating:

Because money does shape behavior for good or ill, much care should be given to the requirements necessary to earn it. I emphasize the word earn because that should be primary in the decision to award someone a bonus. If bonuses are truly earned by above-and-beyond contributions to the mission, vision and values of the enterprise, it will be a good investment. Employees will work harder and smarter and enjoy the place where they do it.

If organizations establish pay systems that allow for a disconnect between pay and performance, then employees (from the top down) and the companies are less likely to realize their potential.  Bonuses are loosely contingent on performance, and as such, when bonuses are not earned they typically will not strengthen productive behavior.

Whether it’s because “that’s the way we’ve always done it” or management holds the belief that bonuses increase loyalty and performance, my bet is that very few organizations pay out bonuses that are truly earned! A company where employees know what their accomplishments are on a monthly basis and are compensated for the accomplishments and the behaviors used to achieve them is clearly more superior, efficient and effective than those that don’t.  An additional benefit is that they most likely will avoid ugly stockholder meetings like Citigroup.