Executive Briefing

SOX cost pressures ease; take time to listen to employees; linking CEO pay to performance works; more.

Jan 1, 2007

HR Magazine, January 2007 CEOs Emphasize Listening To Employees

Listening effectively to employees can easily become a “lost art,” according to two top executives who took over the reins at Fortune 500 companies.

Neville Isdell says that when he became chairman and CEO of the Coca Cola Co. in 2004, he visited 16 countries in his first four months to talk to customers and employees. “I have a fundamental belief that the people in the business know what’s wrong. And senior management takes a long time to discover these things, but if you go down deeply enough, the people at the bottom know. And the strategy that we developed came from within the business, from within the thoughts and concerns and genuine criticism—some of it rough—of the people in the business.”

Isdell made his comments during a recent taping of the PBS television series “CEO Exchange,” sponsored by the Society for Human Resource Management.

Listening is “one of those things that is easy to talk about, difficult to do,” agrees Xerox Corp. Chairman and CEO Anne Mulcahy, another executive interviewed on the show. “I’m talking about listening in a way that actually treasures and absorbs criticism and makes a point of getting honest feedback, which is painful and tough to get when you’re at the top. People kind of want to please, so it takes an extra effort to do it.”

Especially in companies that have “long successful histories, listening can become a lost art,” Mulcahy says. “You kind of just get comfortable with what you know and arrogant about your ability to be successful, so you appear to be listening, but you’re not actually responding and absorbing what you’re hearing in a way that changes the course or direction that you use to make decisions.”

Slashing SOX Costs Faster

Companies wrestling with the high cost of Sarbanes-Oxley (SOX) compliance are seeing welcome financial relief. And the best companies are seeing the biggest cost reductions.

While SOX compliance requirements initially caused a dramatic upward spiral in the costs of running finance departments, those cost pressures eased in 2004 and 2005, according to a report by The Hackett Group, a global consulting firm.

During that time, “typical” companies reduced such costs by 3 percent and “world-class” organizations did even better, slashing costs by 8 percent during the same period, according to the report. (Hackett surveyed 500 companies with median revenues between $3 billion and $4 billion.)

In general, “world-class” companies spent roughly half as much on finance operations as typical companies—0.67 percent of revenue, vs. 1.22 percent of revenue. World-class companies also used fewer staff members in finance departments—about 56 percent less than typical businesses.

Hackett’s chief research officer, Richard T. Roth, says typical companies are “just beginning to recover from the compliance efforts which consumed much of their attention over the past two years,” but world-class organizations are improving faster.

How do they do it? The report found that world-class organizations commonly employ these five factors:

Complexity reduction. They streamline compliance processes and reduce complexity in other legal areas. Their budgets have 33 percent fewer line items, and they focus on “beating the competition” rather than “beating the budget.”

Strategic alignment. They emphasize the link between financial and strategic planning activities and the company’s day-to-day business operations.

Technology enablement. They use technology to automate transactional activities and drive down costs and staffing levels, while also improving access to information. They are more than twice as likely to have the capability to access reports online.

Business process outsourcing. They spend less on outsourcing than typical companies, and practice “selective outsourcing” as needed.

Cross-functional partnering. They are much more successful than other companies at establishing an effective cross-functional approach in areas such as planning and performance management.

Pay for Performance Is Working, Says New Study

There is a direct link between CEO pay and company performance, concludes a new Watson Wyatt study. The compensation consulting firm reports that executives at so-called “financially high-performing” companies are better compensated than their counterparts at underperforming companies, suggesting that the executive pay-for-performance model is working.

According to the study, CEOs at high-performing companies have significantly higher “realizable” pay from sources such as long-term incentive (LTI) awards. Realizable pay calculates the current value of outstanding LTI awards (typically, in-the-money stock options and performance share payouts) granted over a specific time frame (in this case, between 2003 and 2005) using the ending stock price.

The study found that the median realizable LTI for CEOs at higher-performing companies during the 2003 to 2005 period was $4.4 million, compared with just $1.5 million for CEOs at lower-performing companies. And shareholders at high-performing companies realized a median return of 32.3 percent, while shareholders at low performers received just 9.8 percent.

Watson Wyatt contrasts the concept of realizable pay with the more traditional method of analysis, which calculates pay “opportunity” based on the so-called Black-Scholes price assigned to LTIs on the grant date.

Bill Coleman, chief compensation officer at Salary.com, a compensation software and data firm, agrees that the Black-Scholes method is flawed as a measure of CEO performance. “If a company measures its performance based on return to shareholders, however, paying your CEO primarily with stock-based vehicles will align CEO pay with performance. When shareholder return goes up, CEO pay goes up; when shareholder return goes down, CEO pay goes down.”

Coleman continues, “Perhaps the more interesting fact is that Watson Wyatt created this concept of realizable pay, which should reinvigorate the conversation as to the best way to calculate CEO compensation. I think they’re on to something.”

Paul Dorf, managing director of the consulting firm Compensation Resources Inc. and an expert in executive compensation issues, says Watson Wyatt’s premise is “one that we would all like to believe is the definitive proof” of cause and effect. While he remains unconvinced that all questions have been answered on the complex topic of pay for performance, he says it’s a “noteworthy concept and I’m glad to have it brought to the public’s attention.”

Top Execs Work with Corporate Boards on Ethics Programs

As ethics training becomes standard practice at more and more companies, active oversight of companies’ ethics and compliance programs by corporate boards has also become virtually universal, jumping from 21 percent in 1987 to 96 percent in 2005, according to a survey of 225 companies by The Conference Board and Corpedia.

“With the growing participation of boards in ethics, it is most likely that more high-level executives are responsible for these programs,” says Ron Berenbeim, primary researcher and author of Universal Conduct: An Ethics and Compliance Benchmarking Survey. Berenbeim is director of The Conference Board Working Group on Global Business Ethics and Principles.

While the chief ethics officer or chief compliance officer usually is responsible for developing ethics programs, Berenbeim expects that in the coming year the head of human resources also will be increasingly involved. Although not documented in the current survey, he notes that a soon-to-be-released Conference Board report has found that HR is growing significantly more involved in the implementation of ethics programs at nearly half the responding companies.

Berenbeim finds the increased participation of top executives “encouraging, because ethics and compliance issues are becoming increasingly important to the welfare of global companies.” He says these programs offer the best means of “ensuring behavioral uniformity” across the range of countries where a company does business.

The current report, which was released by The Conference Board late last year, also notes that a code of conduct is standard practice at most companies today. Nearly two-thirds of survey respondents train more than 90 percent of their workforce in the company’s code of conduct, and 92 percent provide ethics training of some kind. In 1987, only 44 percent of companies reported having an ethics training program.

Other components of effective ethics programs, according to the report, include an anonymous employee hotline for reporting misconduct (91 percent of surveyed companies have one) and a risk assessment program (70 percent).


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