In all areas of life, incentives work really well. They’re easy to understand—if I do this, I will get that—and they focus people on a specific outcome. We start young—eat your vegetables and you’ll get dessert—and we continue to respond to incentives all our lives.
In business, incentives are incredibly successful. Do we want our employees to do something well? Make it a requirement of getting a raise. Do we want our executives to accomplish something specific? Put it in their bonus plans.
And because incentives are so successful, we must create them carefully. It’s highly likely the thing we are trying to accomplish will be done to the letter, so we must make sure it’s exactly what we want.
If you have a shop and you want it to be neat when customers come in, it may be tempting to set a goal for employees to spend a certain portion of their shift cleaning. But if employees are so focused on keeping the store tidy, they neglect customers who need help, shoppers won’t be back. Your team achieved the goal you set, but that’s not really what you wanted.
Possibly the most important incentives in business are those created for CEOs and other executives. Like any incentive, executive bonuses are highly effective, and they don’t just guide the leadership team. For executives to achieve their goals, the entire company, top to bottom, must work toward them too. The executive bonus plan becomes a roadmap for everyone.
Where to Draw the Line
For decades, increasing short term shareholder value has been the primary goal for most CEOs. Their bonus depends on it, and that bonus usually includes stock, so the CEO is highly motivated to increase the share price.
But does the board really want the stock price to increase at any cost? Or does the board want leadership to live up to other values as well? Where is the line?
In the quest to increase shareholder value, is it OK to break the law? Ruin the environment? Endanger employees’ health?
Is it OK to pay off detractors, hide transgressions with nondisclosure agreements, lie to Congress?
Is it OK to keep wages so low the government must step in with food stamps and other assistance? Is it OK to avoid taxes so others are left to fund the public infrastructure that makes the business possible?
As you read this, it’s not hard to think of a real-world example of each, is it?
No board would overtly encourage any of this behavior, but don’t we tacitly endorse it when we reward one kind of result without setting conditions for achieving it?
The Negative Space
Like an artist who thinks as much about the negative spaces in their paintings as they do about the subject, what if we thought carefully about the things we aren’t rewarding through incentive plans? What if we made a list titled “Accomplishments for Which the Board of Directors Will Not Reward Executives?” That list might include diversity and inclusion, governance, environmental responsibility, creating engaging workplaces, treating employees with respect and dignity—things we want to see our companies accomplish in addition to increased valuation.
We may have policies regarding these things but by excluding them from the incentive plan, we’re saying they are not as important as stock price. Is that what we mean to say? Aren’t we sending a mixed message when we say we care about these issues but will only reward financial performance?
Seeing our negative spaces in that light might be uncomfortable, but it’s the way executives will see it. As long as incentive plans focus only on one thing, there’s no question where the executive team will focus, and—should things not go well in other areas—where they will try to talk their way out of difficulty.
In 2019, Business Roundtable foresaw a need for corporations to change their priorities, to take on some of the responsibilities formerly left to government and to broaden the focus of the executive team to include social responsibility and employee development.
The Business Roundtable announcement included this from Jamie Dimon, CEO of JPMorgan Chase, “The American dream is alive, but fraying. Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term.”
Two years later, we’re in the midst of changes we don’t fully understand. Employees emerging from the pandemic seem to be newly empowered and may have new priorities. They may leave a company because of low pay, but they may also leave because they are dissatisfied with the quality of their managers or the behavior of their companies. We must be nimble and prepared to adapt to changes in our workforces and our customers. Carefully crafted incentive plans that reward executives for improvements in workplace culture, social responsibility and other goals are the most effective way to accomplish that.
Changes for the Board
Changes are coming to the boardroom as well. Some investors are starting to hold executives accountable for more than profits. Notably, those investors are called “activist investors,” not “responsible investors,” or “concerned investors,” but nonetheless, they are making themselves heard. Recently, shareholders have convinced Apple to include environmental, social and governance goals in their executive bonus plan, and an investor secured two Exxon board seats by promoting a climate agenda, so change may come there too.
“For better or worse, this year the world is a lot different than it was last proxy season,” executive compensation consultant Jannice Koors told CNBC earlier this year. “Diversity, equity and inclusion is taking up a lot more bandwidth in boardrooms.”
But it shouldn’t take activism for boards to decide what kind of companies they want to create and the role those companies play in society, then use executive incentives to get it done.
And it will work. It will change behavior, priorities and even company culture. Because like all of us, executives will eat as many vegetables as necessary to get their dessert.
James Monroe is author of Don’t Be a Jerk Manager.