There are three things I do not like about top management pay: 1) they usually get paid too much, 2) way too large a part is flexible, performance-related pay, 3) often, a very sizeable chunk of it is paid through stock options.
I used to think - naively - that high top management pay was high simply due to supply and demand: these smart people with lots of business acumen and experience are hard to come by; therefore you have to pay them lots. These grumpy anti-corporates claiming their pay is too high are just envious and naive. Turns out I was (maybe not envious, but certainly naive).
Pay level
Because digging into the rigorous research on the topic - and there is quite a bit of it - I learned that there is really not much of a relationship between firm performance and top management pay. These guys (mostly guys) get paid a lot whether or not their company's performance is any good. Moreover, I learned what sort of factors push up top managers' remuneration - and it ain't supply and demand. It has much more to do with selecting the right company directors (to serve on your remumeration committee) and making sure you are well networked and socialized into the business elite.* Now I have to conclude: top management pay is generally too high, and quite a bit too high.
Flexible pay
Secondly: where does this absurd idea come from that 80+ percent of these guys' remuneration has to be performance related?! "To reward them for good performance and stimulate them to act in the best interest of the company and its shareholders" you might say? To which I would reply "oh, come on!?" If your CEO is the type of guy who needs 90 percent performance-related pay or otherwise he won't act in the best interest of the company, I would say the perfect time to get rid of him is yesterday. You and I do not need 90 percent performance related pay to do our best, do we? So why would it be allowed to hold for top managers? As Henry Mintzberg put it: "Real leaders don't take bonuses".
Moreover, one should only pay performance-related remuneration if you can actually measure the person's performance. And that is - especially for top managers - actually pretty darn hard to do. The strategic decisions one takes this year will often only be felt 5 or 10 years from now, if not longer. Moreover, the performance of the company - which we always take to proxy the CEO's performance - is influenced by a whole bunch of other things; many not under a CEO's control. Hence, short term financial performance figures are a terrible indicator of a top manager's performance in the job and long-term performance contracts all but impossible to specify. If you can't reliably measure performance, don't have performance-related pay, and certainly not 80+ percent of it. We know from ample research that humans start manipulating their performance when you tie their remuneration to some strange metric and, guess what, CEOs are pretty human (at least in that respect); they do too.
Options
Finally: stock options... Once again, I have to say "oh, come on...". We pretty much take for granted that we pay top managers by awarding them options, but don't quite realize any more why. When I ask this question to my students or the executives in my lecture room ("why do we actually pay them in options...?") usually a stunned silence follows after which someone mumbles "because they are cheap to hand out...?". I usually try to remain polite after such an answer but why would they be cheap; cheaper than cash, or shares for that matter? True, it does not cost you anything out of pocket if you give them an option to buy shares for say 100 one year from now, while your present share price is 90, but if the share price by that time is 150 it does cost you 50. Moreover, you could have sold that stock option to someone who would have happily paid you good money for it, so in terms of opportunity costs it is realy money too. No, stock options are not cheaper than cash, shares, or whatever.
We give them options to stimulate them to take more risk. "Risk?! We want them to take more risk?!" thou might think. Yes, that's what you are doing if you give them options. If the share price is 150 at the time the option expires, the CEO can buy the shares at 100 and thus make 50. However, if the share price is 90 the option is worthless, and the CEO does not make anything. However, the trick is that the CEO then does not care whether the share price is 90 or, say, 50 - in either case he does not make any money; worthless is worthless. As a consequence, when his options (i.e. the right to buy shares at 100) are about to expire and the company's share price is still 90, he has a great incentive to quickly take a massive amount of risk. Going to a roulette table would already be a rational to do.
Because if you placed the company's capital on red, and the ball hits red, share price may jump from 90 to 130, and suddenly your options are worth a lot of money (130-100 to be precise). However, if your bet fails, the ball hits black and you lose a ton of money, who cares; the share price may fall from 90 to 50, but your options were worthless anyway. Hence, options give a top manager the upside risk, as we say, but do not give them the downside risk. Therefore, we incentivize them to take risk. You might think "I seldom see herds of CEOs in a casino by the time options expire, so this grumpy Vermeulen guy must be exaggerating" but I'd reply we have seen quite a lot of casino-type strategy in various businesses lately (e.g. banks). More importantly, we know from research that CEOs do take excessive risk due to stock options (see for instance Sanders and Hambrick, 2007; Zhang e.a. 2008). I think it would be naive to think that we give CEOs 90 percent performance related pay and most of it in stock options, and then think that they will not start acting in the way the remuneration system stimulates them to do. Of course it influences their decisions, and if it didn't, there would be no reason left to make their pay flexible and based on options, now would there?
Therefore, I would say, out with the performance-related pay for top managers (a good bottle of wine at Christmas and, if you insist, a small cheque like the rest of us would do). And while we're at it, let's try to reduce the level as well.
* e.g. O�Reilly, Main, and Crystal, 1988; Porac, Wade, and Pollock, 1999; Westphal and Zajac, 1995.
Commentary on popular culture and society, from a (mostly) psychological perspective
Conservatives: Don't Play into Alinsky's Hands
Make the enemy live up to their own book of rules. You can kill them with this...
Saul Alinsky, Rules for Radicals
I read with disappointment Andrew Klavan's post over at PJ Media entitled "Why We Should Be Unfair to Herman Cain" in which he explains that it is the right, not the left who must be fair:
And yes, it’s unfair. But there’s a reason it’s unfair—a reason it should be unfair. There’s a reason we right wingers vet our candidates while the left adulates theirs, a reason we condemn our miscreants while the left elevates theirs, a reason our news outlets cover stories that the left covers up.
The reason is: we’re the good guys. We have to do what’s right. The left doesn’t. Sorry, but that’s the way it works. It’s the price you pay for defending what’s true and good, the price of holding yourself to a high moral standard. Our politicians have to be better than their politicians. Our journalists have to be more honest. Even our protesters have to behave with decorum and decency—and still suffer being slandered—while theirs can act like animals and commit acts of violence and lawlessness and spew anti-semitic filth and still find themselves excused and glorified...
Herman Cain is going to have to run the gauntlet, not just of a racist and dishonest left that wants to destroy him but of a fair-minded and decency-loving right that wants him to come fully clean and let the voters decide how we should proceed. The fight for truth, liberty and morality requires sacrifice and self-examination. The self-righteous quest for power over others does not.
The world is just as unfair as you think it is. You’ll never catch the devil hanging on a cross.
Bullshit. What Klavan is advocating is political suicide. He might as well have taken his playbook from Saul Alinsky's Rules for Radicals where Alinsky's fourth rule is "Make the enemy live up to their own book of rules. You can kill them with this..."
Mr. Klavan, telling the right that they have to live up to some impossible standard while excusing the left is laughable. All it will get you is defeated. Do you remember the Fresh Prince of Bel Air episode where Will Smith's Uncle Phil was running for political office? His opponent, the guy who played George Jefferson in The Jeffersons bad-mouthed Uncle Phil all over the media. The family told Uncle Phil that he needed to fight back but Uncle Phil stated that he was "not going to sink to that level." He lost the election by a landslide. He did eventually get appointed to the office when his opponent died by the governor but that's not the point.
The point is, we must not let the left use our morality to hold us hostage. You may never catch the devil hanging on the cross, but your double standard will leave the right hanging in defeat, just like Uncle Phil, but without the safety net of his opponent dying. Life isn't a nostalgic TV show or fiction book. The good guy doesn't always win just because you want him to. And though you can feel noble about being the honorable one, honor is no substitute for the loss of freedom, increased government regulation, and economic woes that our country will suffer if the left wins on election day.
Can entrepreneurship be taught?
�Entrepreneurship can only be self-taught. There are many ways to do it right and even more wrong, but it cannot be processed, bottled, packaged, and delivered from a lectern�, one of my readers � Michael Marotta � commented on an earlier post.
I am not sure I agree with the suggestion of that statement, namely that "entrepreneurship can only be self-taught". Of course we hear it more often - "you cannot teach entrepreneurship" - but I have yet to see any evidence of it. Granted, this is a weak statement, since the evidence that business education helps with anything is rather scarce (although there is some)!
However, the fact that the majority of entrepreneurs did not have formal business education does not tell me anything. Suppose out of 1000 attempted entrepreneurs indeed only 100 had formal business education. It might still be very possible that out of the 100, 50 of them became successful, where out of the 900 others only 300 became successful. This means that out of the 350 successful entrepreneurs, a mere 50 had formal business education. However, 50% of business educated entrepreneurs became successful, while only 1/3 of entrepreneurs without business education did.
My feeling about the potentially influence of business education on the odds of becoming a successful entrepreneur are quite the opposite of Marotta�s. I see quite a few attempted entrepreneurs with good business ideas and energy, however, they make some basic mistakes when attempting to build it into a business. The sheer logic of how to set up a viable business - once you have had a good idea - is something that is open to being "processed, bottled, packaged, and delivered from a lectern" (although that is hardly what we do in B-school).
Having a great idea and ample vision and energy perhaps is a necessary condition for becoming a successful entrepreneur, but it is not sufficient; this requires many other skills, and for some of them, education helps. Out of the 10 different skills needed to become a successful entrepreneur, perhaps only 5 can be taught or enhanced through business education, but those 5 will clearly improve your odds of making it.
Perhaps the majority of successful entrepreneurs do not have formal business education, but I have yet to meet a successful enterpreneur who did go to business school who proclaims his/her education was not a great help in becoming a success. Invariably, those people claim their education helped them a lot. In fact, many of such business school alumni donate generously to their alma mater. For example, one of London Business School's successful alumni entrepreneurs, Tony Wheeler (founder of Lonely Planet travel guides) regularly donates very substantial amounts of money to the School, because he believes his education there helped him greatly in making his business a success, and he wants others to have the same experience and opportunity.
In the absence of any formal evidence on whether business school education helps or hinders becoming a successful entrepreneur, I am inclined to rely on their judgement: business school education helps, if you want to become a successful entrepreneur.
I am not sure I agree with the suggestion of that statement, namely that "entrepreneurship can only be self-taught". Of course we hear it more often - "you cannot teach entrepreneurship" - but I have yet to see any evidence of it. Granted, this is a weak statement, since the evidence that business education helps with anything is rather scarce (although there is some)!
However, the fact that the majority of entrepreneurs did not have formal business education does not tell me anything. Suppose out of 1000 attempted entrepreneurs indeed only 100 had formal business education. It might still be very possible that out of the 100, 50 of them became successful, where out of the 900 others only 300 became successful. This means that out of the 350 successful entrepreneurs, a mere 50 had formal business education. However, 50% of business educated entrepreneurs became successful, while only 1/3 of entrepreneurs without business education did.
My feeling about the potentially influence of business education on the odds of becoming a successful entrepreneur are quite the opposite of Marotta�s. I see quite a few attempted entrepreneurs with good business ideas and energy, however, they make some basic mistakes when attempting to build it into a business. The sheer logic of how to set up a viable business - once you have had a good idea - is something that is open to being "processed, bottled, packaged, and delivered from a lectern" (although that is hardly what we do in B-school).
Having a great idea and ample vision and energy perhaps is a necessary condition for becoming a successful entrepreneur, but it is not sufficient; this requires many other skills, and for some of them, education helps. Out of the 10 different skills needed to become a successful entrepreneur, perhaps only 5 can be taught or enhanced through business education, but those 5 will clearly improve your odds of making it.
Perhaps the majority of successful entrepreneurs do not have formal business education, but I have yet to meet a successful enterpreneur who did go to business school who proclaims his/her education was not a great help in becoming a success. Invariably, those people claim their education helped them a lot. In fact, many of such business school alumni donate generously to their alma mater. For example, one of London Business School's successful alumni entrepreneurs, Tony Wheeler (founder of Lonely Planet travel guides) regularly donates very substantial amounts of money to the School, because he believes his education there helped him greatly in making his business a success, and he wants others to have the same experience and opportunity.
In the absence of any formal evidence on whether business school education helps or hinders becoming a successful entrepreneur, I am inclined to rely on their judgement: business school education helps, if you want to become a successful entrepreneur.
Most people have about 2 people they consider friends.
A new study shows that most people have only two good friends:
The study asked what the friends did for people such as provide companionship, loan money, give you a place to crash etc. and those with one friend said that their friend would not provide such things. I wonder if people just say that they have friends when what they really have are acquaintances? And what if your spouse is your friend? Does that not count?
Maybe more of us need to read books like How To Win Friends and Influence People by Dale Carnegie if we want friends or Living Alone and Loving It: A Guide to Relishing the Solo Life if we don't.
Do you think it's important to have friends?
About 48 percent of participants listed one name, 18 percent listed two, and roughly 29 percent listed more than two names for these close friends. On average, participants had 2.03 confidantes. And just over 4 percent of participants didn't list any names.
The study asked what the friends did for people such as provide companionship, loan money, give you a place to crash etc. and those with one friend said that their friend would not provide such things. I wonder if people just say that they have friends when what they really have are acquaintances? And what if your spouse is your friend? Does that not count?
Maybe more of us need to read books like How To Win Friends and Influence People by Dale Carnegie if we want friends or Living Alone and Loving It: A Guide to Relishing the Solo Life if we don't.
Do you think it's important to have friends?
Hottest Holiday Toys for 2011
Now that Halloween is past, there is more talk of Christmas and holiday gifts as retailers, I am sure, are desperate this year to increase their profits.
I am already looking for holiday gifts and took at look at CNBC's list of "Hot Holiday toys" to get some ideas. The list looked pretty much like updated versions of old toys such as the Sesame Street Let's Rock Elmo that interacts with kids 18 months to 3 years old and recognizes which instrument they give him. Nerf is putting out a new line of four guns that shoot greater distances for kids 8-10 or so. The Nerf Vortex Praxis is said to be the least expensive of the bunch and seems kind of fun. Finally, there is the top toy of the CNBC list called My Keepon - Interactive Robot that is supposed to be exclusive to Toys ‘R Us but it seems to be on Amazon, at least when I looked and there were a few left. A couple of the comments at Amazon did not make this toy sound too good, however.
Anyway, the holiday season is always fun for kids and for adults who like toys. What were your favorites as a kid or now?
I am already looking for holiday gifts and took at look at CNBC's list of "Hot Holiday toys" to get some ideas. The list looked pretty much like updated versions of old toys such as the Sesame Street Let's Rock Elmo that interacts with kids 18 months to 3 years old and recognizes which instrument they give him. Nerf is putting out a new line of four guns that shoot greater distances for kids 8-10 or so. The Nerf Vortex Praxis is said to be the least expensive of the bunch and seems kind of fun. Finally, there is the top toy of the CNBC list called My Keepon - Interactive Robot that is supposed to be exclusive to Toys ‘R Us but it seems to be on Amazon, at least when I looked and there were a few left. A couple of the comments at Amazon did not make this toy sound too good, however.
Anyway, the holiday season is always fun for kids and for adults who like toys. What were your favorites as a kid or now?
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