Four Steps to High Integrity Pay

Last Updated Jun 9, 2008 11:46 AM EDT

The apparent lack of correlation between pay and performance has rarely been as stark as it is today. European political figures have weighed in, proposing radical measures that will discourage "hypercapitalism", says the FT. In the Netherlands, the finance minister has even put forward legislation aimed at capping 'golden parachutes'.

But the most effective change will come when shareholders and the board start pressuring executives to act. Next's decision to adjust its targets for incentives comes hot on the heels of M&S's target scale-backs for execs and smacks of mollycoddling.

"Everyone is paid for the wrong thing: greed takes over. CEOs are being paid for revenue, not for good deals," says Ben Heineman Jr, former GE vice-president and counsel and author of 'High Performance with High Integrity'.

He believes pay decisions should be guided by high integrity, which will naturally result in high performance. They are "the basis of capitalism" and the issue facing businesses today, he says.

That means CEOs have to "say it and mean it: the performance-related culture must permeate the company," he says.
He advocates a culture that rewards for performance with integrity and adheres to a global ethical standards -- "thou shalt not bribe, even if it's common to that country's business culture. It's no excuse to say, 'that's the way they do things here.' You have to educate people and maintain you core values."

The CEO has to drive integrity into every aspect of the business -- communications, manufacturing, marketing, risk assessment, sales, IT and all other areas of operation. This creates an "integrity factory" that, with evaluation and auditing, will create your integrity infrastructure.

Directly linking high integrity performance to pay is fundamental.

  • Use annual goals and objectives -- and evaluations.
    The CEO should discuss specific annual integrity objectives with direct reports, identify them as basis for compensation and evaluate them systematically at year end, just as with other performance goals.
  • Assess the leader's own programme
    Corporations should evaluate business leaders' efforts to create high-performance-with-high-integrity systems. GE used a variety of evaluation techniques: corporate audits, employee surveys, onsite reviews by corporate leaders, formal reviews by the compliance review board, the handling of difficult controversies, and how the leader responded to a crisis.
  • Use comparative assessments
    Compare the leader's business with others with a multi-business group or outside firms. Cross-unit comparisons on financial and legal integrity issues are a powerful way to evaluate and motivate business leaders. Employee surveys are also key comparative tools.
  • Make it a clear factor in compensation and promotion
    Success in meeting annual goals, assessments of programmes either comparatively or on their own terms, qualitative evaluations of commitment--the CEO can use these measures to develop standards to pay for performance with integrity. It could constitute, for example, 20 to 30 per cent of overall pay.
The board should evaluate the CEO on similar goals and objectives and link a proportion of base and bonus compensation to integrity measurements.

Says Heineman: "It's a virtuous cycle once you start, but the board has to re-think a bit. There should be more training in companies, as well as management development processes, evaluation and assessment to support performance with integrity. It needs to cascade downwards through executives and managers."

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