Home' Trinidad and Tobago Guardian : April 27th 2017 Contents APRIL 27 • 2017 guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG19
Expensive CEOS not
necessarily best leaders
At the breakfast table recent-
ly, I came across a sentence
in The New York Times so
absurd that I had to reread
it three times. Referring to
deposed Tyco CEO Dennis
Kozlowski (recently indicted for sales-tax
evasion), the article reported that if he had
been fired, rather than resigning, Tyco would
have had to pay a severance package in excess
of US$100 million. Imagine the absurdity of
paying a CEO US$100 million for performing
so badly that he gets fired. If true, executive
compensation has indeed reached a new level
With all of the recent news and discussions
about CEO pay, the question is: what to do
about the egregious abuses of executive com-
As is the case with most issues of human
affairs, the essential solutions lie not in the
"what" but rather in the "who."
In a five-year study of what it takes to turn
good companies into great ones conducted at
my management research laboratory, we spec-
ulated that executive compensation would play
a key role in corporate transformation. Surely,
we thought, with the huge pay packages and
widespread use of stock options that have be-
come commonplace---buttressed by the con-
ventional wisdom that executive pay should
be closely tied to share price as an incentive
for managers to perform---there must be a link.
Why would boards of directors pay out mil-
lions of dollars of incentive pay if it doesn't
translate into improved corporate perfor-
We were dead wrong in our speculations.
After 112 separate analyses looking for a
strong link between executive compensation
and corporate results, we found no pattern
whatsoever. How does executive compensation
drive the transformation of good firms into
great companies; ones that create exceptional
Our conclusion: it doesn't.
We learned in our research that making a
company great has very little to do with how
you compensate executives and everything to
do with which executives you have to com-
pensate in the first place. If you have the right
people, they will do everything in their power
to make the company great, no matter how
difficult the decisions and largely independent
of their stock-option packages.
Consider, for instance, the late George Cain,
the chief executive who turned Abbott Labo-
ratories from a mediocre family business into a
health-care powerhouse that eventually gener-
ated cumulative returns to investors 4.5 times
better than the general market, handily outper-
forming industry superstars Merck and Pfizer.
Cain's first priority as CEO was to destroy
the nepotism that had infected the company's
ranks. He set forth a simple mantra: if you do
not have what it takes to potentially be the
best in the industry in your span of responsi-
bility, then you will not hold that seat on this
bus---regardless of your family connections.
He rebuilt the entire management team,
putting the best people he could find on the
bus, and he rebuilt the board of directors with
independent thinkers more interested in build-
ing a great company than perpetuating a family
ATM dividend dispenser.
Now you might be thinking that Cain came
into his role as a highly paid, outside change
agent motivated by stock options to shake the
place up. You would be wrong. In fact, he was
an 18-year insider and a family member; the
son of a previous Abbott CEO.
Cain was a man driven from within by a cre-
ative need---almost a neurosis---to make the
company the best it could possibly be even if
that meant incurring the ire of brothers, sisters,
aunts, uncles and cousins.
He did this not because of what he would
"get" for it but simply because it could be done.
As one of his colleagues summed up, "George
could not stand the company he had inherited.
He could not tolerate the way it was being run.
He was a very strong person, and he was going
to change it!"
The best executives are like Cain: people
revolted by the idea of leaving unrealised po-
tential on the table; people driven to create ex-
cellence for its own sake; people never satisfied
because there is always a higher standard to
work toward. If you have the right type of lead-
er, incentive compensation is no more likely
to affect whether she will do everything in her
power to make the company great than stock
options would have changed the dedication
Beethoven brought to composing his Ninth
Would Lou Gerstner have tried half as hard
to rebuild IBM to greatness had he been able
to walk away with US$50 million rather than
Would David Glass have led Wal-Mart to,
say, only US$100 billion rather than US$192
billion in the post-Sam era had his pay grown
at only half the rate?
Would George Cain, Darwin Smith, Da-
vid Maxwell and all the other good-to-great
CEOs we studied have made twice the quality
of decisions and brought double the intensity
to the job had their compensation potential
Any CEO whose dedication to building a
great company goes up and down depend-
ing on the amount and structure of his or her
incentive compensation is simply the wrong
person for the job.
This is not to say we should entirely ignore
the compensation question. Certainly, many
corporate boards have failed in their responsi-
bility to shareholders by granting compensa-
tion packages that have huge upside and little
downside for even the most mediocre leaders.
For the sake of basic fairness, not to mention
self-interest as corporations face increasing
social outrage that can easily lead to gov-
ernment-imposed constraints, boards must
change their compensation practices.
Still, the most important decision a board
makes is not how it pays, but whom it pays. If
boards of directors would stop lurching after
the high-profile, "it's all about me and what
I get" style of leader and turn, instead, to the
disciplined, workmanlike leaders who produce
true greatness over time, we would see better
While we cannot expect the trend in exec-
utive compensation to reverse itself any time
soon, perhaps we can expect boards to pay that
compensation to the types of leaders who ac-
tually come closer to earning it, rather than to
those who feel entitled simply because they
carry the lofty title of CEO.
Jim Collins is the author of Good to Great: Why
Some Companies Make the Leap ... And Others
Don't; How the Mighty Fall and co-author of both
Great by Choice and Built to Last. He operates
a management research laboratory in Boulder,
Colorado and would be featured LIVE via interactive
Satellite at the Distinguished Leadership and
Innovation Conference on May 5, 2017 at the
Hyatt Regency. He will be accompanied by Sir Ken
Robinson (also LIVE via interactive Satellite) and
Pankaj Ghemawat, who will be here in person. Visit
www.dlictt.com for more info.
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