Huge Payments to Executives for Good Luck

By John Hunter, author of the Curious Cat Management Improvement Blog (since 2004).

A recent Harvard Law School Forum on Corporate Governance and Financial Regulation article on the finding that:
90 Cents of Every “Pay-for-Performance” Dollar are Paid for Luck. I agree that mainly we award senior executives huge pay based on luck and the natural result of the organization they are a part of.

It seems there is increasing criticism of lottery sized payout to executives that have done nothing to justify these payments. That criticism of the weak explanations provided for why such huge rewards are deserved is in line with what Deming taught.

At the same time, most of these efforts then try to explain how to fix the problem by better measuring how to evaluate the performance in order to justify the continued enormous payments to many senior executives. This is not supported by what W. Edwards Deming’s shared.

To call it an award of merit when the selection is merely a lottery, however, is to demoralize the whole force

In this quote (page 275 of Out of the Crisis) W. Edwards Deming was addressing the notion of “merit pay” in the context of workers in the system (not executives specifically). But that notion is apt in the case of executives in the USA today, especially as the amount of their awards now are indeed lottery sized.

The idea of a merit rating is alluring. The sound of the words captivates the imagination: pay for what you get; get what you pay for; motivate people to do their best, for their own good.

The effect is exactly the opposite of what the words promise. Everyone propels himself forward, or tries to, for his own good, on his own life preserver. The organization is the loser.

From The Merit System: The Annual Appraisal: Destroyer of People by W. Edwards Deming. As included in The Essential Deming (pp. 27-28).

This puts clearly Dr. Deming’s opinion of the so called “merit pay” practices. We need leaders that are focused on providing good jobs, delighting customers and rewarding investors. We don’t need leaders that are focused on how much they can divert to their own pockets. When you choose leaders that are focused on how much they can divert to their own pockets the entire system loses.

The fix is not to find better ways to measure so the lottery sized pay goes just to the 2 or 3 % of leaders that can make a strong case they are indeed not just being paid for luck or expected results. It would be better to limit the rewards to those few that could show they materially improved the natural result of the organization and not just through the luck in the organization, industry, economy or stock market that lead to widespread good results for everyone. But that is not the correct aim (though honestly if the organization insists on letting executives shippon off huge amounts to their own pockets it would be better if the ability to do so was much more difficult than it is today).

The fix we should seek is to stop thinking trying to pin blame or justify outsized rewards on an individual or a few individuals but to realize the principle of an organization as a system and focus on continual improvement of that organization.

It is my personal belief that the excessive pay of executives reached such a harmful level that Dr. Deming would have added it to his list of 7 deadly diseases long ago if he were still with us. But that is just my opinion (not a position of The W. Edwards Deming Institute). My believe is based on the damage done to the management of our organizations due to the practice of vastly overpaying executives.

But whether or not you believe the current system of executive pay is a deadly disease or not it is clear there are big problems related to executive pay today that do great damage to our businesses. The extremely poor use of data with a lack of understanding of variation behind the justification of current practices is not consistent with Dr. Deming’s ideas. The pay practices also highlight the failure to understand the organization as a system that is required to assign massive awards to a few individuals for the expected results of the business.

Related: Business 901 Podcast: Two New Deadly Diseases for Business (2013)Too often, executive compensation in the U.S. is ridiculously out of line with performance. (2006)
Proving CEOs Overpaid for Luck Helped Stir Pay Backlash (2013)Using Outdated Management Practices Can Be Very CostlyCEOs Plundering Corporate Coffers (2008)Where There is Fear You Do Not Get Honest FiguresDistorting the System, Distorting the Data or Improving the Systemwe honestly translate aims to goals. And then we do stupid things in the name of the goal get it the way of the aim

Toyota Posts Record Profit: Splits $15 million in Pay and Bonus for top 21 Executives (2014)

After posting record profits of $17.9 billion Toyota proposes to increase the pay and bonus for the top 21 executives to $14.9 million. That is not as you might expect just the increase in the bonus to the CEO. That is the entire pay and bonus for the top 21 executives. That places all 21 together below the top 50 CEO paydays in the USA.

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