Category: Ethics & Core Values

The following article is excerpted from a lecture by Prem Chopra at the University of Tennessee, Chattanooga in September 2006. The text of the entire lecture can be found in Masters of the Game: Reaching Beyond the Nexus to Success and Happiness.

Reinforcement with Tough Love

It is unwise to work for companies that have inequitable reward systems, or to tolerate such systems in companies you manage or lead. Let’s say one of your subordinates is incompetent, such as an office assistant who does sub-standard work, is lazy and uninterested in the assigned tasks. Despite receiving repeated training and warning, her performance and attendance is still unacceptable. What should you do? What if she’s a single mother with two kids, and it’s almost Christmas time. What would you do? If you were the manager, would you keep this person in the job or would you terminate her?

We had such a situation with an employee who reported to one of my managers. The manager told me that she should be fired, but he did not feel right doing it, particularly, since Christmas was coming. Our management team reviewed the company’s purpose, goals, staffing needs and our budget, and the manager re-confirmed that this employee did not fit in his organization, she would not improve, and there was no future for her in the company. But he still refused to fire her. So, here is the solution we came up with. I asked the manager to step into my office so we could talk in private. “Look,” I said, “This is how much you’re paid, and this is how much she is paid. If you feel so strongly about keeping her on, we will take this amount from your salary and use it to pay her. That way neither your wishes, nor the company’s objectives will be compromised”

Needless to say, the manager walked right out of the office and terminated the employee. You see, people do not think of the organization’s money as their own. If they did, they would make more prudent decisions. If you have true empathy for someone and you’re concerned about their financial welfare, then why not share some of your own money with them? Why use the company’s money to satisfy your personal conscience, when you are unwilling to spend your own for the same purpose? In the case of this assistant, we gave her a generous severance package.

The lesson here is: don’t reinforce negative behavior with positive rewards. When you are dealing with children, do you scold them when they misbehave and then bribe them with candy so they won’t do it again? Do you think the child remembers the short reprimand or the lingering sweetness of the candy? No, you don’t want to reinforce negative behavior. You don’t want to keep paying people to produce defective products, and you don’t want to pay executives for making the wrong and, sometimes, unethical decisions.

Fair and balanced corrective action, or tough love, is very important. Organizations fail when companies or individuals forget their purpose and their commitment to quality. Products must fulfill a certain quality standard, and we must perform all the necessary actions to fulfill those standards. Otherwise, the quality fails and the business fails. You must honestly apply whatever purposeful actions that are required to meet or exceed those quality standards. This is what customers expect. And, this is purposeful action

The following article is excerpted from a lecture by Prem Chopra at the University of Tennessee, Chattanooga in September 2006. The text of the entire lecture can be found in Masters of the Game: Reaching Beyond the Nexus to Success and Happiness.

Unjust Rewards – The Irony of Compensation for Failure

American business executives are well known for giving themselves positive rewards for negative actions. Take the example of some large public corporations. How are the Chief Executive Officers, or CEOs, compensated and rewarded? Well, they are paid salaries that are much higher, compared to the lowest-paid workers, than in any other developed or developing country. In addition, they are paid with company stock and stock options. In most business organizations there is a big discrepancy between the lowest-paid worker and the CEO. This is so all over the world. In approximate numbers, the ratio in Japan is about 1 to 115. In Europe it is about 1 to 150. In the US it is as high as 1 to 500, and in recent years it has continued to rise, creating an even bigger gap between the lowest-paid workers and executives.

Now, let me show you how rewards work in the opposite way, from which they should—how executives receive even more compensation for negative results. Here’s what happens, and it occurs repeatedly. When the corporation performs poorly, either due to poor management decisions or due to other reasons such as global unrest, the CEO lays-off or fires a large number of employees. Corporations have been known to fire tens of thousands of employees to reduce costs. However, the CEO continues to receive a salary and bonuses amounting to $10 million a year or more. Even $100 million is in compensation is not unheard of for some CEOs in a “good” year. In addition, they have options to buy stock at a fixed, generally below-market price. Some might earn as much hundreds of millions when they exercise those lucrative stock options, even if they are fired.

Now, here is the most interesting part of this reward system. Even if the CEO doesn’t get fired, once the corporation lays-off the people and reduces costs, thereby shoring up future earnings, the investment analysts, and investment bankers “talk up” the company. People start buying the stock and the price goes up, further enriching and rewarding the CEO who was responsible for the problems that led to the mass retrenchment and cutbacks in the first place.

Hewlett Packard provides an example of this. In the early 2000’s, after a spree of acquisitions and quality problems, they laid-off thousands of employees, but the price of their stock went up because they cut back several hundred million dollars in salaries and expenses. They closed plants, fired thousands of people and ruined families all around the world. Basically, such corporations run people into the ground and in return, the top executives and astute investors make millions of dollars because of quality problems. So even if the CEOs are fired, they make millions on their stock options. Such situations, which occur daily, are examples of inequitable and unethical reward systems in this country.

By contrast, in Japan for example, CEOs do not receive such unjust rewards. If a Japanese company gets into trouble, the top executive simply quits out of shame, and forgoing any compensation as a reward for failure. Sometimes Japanese executives even commit suicide.

Most of us are aware of the dramatic daily drops in the stock market, which have eroded more than eight trillion dollars of the value of US and foreign corporations.  The general belief has been that this is a problem brought about by greed and corruption in financial firms, and predominantly financial firms that make their billions through “deals” involving “financial papers” – now mostly in electronic form.  This has resulted in a spiral of increasing values and volumes of deals at higher and higher transaction speeds, across global markets – while at the same time, our Government has loosened regulations and regulatory oversight instead of pursuing the more prudent path of increasing scrutiny of the mushrooming deal-making euphoria that has led up to this unprecedented disaster.

So, do we mean to say that this crisis is a Wall Street problem that has been allowed to balloon to the current burst?

Do we also mean that we should let the Government and Wall Street work it out with our, Taxpayer, dollar serving as the fodder for this giant gone berserk?

Or, do we mean that this problem does not affect us, so long as we keep our jobs or other sources of income, even if the value of our investments is eroded temporarily (we hope)?

The graduate class on Legal and Ethical Perspectives in Business, at the University of Tennessee at Chattanooga, heard my views on this grave matter last Tuesday evening.  Listen to audio excerpts on integrity from my lecture on purposeful action for quality improvement (3:09): Make Integrity a Habit

For those of you who are disturbed by the lucrative payoffs in the tens of millions of dollars to the CEOs of highflying and now bankrupt Wall Street firms, will relate to this excerpt from my lecture on purposeful action for quality improvement (4:09): Unjust Rewards: Compensation for Failure

We would like to hear from you on this most important matter that will affect the world for generations…

With best wishes,

Prem Chopra