Rewarding Failed and Unethical Managers

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.

What is the Purpose and Meaning of Life?

The Search for Meaning and Purpose

At the core of human existence lies a desire to know about one’s being.  This desire is intimately related with the underlying question: What is the purpose of our life and what is the purpose of what we do? Of course, there are many other related questions.

All such questions may be combined in a practical way to form a single question: What is the meaning of my life, my journey, or my actions? This basic question forms the starting point for contemplation about significant actions in purposeful and effective leaders.

We will explore this question through five sequential actions one could contemplate on the way to discovering the answer:

Introspection

A Plan for the Journey

Reviewing Your Progress

Dealing with Diversions

Receiving Help along the Way

Introspection

Most individuals have an innate desire for something that we refer to as happiness.  We desire happiness to the point of fulfillment. Yet most of us move through life experiencing moments, and occasionally extended periods, of joy, sorrow, remorse, regret, pleasure, pain, loss, triumph, rejection, fear, anger, etc., without thinking consciously about what it is we really want.

At some point in our lives most of us come to a realization that either consciously or subconsciously, we want from life what we do not have. In other words, we realize we are not satisfied with our lot in life.  Sometimes, such thought, or introspection, leads us to search within ourselves for an answer to the question: What is it that I really want from life?

Let us assume, for the present, that we come to some conclusion about what it is we really want. In that case, assuming that we do not already have it – for if we had it, it is unlikely that we would be engaged in this thought process – we may begin to ponder another question: What is the likelihood of getting what I want?

In other words, we would like to know whether or not we might expect to achieve or obtain what we want during our life span.  A sub-set of this query would involve the determination of what we would do in the event that we achieve what we want.

If we view this want in terms of reaching a specific goal in our journey, then two questions arise immediately and intuitively. Taking them one at a time, the first question may take the form: Where am I now?

Assuming we know where we want to go, we cannot determine whether or not we will get there, or the probability of our getting there, unless we first determine where we already are. For most individuals it is relatively easy to find an answer to this question.  In most cases we can determine with some reasonable degree of certainty where we are with respect to where we want to go. So, the next question is how do I get to where I want to go? Thus, the process continues.

A Plan for the Journey

At the core of these questions about our journey lie three important assumptions.

  1. I do want to get somewhere. In other words, you have a destination in mind that is related to, or springs from, your intended purpose.
  2. I have the ability to implement my plan. This requires action, or a specified set of actions.
  3. When I get to where I want to go, I will want what I have received. In other words, it is expected that you did indeed get to where you wanted to go and you are satisfied, at least for the moment, with where you ended up.

We must also recognize that much of our success hinges upon the quality of the plan. We may ask some unnerving questions, such as: How will external factors, such as the actions of others or acts of nature, affect the plan and its execution?

On the other hand, we may wonder, in the first instance, about the basis for our belief in the potential for our plan to succeed.  Moreover, what may sound alarming to some of us is that we may have lingering doubts – do we still want to be where we are aiming?

This last question, if not answered in the affirmative, may reset the cycle of questions, with resulting review and perhaps a redefinition of purpose, goals, plans and actions. And the cycle continues on and on.

For the present, though, let us assume that these preliminary questions are not enough to discourage or overwhelm us – the determined goal-seeking individuals. That is to say, we have a defined purpose for our journey, we have a plan of action, or a map with the necessary navigational tools (i.e., compass, binoculars, etc.) to get there. Let us assume, furthermore, that we are confident that where this journey will take us is where we want to go. Let us say, then, that we have embarked upon our journey.

Reviewing Your Progress

If the goal is distant and the journey is long and difficult, many questions will arise along the way.  On such a journey, even the most determined individuals may be troubled by doubts regarding their progress. This may cause them to assess their situations, review their maps, question their plans and, in extreme cases, even question their purposes. These doubts can be expressed in the form of four new questions related to our journeys.

  1. How am I progressing? The first question suggests that one needs to have a way of measuring progress.  You cannot assess something that you have not measured or gauged.  So, you need some form of measurement to determine the progress of your journey.  Only when you have determined where you are, with respect to where your plan shows that you ought to be, can you determine whether or not you need to revise your action or to change your plan and redirect your journey.
  2. Do I need to revise my action or my plan? Once you have determined where you are with respect to your original plan, it is possible for you to decide whether or not you need to make a change.  This then gives you a clue to what you need in order to be prepared to answer this question.
  3. At what level of depth does the change have to be? The third question is more complex.  It is more difficult to answer because it requires a high level of judgment, based upon knowledge or wisdom and gained from prior experience. In other words, we have to judge whether the correction or change calls for a simple redirection of the action at hand, or if change is a necessity to accomplish some of the intermediate goals (i.e. milestones along the way), the ultimate goal, or the mission which defined the purpose for our action or journey.  Or, perhaps, you need to rethink and modify your vision.
  4. How can I assure that I will stay the course in my revised journey and, as a result, reach my goal? The fourth question is centered upon issues such as confidence, belief, faith, and perseverance or persistence.  In other words, the response to this question depends upon a series of other questions, such as: what degree of confidence do I have in the quality of the plan? How much faith do we have in the leader’s ability to get us to where we want to go (that is, if we have a leader or a living teacher or guide)? Do we have the degree of faith or self-discipline necessary to stay the course? And so on.

These questions help our doubts surface and make real changes in our lives that may be beneficial in the course of our actions. They influence what we may, from time to time, envision about our future. These considerations provide a basis for changes to our lives. They can help us find a path for self-growth. In other words, through recognizing and responding to these questions, we may become better equipped to review and redirect our journeys in life.  The significance of these questions is independent of the philosophies or theologies upon which our personal religions or faiths are based. These considerations are common to all individuals and are relevant to all aspects of our lives. They can help us face and overcome obstacles and doubts that we face in most of our actions each day.

Bothersome as they may appear, these considerations need to be addressed if all except the most trivial actions are to be accomplished successfully.  With considerations such as these in mind it will be easier to search for the right answers, since you are more likely to ask the right questions at appropriate times.  The questions asked will depend upon your situation and their relevance and importance to the particular journey upon which you have embarked.  Much could be gained by adding such considerations to your reservoir of knowledge, even if it were in the form of nagging and bothersome questions.

Dealing with Diversions

Even as we strive towards our goals in accordance with our plans, we cannot be assured that there will not be any diversions.  Diversions may appear in the form of distractions for the mind that result in a clouding of purpose or mission, thereby causing us to question our commitment to the journey.

There are many sources from which obstacles and diversions stem.  They may be caused by events within our own life and by our own actions. They may be forced by events resulting from the actions of others. Some diversions in our journeys may be caused by actions in our environments. In addition, diversions may be caused by any of several simultaneously operating and complex sets of events caused by a combination of these and other causes.

Each individual is unique, with a unique set of circumstances that comprises the life conditions for that individual.  Furthermore, our world is dynamic, like the flowing water of a brook.  The waters, once they flow past you, do not return to the same part of the flow. Over the ages much has been learned about the dynamics of life, as about the flow of water.  This knowledge can be useful to those who choose to acquire it as they navigate through their individual brooks. For, even if we cannot predict each change in the course of the Brook, we can develop a better understanding of the waters in which we navigate.  We can learn how to deal more effectively with the dynamics of life.

Receiving Help along the Way

One way to deal with obstacles is to find sources of help along the way. However, in order to obtain help, you must first desire it and then be willing to look for it. Finally, you must be willing to accept it. Acceptance of help generally paves the way for giving.

Having by now unfolded your journey in the brook and your life as action, you are ready to embark on a path to success and fulfillment.

Read more in the series of books on The Purpose and Meaning of Life, by Prem Chopra

Introduction to Ethics

The links below provide a brief introduction to engineering ethics, and three major ethical theories.

Here is a link to a YouTube podcast on ethical theories from a Leadership Seminar presented at the American Society of Engineering Management, National Meeting in November 2007:

Ethical Theories and Purposeful Action

In most actions, all three ethical theories lead to the same conclusion about the ethical balance of the action.

Can you think of three examples from your personal life, or from the actions of public persons, that illustrate this?

codes-standards

corporate-responsibility

ethical-concepts-and-theories

These files are part of a Micro-eCourse on Ethics, developed for engineering students and staff at the University of Tennessee at Chattanooga.

Were McCain, Clinton and Obama driven by goals or vision?

The starting premise for this post is that actions of purposeful servant leaders should be driven by vision (the first step in the Framework for Purposeful Action) and not by expectations of achieving goals (step 4) or of results (step 10 – where the arrow lands) or rewards (step 12).
In Volume 1, Issue 13 of the Brook of Life News, August 13, 2002 (some things do not change…) the following thoughts on vision and goals were published:
“I set goals but am not driven by them,” said the young woman.
“That makes no sense,” said the mature businessman.  “Why set goals if you do not pursue them?”
“Goals are just milestones to evaluate the progress of your mission–towards your vision?” She replied.
“So, why are you not driven by your goals?” the man persisted.
“Because, I am driven by a commitment to my mission–which is to achieve my vision.  If I were driven by goals, I would be tempted to manipulate in order to achieve them. This is the root cause of unethical actions we see today in politics and business.” She replied, with passion.
“You sound so idealistic.”  He said with a knowing smile.
“I am practical,” She responded, “This is purposeful action.”
When you apply this young woman’s thinking to the actions of McCain, Clinton and Obama during the course of the recently ended election season, does some pattern emerge?
 

What can you learn about these three politicians by playing the BrookMaster Leadership Game, emulating each of them in turn?
Some issues and promises by Candidates:
  1. Subsidies for runaway gas prices
  2. Taxing exorbitant profits of oil companies
  3. Graduated income tax relief
  4. The financial bailout of Wall Street firms
  5. Personal attack ads
  6. Interjection of Joe the Plumber
  7. Wardrobe-gate
  8. Campaign financing
  9. Interjecting gender and race
  10. Interjecting fear and experience. or lack thereof
  11. Environment versus energy independence
  12. Defense, war and diplomacy
  13. Universal healthcare versus insurance subsidies
  14. Immigration
  15. Education
  16. Jobs

 

Global Financial Meltdown: What does it mean to you?

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

What is Purposeful Action?

Nothing occurs by accident.  Everything has a purpose and flows with it.  It is up to you to realize this.  Once you understand action, what motivates it and what drives the actions of others, you are ready to navigate the whitewaters of the Brook of life.  The Framework for Purposeful Action shows you how.

The Framework dissects action into twelve steps that apply equally to your personal and professional life.  These twelve steps are organized in three phases:

  1. Forming the Mission for Action
  2. Performing the Action
  3. Reinforcing the Action

The first phase covers three steps.  Using the metaphor of the archer, this phase expresses the desire to hunt, the spotting of the target and the aiming of the arrow.

Introspection is the search for resonance–to discover the dream that represents a state to which one aspires.  One reaches within to find the vision for action.  Enlightened leadership starts with this step.

In extrospection, one looks outside to reconcile the vision with the world.  This is called ‘gap analysis’ in business–finding a need.  It includes an assessment of strengths, weaknesses, opportunities and threats.  Entrepreneurship starts with this step.

Once the internal vision is reconciled with the external world, a mission is formed and commitment is made to the mission.  Management starts with this step.

Listen to an excerpt from my lecture on purposeful action for quality improvement (2:28): What is Purposeful Action?

Look for additional excerpts in future posts.