Tranparency is the key

Recognition Focus

By NIGEL PHILLIPS

BONUS ExecutiveSurf provides an overview of the bonus system at a time when myths regarding its usefulness are shattered. They also suggest a provocative solution.

Transparency is the key

The bonus culture is a vexing issue. People are worried about their jobs, their pensions and their overall financial life. Governments are using taxpayers’ money to save a system most see as corrupt and lining the pockets of the people who actually put us in this mess. People feel a sense of injustice and know a rotten system needs to be overhauled, but how? The definition of a bonus is “something given or paid in addition to what is usual or expected.” In banking, bonuses have become usual and expected. The question of whether the pay structure will change is not a new one. The first traders in the City of London to earn over £100,000 caused a scandal and Michael Milken’s bonuses were spoken of in tones of awe; $100m was not unusual. People accepted that bankers were overpaid, European bankers were allowed to steal from their bank, to prevent them moving to the competition and Forex brokers were allowed to get commission rebates in cash or paid to offshore accounts. This was considered acceptable, but many bosses simply did not know what their traders were doing. The economist JK Galbraith wrote a book called The Economics of Innocent Fraud, where he argued that big pay settlements for executives, amounted to grand larceny, legitimised by the pretence that they were subject to shareholder, auditor and regulatory oversight. Executive pay has raced ahead of average incomes and Galbraith said this reckless remuneration “was no more than a warm personal gesture by an individual to himself”, or in the case of bonuses by a group of individuals, to each other. We frown on excessive pay because it has a negative social impact, as differentials grow between executives and blue collar workers. It also encourages managers to seek short-term gain, rather than corporate growth. The American union, ALF-CIO, website says: “Outrageous executive pay is a symptom of a disease that has infected our entire economic system. It is a disease of greed and corruption made worse by the Bush administration’s obsession with further deregulating Wall Street and ideological aversion to oversight and accountability in our financial system.” There does not seem to be any demonstrable correlation between executive pay and corporate performance. Investors own a company and are entitled to have a say in what people should be paid, but they tend to look at the figures only after money has been lost. A banker I spoke to, on the guarantee of anonymity, said: “Everyone agrees the crisis was, in part, due to inadequate regulation. People who don’t understand how the financial markets work, think we just need more regulation, but that could do more harm than good.” He said that too much restrictive regulation will increase the incentive to come up with new complex products to hide leverage. “Good regulation should aim for transparency and the market can then price risk properly.” He believes that regulation could not previously keep pace with innovation and that regulators lacked the necessary skills to police financial firms. He comes up with a novel solution to the problem: “Regulators are not paid much as a basic salary, so they should receive a bonus from a wrongdoer’s crime.” Genius. • The reasonable side of bonus

“This year, our organization decided that certain divisions would not pay out the bonus, except for the individuals who had a contractual right. Of the others that did pay out, they were of lower amounts in almost all cases.” This was Sabrina Muheim, Director at one of the large European Banks in Nyc. She does not think that, in general, there will be a complete shift from how bonuses are being paid, but want to stress the difference between top managers’ bonuses and the 90% of employees’ bonuses. “For top managers it is to be expected that things will go back to the ‘old times’ eventually, though it will take a while to do so and the additional scrutiny over this matter won’t allow for much excess. What happened in 2008 was a necessary readjustment to the market,” explains the Muheim. “New legislation is required and it is now the right moment to receive consensus from all parties involved”. “Like with every regulation, a new bonus system would ‘fix a problem’, but it would also discourage some talents away. Hopefully, the ratio of benefits versus losses will be a positive one,” comments Muheim. “But to hope that losses can be avoided by a hundred percent is not realistic.”

Book Twsm Selection

BOOKS A book on trust was recently published in The Netherlands, written by Tica Peeman, General Manager of VIStrainingen, a training company. The book aims to describe why times are ripe for so called hightrust organizations and why ‘traditional’ organizations fail to meet the challenges of the modern world.

01 Tica Peeman, I Trust U, Nederlands, Pearson Education Uitgeverij (2009), 212 pp., ¤ 22.95

In trust we trust

Why do we choose to belittle employees in organizations? Often, there are all kinds of ridiculous rules on how employees should act and behave. It is as if they were children, but they are not. They are competent, innovative, responsible adults when they are treated as such. We need to trust each other. This is Tica Peeman’s belief, as expressed in the introduction of ‘I Trust U’, a comprehensive and clearsighted book on trust written by the General Manager of a Dutch training company VIStrainingen. The author starts with a question: “Why do we put a lot of emphasis on trust in our private lives and this seems to be the reverse for organizations?” Maybe it is because, traditional ‘planning and control’ organizations are too conservative, inflexible and most of all do not inspire employees, she argues. Why are high-trust organizations a far better alternative? It is because control is less and less possible in our modern world, while employees more and more want to work for companies they trust. This, argues Peeman, will become even more important as the new ‘Generation Einstein*’ enters the work place. ‘Generation Einstein’ refers to the those born after 1991, which, in contrast to so-called generations X and Y before them, has a collectivist rather than individualistic mindset. Tica Peeman outlines three indicators of trust through involvement, influence and transparency. To build high-trust organizations, the author argues, we have to redesign our organizations dramatically in four ways: structural, cultural, managerial, and being transparent.

THE CELL The book suggests that a high-trust organization has to be divided into small independent units or teams. The reason being, that trust can only grow between people who know each other well and in places where employees have a lot of influence on their work. To connect Mike Armour, Leadership all the mini-companies, that is cells and and the Power of Trust: teams, you have to build a strong culture, Creating a High-Trust, Peakwhich, permeates the organization and Performance Organization, reflects the way people act, think and LifeThemes Press (2008), 207 dream in this organization. pp., ¤ 12,67 (image 02) An organisation also needs to dramatically change the way managers have to The last decade of corporate, perform in order to build high-trust. First, government, and institutional they have to understand that the compa- scandals has led to ny does not serve them, but that employ- widespread distrust of those ees are the core of organizations and have in positions of leadership. to be treated as such. Managers are facil- Dozens of independent itators. As we have traditionally selected studies confirm that dominant persons corporate America is running for position of man- a serious trust deficit. It’s as ager, explains Pee- glaring as our trade deficit man, we now have As we have traditionally and no less damaging to the to select managers selected dominant persons bottom line. The antidote to who are capable of for position of manager, this trust crisis, the author facilitating, coach- explains Peeman, we now believes, is Trust-Centered ing and restraining have to select managers Leadership. He illustrates their own egos. who are capable of eight basic principles of Managers have an facilitating, coaching and Trust-Centered Leadership important role to restraining their own egos. by drawing on his own play however, Pee- experience as president of a man argues, in introducing trust as the financially-troubled college. dominant organizational choice, building a strong culture and being role models in trustworthiness themselves. Transparency is also needed in a hightrust organization, namely transparency in * Generation Einstein is the title of a book information and communication that has introducing of a new name for the generation to be active, speedy and intentional. Pee- born after 1991. In contradiction with previous man then proposes a five-stage program to build lasting trust in organizations. • Generation X, G. Einstein does not have a individualistic, but a collectivistic mindset.

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