The Real Cost of Mismanaged Incentives: Wells Fargo

untitledWell, so much for the warm-hearted caffeinated, pick-me-up from the Comp Café. Today is a steaming jolt of quadruple espresso in response to the Wells Fargo incentive pay mess. Let me start with the fact that I have been interviewed a few times about this story and even I was surprised by my response to the question, “What companies in the financial world are considered to have good incentive programs?” I answered that if I had been asked a few weeks ago, Wells Fargo would have been on the list. I guess it’s hard to know what you don’t know.

If you have been under a log for a couple of weeks, please start by reading a couple of earlier Compensation Café Articles (my own When Incentive Pay Goes Rogue! and Jim Brennan’s Excessively Successful Incentives). That foundation will help you understand the following summary.

A couple weeks ago, Wells Fargo was fined about $185 million for fraudulently opening millions of accounts. They also fired 5,300 employees and were the media poster-child for why incentive plans are terrible. At the very least, the plans in question ended up costing more than they delivered. In the past few days, the real costs of these programs are starting to reveal themselves. Recent developments are listed below. Continue reading

Executive Pay Has Been Fixed on Both Sides of the Pond!

6a0134836082f8970c01bb09238e9f970d-200wiIn the past week there have been two major reports describing how to fix executive compensation. The first is from the UK report and comes at the end of a project by the “Executive Remuneration Working Group” (those Brits love their whimsical names) This project was publicly announced September 8, 2015 as an effort by The Investment Association. The second report “Commonsense Principles of Corporate Governance” is from a group of executives in the US. It covers a broad list of corporate governance issues. For the purposes of this post we will focus only on the section titled “Compensation of Management.”

Here’s the basic run down: Continue reading

Why Equity and Not Just a Bigger Salary?

6a0134836082f8970c01bb0904b74f970d-200wiThis February, the Harvard Business Review published Stop Paying Executives for Performance” by Dan Cable and Freek Vermeulen. The basis of the article is that we do away with all executive incentive pay and replace it with high (in cases much higher) salary. Their argument is that there is no evidence that pay for performance works and some evidence that it is dangerous. Since this post is part of my ongoing “Stock Options on the Precipice” series (earlier articles: 12345678, 9, 10, 11), I will try and focus only on that one aspect of incentive pay. Perhaps some of you will add additional information in the comments.

Note: We are not arguing that top managers such as CEOs should be paid less. That may very well be the case too, but that’s not the focus of our analysis. HBR , Cable, Vermeulen, Feb. 2016

Let’s start with the premise that pay for performance does not work. There is Continue reading

UPDATE ISS Equity Plan Scorecard EPSC 2.0

untitled3Have you ever played a card game with 5-year olds? Before you start, they explain the game in vague details and provide a list of rules that are customized to their needs. Then you begin playing, doing your best to remember the rules and keep the game moving and fun for everyone. STOP!

The game is no longer fun. The 5-year has just realized that one of their rules is not beneficial to them. Because they are a kid and generally pretty darned cute, you allow the change of how the rules apply to them without comment (yet you must continue following their original rules). It doesn’t take long for Continue reading

Time to Work Out Your Chicken Legs

12092015 6a0134836082f8970c01b7c7f76a0f970b-200wiWe have all been to the gym or have seen this guy walking down the street (here’s an example). He’s the guy with those big arms, broad chest, and a narrow waist looking like a cartoon superhero. The guy is impressive in a t-shirt but carried around by skinny chicken legs. It’s obvious he puts in the work. It’s also noticeable what he likes to do and what he doesn’t.

More and more companies have compensation programs that look like Continue reading

Our Nearsighted Friends and Us

12022015 6a00d83451df4569e201b7c7f4012c970b-200wiI have a brother with 20:15 vision. For those of you normal humans, this means he can see things clearly in the distance that the rest of us see as only a blur (if at all). I have a sister with, to be kind, worse vision. Like many people, her vision imperceptivity worsened over decades. She began to think it was normal to see street signs only as she came close to them. It did not seem odd that she depended on her experience rather than her senses. And, simultaneously, most of her friends were also slowly losing their ability to see into the distance so they didn’t notice anything changing.

Perhaps the world of executive compensation and all of our friends have slowly become nearsighted.

A recent New York Times Continue reading

Navigating the Whitewater of LTI Design

11252015 6a00d83451df4569e201b7c7f13efa970b-200wiSomeone recently asked me to explain how I knew what direction to take plan design conversations. She had participated in a several plan design discussions and it seemed like there was not much rhyme or reason to the process. After giving it some thought, I told her it was a bit like navigating a river with occasional whitewater.

Much of any long-term incentive plan design is like gently steering your boat in slow moving water. But, every plan design has stretches (sometimes miles) of whitewater. The path through these Continue reading

Big Bucks, Tiny Details and Multiple Personalities

11122015 6a00d83451df4569e201b8d173f5a4970c-200wiWhen it comes to compensation, it’s easy to get caught up in strategy and communication. We know that missing a chance at impacting the big picture is missing a chance at being successful. But, pay is also about the smallest of details. These include the language in plan documents, the timing of processing or reporting transactions and making sure that people know their roles and sign correctly on the correct lines.

In June of 2014, a shareholder filed a lawsuit against Facebook. The suit alleged that Continue reading

Speed, Velocity and Acceleration in Pay

untitledI was reading a Facebook message a parent posted about their kid’s physics homework and it resonated as a reminder for the compensation world. The question was how do you explain the differences between speed, velocity and acceleration. A few years ago, I wrote an article about Newton’s Three Laws of Compensation Motion and I guess it’s time for another physics lesson.

Speed is a point on a graph. It tells you a whole bunch about an instant. Much of the data we use in compensation is like this.  We know exactly the amount or percentage, but we have little information regarding the path to that point. We feel like we somehow already have this information, but in most cases it’s a deception. Most pay data provides as little Continue reading

CEO Pay is a Problem, but not THE Problem

untitledFirst, I want to make it clear that plenty of CEOs are paid way too much money, but most are probably paid in accordance with the value they deliver. But, that is a topic for another post.

Let’s talk about how much CEOs get paid. I took a quick look at the CEO pay for the 2013 Fortune 100. In 2013, these 100 individuals were paid cumulative compensation of $918M! That is a lot of money; in fact, it’s a smack in the face. They are paid so much obviously they must be the most heavy-hitting movers and shakers among the wealthiest people in our country. So, I checked the 2015 list of Fortune’s 400 wealthiest Americans*.

It turns out the Continue reading