Case 4: Corporate Boards Decide to Lower the Instrumentalities between CEO Performance and Pay
Alpha Natural Resources, a coal producer, gave CEO Kevin Crutchfield a $528,000 bonus after having the largest financial loss in the company’s history. The board said it wanted to reward him for his “tremendous efforts” in improving worker safety. This “safety bonus” was not tied to any corporate goals, and the company had never before paid a specific bonus just for safety.
The board at generic drug maker Mylan made a similar decision, giving CEO Robert Coury a $900,000 bonus despite poor financial results. The board felt the results were due to factors like the European sovereign-debt crisis and natural disasters in Japan. Not to be outdone, the board at Nationwide Mutual Insurance doubled its CEO’s bonus, “declaring that claims from U.S. tornadoes shouldn’t count against his performance metrics.”
The New York Times reported that former Walmart US CEO Bill Simon also was rewarded for missing his goals. He was promised a bonus of $1.5 million if US net sales grew by 2 percent. Net sales ultimately grew by 1.8 percent, but the company still paid the bonus. The Times said this occurred because the company “corrected for a series of factors that it said were beyond Simon’s control.” Hourly wage bonuses for Walmart associates who perform below expectations are zero. Apparently, what’s good for the company’s CEO is not good for associates.
Is It Good to Relax Instrumentalities between Performance and Pay? Companies relax instrumentalities between performance and pay because they want to protect executives from being accountable for things outside their control, like a tornado or rising costs in natural resources. While this may make sense, it leaves open the question of what to do when good luck occurs instead of bad. Companies do not typically constrain CEO pay when financial results are due to good luck. Blair Jones, an expert on executive compensation, noted that changing instrumentalities after the fact “only works if a board is willing to use it on the upside and the downside.… If it’s only used for the downside, it calls into question the process.”
1. What is the problem?
Remember that a problem is a gap between a desired and current state. If more than one desired outcome is not being accomplished, decide which one is most important and focus on it for steps 2 and 3.
2. What are the causes of the problem?
Start by identifying which person, group, situational or any other type of factors, are most likely causes of the defined problem. For each cause, explain why this is a cause of the problem. Asking why multiple times is more likely to lead you to root causes of the problem. By following this process of asking why multiple times, you will be more likely to arrive at a more complete list of causes.
3. Make recommendations for solving the problem.
Be practical and precise. You can be creative with your solutions so long as you justify them.