We Need to Stop Rewarding Win-At-All-Costs Leaders
Sep 2nd 2011 2:30PM
Updated Sep 2nd 2011 6:00PM
If I had to pick a single attribute to base my investment decisions on, it would be the quality of leadership. In fact, in politics, sports, or big business, success can be traced back to the decisions that are made -- or enabled -- by the people directing the enterprise.
Unfortunately, leadership can be faked, at least for a little while, especially when a leader is preoccupied with the singular pursuit of winning.
It's easy to fall for the company or team du jour when it takes home the trophy or trounces the competition. But can it do that time after time, year after year? It can if its leaders have the right stuff.
Rewarding the Wrong Stuff
Misaligned incentives and short-term thinking have produced a legion of myopic, win-at-all-costs leaders.
Take Jim Calhoun, coach of the NCAA champion Connecticut Huskies men's basketball team. His team has a 31% graduation rate. His defense of that appalling metric? He says the school has more players leave for the NBA and other pro leagues than almost any other program in the country.
That's like a mountain guide saying, "I did my job. I got them to the top of Everest." Is it any wonder that most climbing accidents happen on the descent?
Calhoun admits that he could have done a better job as a coach motivating some kids to graduate. Instead, he chose to maximize a short-term goal -- the number of people they sent on to the NBA -- that unfortunately shortchanges his players over the long term. The lack of emphasis on learning is the kind of thing that leads to a full 60% of NBA players going broke within five years of retirement.
Even with that sad statistic in mind, Calhoun would be hard-pressed to change his focus. His superiors have rewarded this myopic behavior: He's not paid to prepare student athletes for what happens after basketball.
Blinded by Bonuses and Short-Term Wins
Most business and personal disasters are caused by the pursuit of short-term gratification. Mind-numbingly dumb incentives only add fuel to the fire. And nowhere is this dangerous behavior more obvious than in Lower Manhattan.
Wall Street executives, like the tech titans of the 1990s, will have you believe that no one would show up for work without the lure of multimillion-dollar bonuses or stock option packages. Not surprisingly, the bulk of those riches go to a select few. In 2010, the average CEO earned a whopping 325 times as much as the average U.S. worker, up from 263-to-1 in 2009.
Unfortunately, these very incentives cause the behavior they should be trying to prevent. You see, incentives narrow our focus. This laser-like tunnel vision leaves us blind to many risks. Contingent motivators often decrease your actual performance. What? That's right: By focusing our attention only on the outcome, it restricts our creative thinking and decision making.
Former Exxon (XOM) Chief Executive Lee Raymond's $400 million retirement package in 2005 is another example of misplaced accountability. Did Raymond's wonderful management lead to such profitable returns for Exxon -- or was a run-up in the price of oil primarily responsible?
The best antidote to these disasters is to have a leader with a long-range perspective on both performance and overall compensation. Great leaders choose the right incentives and reward people for achievement in the important areas that they can control.
Two True Leaders
Costco's (COST) CEO and founder Jim Sinegal -- who yesterday announced his retirement -- eschews convention at the world's greatest membership discounter. He answers his own phone and spends most of the year on the road visiting stores. Costco pays its average warehouse employees almost double what its competitors do, and this commitment to fairness pays off big time. By almost any measure Costco shines above its peers in nearly every way, except for margins, and that's actually part of its strategy: Drive costs out of the system and pass them along to members.
Costco is a service business with a membership model. It should surprise no one that its member renewal rates hover near 90% each year. Costco has figured out a way to reward good performers, and ultimately that drives the bottom line.
Lincoln Electric's (LECO) John Stropki is another example of stellar leadership. He runs a storied business that is -- get this -- a U.S.-based manufacturer! He's had a total of one employer in his working lifetime. From his beginning as a floor welder in 1969, he's moved all the way up to CEO.
Stropki's system rewards efficiency and achievement. It also includes guaranteed employment and profit-sharing for workers. Stropki also leads by example, having taken an 8% salary cut and had his bonus cut nearly in half for 2009. The ratio of his pay to the average employee's, which comes in at 65, is much lower than the same figure at other companies.
Is it any wonder that Lincoln Electric continues to crank out outstanding results for both its shareholders and its employees?
Which Leaders Do You Admire?
Ultimately, winning isn't just about outscoring your opponent. Winning is not about exceeding one quarter's goals. It's about doing what's in the long-term best interests of all your fellow stakeholders and doing the best that you are capable of. Investors should demand that much from the leaders of their companies and the boards of directors they report to. What winner do you respect?
Buck Hartzell is the Motley Fool Director of Analyst Learning. He does not own shares in the companies mentioned in this article. The Motley Fool owns shares of Costco. Motley Fool newsletter services have recommended buying shares of Costco.