We Need to Stop Rewarding Win-At-All-Costs Leaders

Ceo's BonusesIf 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.

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Bill Hale

Handsome Gary is right on the money in his defense of Lee Raymond. All his examples ring true. But there is more. Exxon has paid a dividend every year for more than 5 decades, and increased it continuously since 1989, the year Raymond became president. The share buyback program coupled with the growth in the dividend and the growth in the value of the stock has made Exxon shares an enviable investment, providing far far more value to shareholders than the supposedly excessive severance granted to Raymond. It is also simply uninformed to imply Raymond was careless of the long-term interests of the shareholders. For many many years he advocated staying the course on company strategies and on investing for the long-term and not for cyclical market reasons. And it is also instructive, in my view, to assess his long-term impact on the company by remembering that other executives were not so successful in the same industry -- here one could suggest that the CEOs of Gulf, Texaco, ELF, Sohio, Superior, Occidental and others -- all companies now among the missing -- may have been less capable of surviving in what has in fact been an extremely turbulent oil market. Raymond was paid a lot, and was worth every penny.

September 05 2011 at 10:28 PM Report abuse rate up rate down Reply

A precept of leadership is doing the right thing, every time. Sometimes painful. It is not about winning at any cost. That's the "management" mentality coming out of our MBA programs. It is not leadership. America is suffering from an obvious lack true leadership in business and in our government.

September 05 2011 at 9:44 PM Report abuse rate up rate down Reply
Handsome Gary

Lee Raymond, former ExxonMobil CEO, (this is going to shock some readers) actually earned his $400 million retirement bonus on just one of his manny ideas, not including the Mobil merger. For instance, crude oils from all over the world went to 52 refineries that XOM had worldwide, and those crudes have subtle differences now known as crude "Fingerprints." Lee Raymond had XOM crudes chemically fingerprinted, and then each unique crude was shipped to the XOM refineries that would get the most production out of each barrel, adding an additional $1,000,000,000 profit to XOM each year. Mr. Raymond has been retired for several years now, but that one innovation of his keeps adding $1,000,000,000 profit to XOM every year. So, in Mr. Raymond's case, his $400,000,000 severance bonus gets cheaper each year. He also built the Chadian pipeline to West Africa in the most ecologically responsible manner. And authorized 7 mile slant directional drilling from the seashore of Sahkillin Island in Far Eastern Russia, a decision that brought millions of barrels of crude safely into the global market, again in an ecologically responsible manner. His decision to "design one, build many" in designing and building the revolutionary "FPSO" giant offshore exploration vessels [Floating, Production, Storage and Offloading] made it possible for the millions of barrels per day production possible in offshore Angola in Southwest Africa. Also, XOM during Mr. Raymond's tenure slowly eliminated almost all corporate debt. No, make no mistake, Mr. Raymond's earned his bonus many times over. If Wall Street executives and all of the the Bush Administration from top to bottom had acted as honestly and responsibly as Mr. Lee Raymond did, we would now have no debt and no Great Recession.

September 05 2011 at 7:20 PM Report abuse rate up rate down Reply

Why consider long range strategy for business; rather than win now, when we expect immediate, WIN NOW, results from politicians? We are the now generation, no time for good long term strategy.

September 05 2011 at 6:14 PM Report abuse rate up rate down Reply

his description of win at all costs is the story of the Tea Party, The most divisive group we have ever encountered, I see them as being traitors to th American people .Good Government can only exist through compromise, they are like freshmen in high school, they have no understanding of the broad picture of an economy the size of ours, They only know about how to live on an allowance, they have no idea of their parents responsibility for the entire family. Annd no real knowledge of what Good Government, is and the real responsibilty of goverment to its people

September 05 2011 at 10:31 AM Report abuse rate up rate down Reply
1 reply to rpiretti's comment

Traitors, extortionists, racists, lynch mobs going to hell, hostage takers, Hitlers, you name it and lefties have said it about the poor tea drinkers who want the government to:

We are taxed enough already and half of Americans don't pay any income tax for some reason.
Stop spending money we don't have on things we don't want.
Balance the budget - no lefty can do it.
Stop borrowing money - You borrow 40% of your spending, our grand children can't pay back what lefties have borrowed already

Now who sounds insane again when every non progressive American has to live by these same financial rules in their every day lives.

Remember it was the left who called you these names because they hate you and fear you greatly. Hate and fear is a bad combination, unless of course, you are insane like they are.

Never trust a lefty with your money or your life. They will steal you blind, blame you for it while calling you all kinds of hideous things and then leave you in the gutter to die , the gutter you paid 3 times too much for in the first place

September 05 2011 at 2:19 PM Report abuse -1 rate up rate down Reply

We have been rewarding the wrong stuff for a long time. America needs to get it's act together and we need start demanding integrity across the board.

September 05 2011 at 8:37 AM Report abuse +1 rate up rate down Reply

When you have players getting big time NBA contracts before completing school you get a distorted graduation rate. A player is silly staying in school when he can get a multi-million dollar contract. Schools with the best programs get the top players and that is all their is to it. Graduation rates for these players don't matter. Charles Barkley says he doesn't have a degree but a lot of people that work for him do.

September 05 2011 at 6:59 AM Report abuse rate up rate down Reply

Let's be honest. The fact of the matter is that sports programs support many universities and therefore no one at the university really cares if an individual with great sports ability is intellectually qualified to even be there. As only one example, one of the Washington Redskins years ago admitted that he could neither read nor write despite having a college degree (and, of course, had been previously processed through the public school system) . And all you have to do to understand this attitude is to listen and watch the sport fans. They are willing to pay any price to see their team in action and they want (demand) a winning team at all costs. They may even try to beat you to death if you wear a sport shirt from the opposing team or dare to make a casual remark about their team. Even parents at little league games will engage in fistfights with the umpire or other fans over a called strike on little johnnie. So if you want to see who is to blame for this attitude of sports over intellect - look in the mirror.

September 05 2011 at 5:58 AM Report abuse rate up rate down Reply

America is becoming a land of oppurtunity for everyone but Americans. Happy Labor Day!!!

September 05 2011 at 5:15 AM Report abuse +2 rate up rate down Reply

I believe you picked a wrong example to back up your premise when you wrote about Calhoun and Connecticut. I do not know the percentages but I would bet the majority of college basketball players from major universities do not have the intention of graduating or getting an education to begin with, especially those from the lower socioeconomic strata. There are too many people going to college for sports related careers that are not academic students but who have gifts in other areas. Unfortunately our high schools put so much pressure on academic grades and do not take into consideration those students who would rather choose non academic fields to study and earn their certificates in learning a marketable skill or trade. This is not just in college but is wide spread throughout our education system.

September 05 2011 at 5:12 AM Report abuse rate up rate down Reply