Keyword: compensation

There is a great article in the Wall Street Journal today [Note: I believe this link is subscription-only].

The title of the article says it all: “When $70 Million is Not Enough”.  It is about how a star at Goldman Sachs, aptly named Mark McGoldrick (nicknamed “Goldfinger”), quit because he felt his $70 Million in compensation in 2006 was inadequate.

I’m quite sure that the vast majority of the world is just flabbergasted by the hubris of Mr. McGoldrick.  I’m sure the indignation is quite ripe.  After all, even the biggest lottery winners don’t even dream of getting this much money over their lifetime, let alone as one year’s compensation.  And they marvel at the fact that the island of Saint Kitts is overwhelmed by the damage done yesterday by Hurricane Dean, estimated to be over $50 Million — an amount Mr. McGoldrick could cover and still have tens of millions to spare.

But I’m not surprised.  Because I’ve seen worse.

Yes, really, I’ve seen worse.  You see, I was in charge of compensation at Microsoft at the zenith of the dot-com boom.  If you want to get a brain freeze, if you want to see warped values, and if you want to see upset people, you need to see extremely competitive people discuss their compensation.

I had senior people in my office griping about net worths in the magnitude of the GDPs of small countries.  They pointed to others who they deemed less worthy, and complained that just being ahead of them was not enough.  No, they needed to wipe the floors with them.

I had more than one executive who was on their way out the door demand, and get, millions in compensation — for what I was not sure.  They stomped and moaned and complained like children until someone, anyone, would grant them what they wanted.  And then they left.

I had one case where an executive threatened to start up a business that potentially would cause one small part of the company some grief.  He made numerous vague, disguised threats until he was granted $30 Million in stock options.  He promptly left, and started the business anyway.  And now his biggest customer is Microsoft.

So, Mr. McGoldrick is disgusting, and clearly demonstrates that all that is wrong with Wall Street today.  But he’s just an amateur.  If he wants to really know how it’s done, perhaps he should drop me a line.

Apple Logo

There has been more than a little noise about executive compensation in general, and stock option backdating in particular.  I have been quite vocal about the ridiculous level of CEO pay, it is just silly that people should be getting 9-digit pay — for anything including professional sports.  I have witnessed some of the ugliest side of this, with supposedly mature executives arguing to me that, in some way in their mind, their mid-8-digit net worth was inadequate.  Little in this realm shocks me any more.

So when the charismatic do-no-wrong CEO of Apple, Steve Jobs, got caught up in the whirlwind of backdated stock options, I was not really surprised.  Only just a little disappointed.  But in some way, it proves little more than that Steve is, in fact, a mere mortal.

Now, time for a disclaimer.  I’m both a huge Apple fan and a shareholder.  I’m writing this on a MacBook Pro, am very close to swapping out my Windows desktop for a new MacPro, and have at least eight iPods in the family.  I love the simplicity, the way things just seem to work, and the passion for nice design.  And the stock has been a winner for us as well.  I am as excited as the rest of the planet about the future of the company, especially with the new iPhone in the works.  So I am admittedly biased to see the Apple glass more than a little half-full.

Recently it was revealed that Apple issued stock option grants that don’t meet with the standards of scrutiny that should be expected.  Specifically, grants were issued with dates that were the most favorable to the grantees, and this news forced the resignation from the board of the CFO at the time of the grants.  To Apple’s credit, they admitted the issue, although some complain not quickly enough.

What impressed me the most is that the release disclosed quite frankly that Steve was aware of the issue.  Most companies would first deny that anything like this happened, and their CEOs would almost certainly distance themselves from the fallout as quickly as possible.  It is refreshing to see at least one company and the CEO admit the issue.

Steve Jobs

But to be clear, Steve is no saint in the realm of money.  He is famous for his $1 a year compensation, but this belies his huge stock and option stake in Apple that has made him extremely wealthy.  Combined with his Pixar (now Disney) stake, Steve is well off with an estimated $4.9b net worth, placing him at number 49 in the Forbes 400 list.  In sum, he ceratinly hasn’t been short-changed with respect to compensation.

In Steve’s defense, however, is the fact that he made his money on the stock of his companies.  He doesn’t hold the companies hostage for some huge pay package, he simply owns stock, makes the company and stock grow, and both he and the other shareholders benefit.  In short: he earned it.

As a CEO compensation critic, this is just fine with me.  As a purchaser of technical products, I love the fact that he has advanced the state of the art and am happy to let him get his just reward.  And as a stockholder, I’m ecstatic.  The stock is up 10-fold in the last three years.  And if that works for Steve too, that’s great.

I have written more than a little about Home Depot and its CEO Bob Nardelli.  From their top-heavy “Culture Change Offensive” (which I found offensive here), and the silly army mentality Nardelli tried to force down everyone’s throat (and got stuck in my craw here), to Bob’s stunning pay package (which rubbed me raw here), and even his autocratic shareholders meeting (which I recounted here) Nardelli has provided plenty of fodder for these pages.  Well, it seems that the company and the board have finally come to their senses.

ATLANTA, Jan 03, 2007 — The Board of Directors of The Home Depot and Bob Nardelli announced today that they have mutually agreed that Nardelli would leave his position as The Home Depot’s chairman, president & CEO and as a Director effective January 2, 2007.

In other words: “get out…  like yesterday”.  Clearly the company simply tired of all the bluster and noise that went along with Bob’s “Army Mentality”, and the corporate results have been lackluster since he arrived.  And as I said in this piece, the mood in the stores is rancid.  It is a wonderful sign that the company saw the insidious effect Nardelli had, and chose to put an end to it.

But, the company didn’t completely come to their senses.  They continued to give Nardelli completely ridiculous payouts even as he exits in disgrace:

Nardelli and the Company have agreed in principle to the terms of a separation agreement which would provide for payment of the amounts he is entitled to receive under his pre-existing employment contract entered into in 2000.  Under this agreement, Nardelli will receive consideration currently valued at approximately $210 million (including amounts which have previously been earned or vested).

Holy Cow!  Even in the face of amazingly generous pay packages to CEOs, this one is a stunner.  This means that Nardelli has received, since becoming CEO of Home Depot, a whopping $400+ million in compensation!  During the same time, HD (the stock) has gone from a high of around $70 to the mid-30s.

And worse, much of this is clearly a golden handshake, or simply “go away” money.  It is optional, the board didn’t have to agree to it, but just wanted him out so badly they were willing to pay almost anything to have him go away:

This consideration will include a cash severance payment of $20 million, the acceleration of unvested deferred stock awards currently valued at approximately $77 million and unvested options with an intrinsic value of approximately $7 million, the payment of earned bonuses and long-term incentive awards of approximately $9 million, the payment of account balances under the Company’s 401(k) plan and other benefit programs currently valued at approximately $2 million, the payment of previously earned and vested deferred shares with an approximate value of $44 million, the payment of the present value of retirement benefits currently valued at approximately $32 million and the payment of $18 million for other entitlements under his contract which will be paid over a four year period and will be forfeited if he does not honor his contractual obligations.

The bulk of this is sickening…  I’m sure there were clauses in his contract that would have allowed the company to fight most of this.  I haven’t seen it, but I’d be shocked if it was all carved in stone.  I’m betting they didn’t have to accelerate his unvested and/or deferred options, they didn’t have to buy out his retirement plans, they just did it to get rid of him.

While I applaud Home Depot for ridding themselves of this jerk, I wish they had the backbone not only to fire him, but to not pay his blackmail too.  But I’m sure the company is better off without him.  The markets surely agree, the stock is up over 3% today alone on the news.

There has been quite a bit of hubbub lately over the end-of-year bonuses paid by Goldman Sachs.  It even provoked an op-ed piece in the venerable New York Times.  Totaling some $16.5 billion, and averaging $623,000 per employee, the payouts have set off a firestorm of shock, awe, envy, and more than a few cries of “That’s obscene!”  It’s really funny to see how people react when things not only work as intended, but work perhaps too well.

The more serious people question whether the pay was justified, or was prudent for the company.  With the average employee getting more than $200 an hour, and some reaching into the tens of thousands an hour, it seems inevitable that there would be sour grapes but the real question should be: is it right?

In a word: yes.  It’s fine, and even exemplary.  I think there are three key measures by which to judge a compensation system:

• Is it based on, and does it reinforce, the organization’s goals and objectives?
• Is it applied according to some reasonable, and preferably transparent, methodology?
• Is it fiscally prudent for the organization?

That’s it.  Forget about providing a living wage, or some sense of social fairness, or even public perceptions of the system.  If it meets these three measures, I think it is great.  Let’s look at each of these measurements, and reflect on Goldman’s application of them.

Reinforcing goals and objectives

This is number one for a reason: it is by far the most important.  I’ve said it here on these pages a hundred times, but the key to success in an organization is defining a clear vision followed by consistent daily application of that vision.  There are many ways to apply the vision, but few are more effective than to base compensation on it.  I have built compensation systems that are directly based on the company vision, and the results are astounding. [ed: more on this later]

Does the system at Goldman Sachs meet this test?  Well, from a distance it’s hard to tell.  But I can say that, from what I know of the company, the goal is to make deals and trades that benefit the buyers, the sellers, and Goldman Sachs.  And by all reasonable measures, they hit a home run there.  Pre-tax profit (that’s net, not gross) even with these salaries included was over a half-million per head.  That’s twice the Wall Street average, and 5 times what we so proudly got when I was at Microsoft.

So, even without knowledge of the specific goals and objectives that Goldman set for itself, it’s clear that from a strictly financial perspective, they scored big.  And the compensation system should reward those who exceeded those objectives so dramatically.

Reasonable and transparent methodology

This is the point that catches up so many companies.  Many firms have their compensation set extremely top-heavy, with those who control the purse strings, taking the most out of the purse.  I like to see a compensation system that is based on some simple, clear, and preferably public, metrics.  Typically it’s something like gross sales, or gross profit, or even something like regularly measured customer satisfaction.  Whatever it is, it should be simple, directly correlated to things people actual have some influence over, and difficult to “game”.

Another key component of this is that the compensation system should be very broadly based.  Not just a perk for those at the top, but dipping deep down into the organization, so that all people who have a part in creating the success can share in it.  When I was at Microsoft, virtually all full-time employees were eligible for stock options.  That’s the kind of example I’m stressing here.

From what I can see, Goldman’s scheme meets these objectives.  There are stories of most employees seeing twice to three times their peers at other firms, and this is in line with their company performance against their competition.  Yes there are reports of some secretaries complaining they only got $120k when others saw millions, but that melts when you point out that’s 2x the going rate.  So what this all means is that the system is implicitly broad-based and relatively effective.

Fiscally prudent

This is where Goldman has me completely won over.  You see, they pay compensation in arrears.  They wait until the end of the year, and then, once all the numbers are in, they divvy up the spoils.  This has many great effects, a key one being that they never have to worry about paying for performance they might achieve.  They know both how well the person has performed, and how much they can afford to reward them.  How clean is that?

In addition, they have the benefit of drawing the bonuses not from pending revenue, but from cash on hand.  And they’ve had the better part of a year to invest that money wisely, before they have to pay it out.  I think every small firm that has had to scrape to make bonus payments would do well to consider a scheme like this.

So, in summary, I think Goldman has it just about right.  They pay people from their profits, they do it in a manner that rewards for definitive past performance, and in line with their corporate objectives.  The fact that the company was enormously profitable isn’t something people should resent.  Envy, maybe.  Emulate, probably.

Want to make the minimum wage yet still gross almost $100,000 a year?  Be a dealer in casino in Las Vegas.  Want to make a little more than half that amount?  Be their supervisor.

Wynn Las Vegas Resort

That’s right, even though the minimum wage in Nevada is just $6.15 an hour, because of tips many dealers make nearly six figures.  Their supervisors, the pit bosses, however are salaried and make around $60,000 a year, with no tip sharing.  This inequity makes it hard to convince talented people to leave the table and become a supervisor, with all the challenges that position entails.

Recently, Steve Wynn decided to make a change at his Las Vegas Resort.  Experiencing trouble getting supervisors for his 580 dealers, he added he pit bosses to the tip pool.  This earned him the ire of the dealers, who worried about dilution of the tips and the honesty of the tip counting process which they had long controlled.  It was bad enough that, years ago, the tip process had been formalized so that it was taxable income.  But it came to a head when a generous winner spread out almost $500,000 in tips in a single flurry.  Adding the bosses to the pool diluted the shares by more than 10% and created quite a fuss.

This experience points out one of my most important rules: never make your compensation system dependent on variables that you do not control.  I have learned this one the hard way, and spent one of the most challenging years of my career trying to fix just such a system.

Microsoft was one of the first tech companies to spread stock options well down into the organization, essentially to all employees.  This had the wonderful effect of letting a very broad range of people share in the ride when the stock was on its incessant rise to the stratosphere, and minted numerous millionaires.  The excitement at the company in the late 1990s was palpable.  There is little doubt that the company benefited by paying low base wages and letting this “free” compensation provide the rest.

But of course, there were downsides.  The signs were there, even when the stock was on the rise.  People paid constant attention to the stock price.  There were people spending their evenings writing desktop stock tickers, and mounting led stock tickers in the hallways.  And the pressure to constantly split the stock (which seemed to spur further rises) was enormous.  It was all people talked about for weeks at a time approaching a split.

And obviously, the ride was destined to end.  The company simply couldn’t double in market capitalization every few months without eventually being the equivalent of the GNP of an entire continent.  It just had to stop.  Steve Ballmer (Microsoft’s CEO) was well aware of this, and that when it did stop, it was going to be ugly.  Without a constantly rising stock price, the entire compensation scheme would collapse.

As VP of HR for the company, I used to say that our compensation plan was at the mercy of NASDAQ.  I spent the entire last year of my tenure at Microsoft reconstructing the compensation plan for all 35,000 employees to be less dependent on stock options.  And my successors (there have been three) have spent their tenures furthering the effort.  Given the exodus of key people over the last several years, their job is not complete.

Back to Las Vegas, you can see that having the casino workers’ pay being largely based on tips is dangerous.  Not only do you run into the inequity issues, but the compensation plan is in control of others whose motives may not match those of the organization.  Yes, people tip when they are happy customers, but they also only tip when they win (which doesn’t help the organization), or when they are drunk, or simply when they feel like it.  And if their economic prospects go down, so do their tips.  Is this variability good for the employees?

Clearly, Mr. Wynn swung the pendulum in the wrong direction.  Rather than adding the bosses to the tip plan, he should have crafted a compensation plan for the bosses that derived less from the tips, but on broader organizational objectives.  Some ideas may be to base it on measured customer satisfaction, personal job performance, or even profitability at some level.  Most likely a simple combination of a few measures would be effective.  It’s hard to say without direct input into the process.  Perhaps Mr. Wynn is reading and would like me to look into it…

In any case, this is yet another example of why compensation plans must be thought through carefully.  As I have said repeatedly, you get what you deserve.  If you measure and reward some narrow behaviors, you will get people who respond, and even overreact, to those rewards.  Be careful what you wish for, you will undoubtedly get it.

When the discussion of how to compensate and reward employees comes up, almost invariably someone comes up with the idea of the “employee of the month” award.  Sometimes the name of the award is less tired, maybe it’s outstanding associate of the year.  Or the top achiever of the quarter.  It doesn’t matter what you call them, these kind of awards are a bad idea.

Every time I tell people not to fall for this easy trap in the employee compensation world, they object.  They complain that I’m harping on them all the time to think of ways to reward employees that don’t involve money.  They say: “here’s a great way to reward people for good performance, it’s cheap, what more could you want?”  And there are hundreds of companies that proclaim to make “tools to motivate employees” who push this junk (here’s a link to one).

For the first clue as to what’s wrong with these kind of awards, walk into your local fast-food joint, distribution company, or supermarket.  There, over in the corner, you’ll see it.  The dusty brown frame with little brass name plates, and maybe faded photos taken from employee badges.  The employee of the month award plaque.  Look carefully.  What’s the most recent date?  If you’re lucky it will only be six months ago.  I’ve seen some as old as three years, with not an update since.  I don’t think I’ve ever seen one with more than ten months on it.

The first and most obvious problem is that it’s hard to keep up the momentum with these things.  With all the things you have to do to run a business every month, this inevitably falls to the bottom of the list.  So for a couple of months you wrestle with it to get it done at the last minute, then you find yourself a month or two behind, finally it just falls by the wayside.  What a message this sends to the employees: you can’t even find time for this simple little form of recognition.

Employee of the Month

Another problem is also obvious.  Look closely at that plaque.  See any patterns?  Yes, you see the same couple of employees over and over again.  And why is that?  Because you really only have two choices when awarding these things: 1) be honest and give it to the best employees, or 2) rotate it around and give it to everyone once.  In the first case, the same few employees will consistently rise to the top.  In the other case, the award becomes a joke to the employees.  Which is why it’s always done the first way.  And the pattern is inevitable.  What a wonderful message it sends to your employees, that only a handful of them are worth recognition.

Which brings us around to the effect of these awards on the employees.  Does it really reward the winner?  Or do they feel awkward for being singled out in this beauty contest that really doesn’t mean anything?  They know there is no money in it, they know the choice wasn’t really objective (more on that later), and they know you’re not recognizing them because you want to, but because it’s the end of the month and someone has to get the silly thing.  They also know they are either going to get a lot of grief from their friends for winning it, or a bunch of resentment from others who didn’t.  So they sheepishly accept it, and the flaccid applause of the folks gathered in the lunch room, and go back to work.

What do the non-winners (the other 99% of the employees) think about it?  More often than not, they feel like…  losers.  To make themselves feel less like losers, they badmouth the award, and tell everyone that only idiots and suckups get it.  And they probably give the winner a hard time for winning it.  They certainly don’t say to themselves: “gee how do I get one of those?”

Which brings me around to the final point: how do you make this decision?  If the choice is truly objective (top sales, lowest complaints, etc.) you need to resign yourself to the fact that you have no control over the award.  And constant repeat winners are inevitable.  And the losers, who already know they are losers, certainly don’t need this award to rub their noses into it.

Or, you can make the award be more subjective: “most eager”, “best team player”, or maybe “best overall”.  This puts you back in control, but then it introduces a number of problems.  Like accusations of favoritism.  Or having it seem arbitrary.  Or second-guessing from all corners about why you chose who you did that make a baseball argument look like a picnic.  Ugh…

The more you think about employee awards, the less you’ll think they are a good idea.  I have a number of thoughts on better ways to reward and recognize your employees.  Stay tuned to CLWill.com for more.

This is by far the most common question I get asked by employees.  In my experience, there are only three ways to get a raise (in decreasing order of success):

• Excel at what you do, and don’t look like you want/need/care about a raise.
• Have a very carefully orchestrated conversation with your immediate supervisor.
• Hold the organization hostage.

As I noted, these are in decreasing order of potential, with the first being successful about 90% of the time, and the last being successful about 10% of the time.

Excel at What You Do

This is the easiest, most effective, and most rewarding way to get a raise.  You simply what you do extremely well, focus on making the organization successful, take on important problems without being asked to, make yourself indispensable, and don’t look like you want/need/care about a raise.

Perhaps the best way to look at this is to put yourself in your manager’s shoes.  What do they want and need from an employee?  Someone who is really good at what they do, doesn’t complain, solves problems for them, and always keeps the organization’s best interests up front.  When they get that, they naturally want to reward it.  And, most managers are not very creative in the ways they can think of to reward people.  So they throw money at them.

If you think about it, someone who behaves this way is a gem, someone they want to keep happy, motivated, and on the team.  It’s just good business to give them the one thing they know how to give — money.

How you react is an important part of this.  You should be surprised, and very appreciative.  Not drippingly appreciative, but honestly thankful.  And this is also a good time declare your loyalty.  It doesn’t have to be “I’m never leaving”, but a good, solid “I like it here, this is fun”, works wonders.

Now, this doesn’t help if you want a raise today, but I promise, if you keep this up, it works.  And if you do it consistently, you’ll notice that each time the money increases in frequency and amount.  It gets more fun as the game goes on.  It works for them, works for you, works for years…  it’s all good.

Have a Careful Discussion

This is less successful and effective, and is extremely hard to pull off correctly.  But it can work.  The key is to sit down with your boss and have a meaningful discussion about you and your value to the organization, with a subtext of how underappreciated you feel.  It is hard to have this conversation without sounding like Dagwood Bumstead going to Mr. Dithers.  But if you are truly going unnoticed, and the above isn’t working, this is an option.

This discussion should focus quite clearly on your value to the organization, and the quality and importance of your work to the firm.  Keep the focus on your work, your value, and your recognition.  Don’t bring up money at the beginning, and don’t make money they only solution to the problem.  Trust me, it’s one of the few tools managers have, so they can think of money as a solution without your help.

You perhaps can include some discussion of comparable wages elsewhere, but never discuss salary surveys, and be fully prepared for this to fail.  Discussions about other organizations end up sounding like a discussion with your mother: “if Billy Johnson jumped off a cliff, would you?”  Situations are different, and you are different.  As often as not, using this kind of tactic takes the discussion irreparably to other places you don’t want to go (like your performance, or your competition, or…).

Absolutely never make the discussion be about why you need the raise.  The company doesn’t care anywhere near as much about you as a person as they care about you as a resource.  And it’s difficult to say how much you need it without sounding trite or like a cliché.  Also, you open yourself up to the manager thinking: “hey, I’m underpaid too, what makes you so special?”  So never, ever say: “but I really NEED this raise”.  It’s a quick path to not getting it.

Remember, this isn’t a supposed to be a discussion about money, it has to be a discussion about value given for value received.  You need to show why you are so valuable.  Always try to take it back there, to the organization, to the wonderful work you do.

However, to be honest, most of the time they know what you do and how well you do it, and they have consciously chosen not to give you a raise for some reason.  It is rare that your manager will sit back, think for a minute, and say: “gee, I guess you’re right, you’re far more valuable that we’ve ever thought, and you are underpaid”.  Most of the time, they know you, and your work, and they feel they are doing just fine by you, thank you.

But every now and again, you’ll point out things they didn’t know, and you’ll make a case.  Even more rarely, they will see that you are concerned and try to fix it, but that usually falls under case #1 above.

This conversation is incredibly hard to do without sounding either cocky or that all you care about is the money.  But it can work if done right.

Hold the Organization Hostage

This is by far the riskiest strategy, and it backfires as often as it works.  In fact, I can’t recall the last time I saw it work in person.  But I’ve heard that it does.

It goes like this, you get another offer for more money somewhere else, and go into your manager with “match it or I’m out of here”.  The offer can be from another company, or better yet, from another part of the company you are in right now.  Obviously an offer in the same company is much better, you can check on the validity of the offer more easily, it demonstrates to your current manager that people they know think you are worth more money, and you don’t have to change health care plans…

Wherever it is from, it absolutely has to be a bonafide offer, and one that you really would accept.  For three reasons: 1) your manager may well check up on the offer, 2) if you do get a counter offer and it turns out later to have been a lie, you are in deep trouble, and 3) you may well need the offer if they fire you on the spot.

This usually backfires (see my post on the manager’s side of this here) and when it does, it’s usually not pretty.  One way I’ve actually seen it backfire is for the manager to steal the offer from you, and take the job themselves.  Really.  Amazing, but true.

But on occasion this hardball tactic works.  However, I strongly recommend against this unless you are a) a major league sports star or b) really willing to leave.  I usually fired people who tried this on the spot…

Other Ways

All the other ways, especially demanding a raise, trying to wave salary surveys in peoples’ faces, or joining together with others to protest (or a union), usually just get managers ticked off and looking for ways to lose you.  This sounds trite, but again, put yourself in your manager’s shoes.  They want and need good resources who make things easy for them.  Squeeky wheels who make things difficult are not what they want or need.  Good managers will find a way to lose them quickly.

So, in summary, getting a raise is a lot like getting a loan: they give them most often to people who don’t need them (or at least don’t seem to need them).  The best and most effective way to get raises, and lots of them, is to be really good at what you do, take things off your manager’s plate, and never look like you are only working for the money.  It will come in waves.

Bill Gates

With the announcement today that he’s going to step aside, a load of my Bill Gates memories have flooded back for me.  Forgive me while I share those with you.

I’m a fortunate man; I’m among a very small group of people who’ve had the priviledge of working closely with Bill Gates.  When I was VP of HR, he and I had a number of private and quite frank conversations about key members of the Microsoft leadership team.  We worked together to set compensation, decide assignments, and make tough corrective choices.

I’ll never forget the time we worked on his own salary together — it was almost comical.  I had to implore him to take a reasonable number that even vaguely reflected his peers at the top of the Fortune 500.  There I was, trying to convince the world’s richest man to take a reasonable salary.  The company was moving to deemphasize stock and put more weight on salary; I wanted him to lead by example.  To his credit, he pushed back relentlessly and I ended up recommending to the board’s compensation committee a number about 33% lower than what I thought was right.

Bill is a very special person, with legendary business insight to be sure, but it is coupled with a remarkable sensitivty and concern for his key associates.  He treats them much like family-members, with all the good and bad that goes with that.  Yes, his blow-ups are legendary, and he can carve new orifaces with the best of them.  But more often than not, he is concerned about their welfare, about their family, about their mood and attitude.  He values loyalty above most other things, and does not handle defection well at all.

I can think of no one in the world for whom I have more respect, and I know his presence at Microsoft will be sorely missed.  Although well divorced from the day-to-day in recent years, he always served as a settling and humanizing force in the company.  In the face of Steve Ballmer, a legendarily gruff and difficult manager (which I can personally confirm), this influence should not be underestimated.

I will have much to say about the future of the company in the hands of the new management team, but that will have to wait.  Now I’m just too busy enjoying reliving the time I had working with one of the most special people in the world.

Dilbert

It’s a classic Dilbert cartoon: in lieu of a raise, I’m going to promote you to “senior whatever”.  Not only does it happen (or it wouldn’t be so funny), but it’s commonplace.  But the question is: is it wrong?

Well, if you listen to the CFO, no it’s not wrong.  We can’t afford to pay Sam what he wants or deserves, so let’s give him something that costs us nothing.  And there is something to be said for that.

And of course people want (even need) cool titles.  As I noted over in another FAQ entry, titles are valued by employees and are important for many internal and external reasons.  So they seem like a really perfect give-away.  People want and value something that costs the company nothing.  How cool is that?  Almost as good a freebie as stock options…

But as with most aspects of compensation you need to realize that you often get what you pay for.  First of all, people aren’t stupid.  Both inside and outside people realize when the title doesn’t fit the person, or when the title is clearly exaggerated.  Look at banks, where every Tom, Dick, and Mary is a Vice President.  Everyone knows that, in a bank, even the teller at your window is but a promotion or two away from being a VP.  Take Wells Fargo, with 152,000 “team members”, I’m willing to bet that there are no fewer than 20,000 VPs.

This, of course, leads to title inflation.  At a bank, if you aren’t talking to a “Senior VP” you are talking to a nobody.  And it leads to a world inside the company where people are fighting over seemingly ridiculous title issues.  The first time you make an unworthy promotion, all the people who were at that level feel devalued.  They all now want to be a “senior whatever”.  Pretty soon you have people running around calling themselves Chairman, CEO, and President, and trying to convince people they hold down three full-time jobs.

Here again, people aren’t stupid, they look at the person, their title, and do a quick compare.  Most can smell something fishy if it’s there, and they immediately discount the title on the business card to something more realistic.

All this means that you can’t throw titles at people like rice at a wedding.  You need to dole them out more carefully.  But it doesn’t mean you simply shouldn’t use titles as compensation.  They can be very effective.

I recommend that you design a “job ladder” for on which you can place all employees.  This ladder not only outlines clear and distinct titles for every position, but serves as a roadmap for the employer and the employee.  With clear qualifications for each and every position, you can promote effectively, and get your money’s worth when you do promote.  I’ll have more on Job Ladders soon, stay tuned.

Who is your recruiter working for?  As I often say, symbols are everything.  And is there a bigger symbol than money?  If you want a symbol for the big business of recruiting, look no further than XtremeRectruiting’s web site.

Xtreme Recruiting

You are looking to hire an executive for your company, your knee-jerk reaction is to call a big time headhunter.  Or you want to get a new job, and you decide to engage one of these superstars yourself.  Some of the first questions you should ask yourself are: Who’s the customer here?  Who is the rescruiter working for?  How important am I to this recruiter?  This web site can help you understand.

The front page is a list of the “big billers”, people who have made a fortune in the last year as a recruiter.  These people made somewhere from $400k to over a $1m last year.  Not bad for a small company — but wait, these are individuals.

Now there is nothing wrong with success.  But this web page doesn’t say how well they serviced clients.  It doesn’t talk about their skills, what they bring to the table, how they will help you.  No, it is a celebration of the “big billers” just for their acumen in bringing in big bucks. [Editor’s note: I find it wonderfully ironic that this site is a .org site, supposedly reserved for non-profits…]

Good for them, but is that what you want?  Sure you want someone who is experienced, someone who is good at what they do.  But is that judged by their billings?  Is that judged by their standing among their peers in their top dollars?  No of course not.  People who appear on this web site should be ashamed of themselves for waving their income in the face of everyone.  And you should look elsewhere for help.

I have a lot of good advice on recruiting elsewhere.  Trust me, “seek out the big billers” is not on the list.

Numerous news reports and blog postings have been aghast at the fact that some execs were setting the price of their option grants at the lowest price in the period.  They are simply stunned that these execs would take advantage of the system. “How could they?”

Oh, grow up.  As the guy responsible for this system at one of the leaders of the whole “options as pay” phenomenon, let me tell you that nothing, literally nothing, could surprise me in the realm of pay.  I’ve seen senior executives complain about pay that would be the GNP for a small country.  I’ve seen people who normally show incredible judgement and morals become slimey at the drop of a paycheck.  And I’ve seen amazingly smart people put sincere time and effort into figuring out ways to game any system that involves their pay.  I’ll tell some of these stories over time here, but, nothing in this realm surprises me any more.

Let’s be clear, you’re giving people options [money] and you need to decide when to give it to them [cost], and the choice is up to them.  Hmmm, let me see…  I’ve got it, how about when they cost me the least?  Why does this shock anyone?  Why does this even make news?  How else would it be done?

At Microsoft, and other companies, the kind of backdating described in these reports was systemized in their ESOP (Employee Stock Ownership Plans).  The plan defined as a rule the price to be paid for the shares as the lower of the stock price at the beginning or the end of the purchase period.  Yes this is outright stock purchase, not options.  Yes, this was defined as part of the ESOP plans, not some hidden understanding between the purchaser and the issuer.  And Yes, it is legal under the ESOP rules.  But it should not surprise anyone that a similar rule/system would be put in place for exec option grants.

The thing that seems to shock people is that this behavior resulted in people making obscene amounts of money.  This is where they begin to get to the point.  Executive pay is absurd these days.  All you have to do is look at mediocre performers getting 9-digit pay packages and you see that it’s not how they get the money, but why they get it that is the problem.  I have lots more to say on that [ed: stay tuned].  But come on, you give children the keys to the candy store, you have to expect them to binge on a sugar high.

Well Bob, it worked.  This great PR offensive (see these posts about it here and here) worked wonders, the board bought all this stuff, and they rewarded you handsomely.  In the last five years, you’ve received some $200 million in salary, bonus, stock, stock options, and other perks.  In 2005 alone, you got a stunning $38.1 million in total compensation.  Nicely done.

But in case you missed it, the Home Depot board has guaranteed Bob Nardelli a “bonus” of $3million.  Read about it in BusinessWeek online.

one lucrative element of the package is not as well-known: Nardelli’s guaranteed minimum annual bonus.  Of course, many CEOs are eligible for a bonus each year, usually if they hit certain financial and operating targets.  Others have more limited guarantees, such as an assured payout in the first year of service.  But Nardelli’s employment contract shows that $3 million of his annual bonus, defined as the “target amount,” is a sure thing. “For each year during the period of employment,” says the agreement, “the executive will receive an annual bonus of no less than the full target amount.”  Last year, Nardelli earned a total bonus of $7 million.

Guaranteed bonus?  Isn’t that an oxymoron?  Aren’t bonuses supposed to be a reward for good work you did, not compensation for work you are going to do?

And as writer Brian Grow notes in that article, it’s not like he’s returned anything to shareholders.

To the ire of many investors, however, Home Depot’s total return to shareholders, a key benchmark of corporate performance, is down 13%, according to Institutional Shareholder Services (ISS).

Gee, Bob, hope you share some of it with the PR team.