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Author: Brent Longnecker

Posted on October 23, 2002June 29, 2023

Weed Out Bad Board Members

While chief executive officers have been taking most of the heat created byEnron, WorldCom, Adelphia, et al., there has been some significant scorchingacross the country toward boards of directors as well … and deservedly so.

Shareholder confidence in board governance is at an all-time low. Analysts,investors and even employees today are asking questions like:


“What are they doing to prevent something like Enron from happening here?”


“What qualifications do they have? How are they chosen? How, if at all, are they evaluated?”


“How are they compensated?”


“Does the way they’re compensated tempt them to do something bad?”


Bottom line: A board of directors is a protector of shareholder interests.Board members should not be “partners” with management. They should not beclients of management. Rather, they should be professional and independent inevery sense of both words.


In a lot of cases, they do not have the qualifications to serve on thecommittees to which they’ve been assigned. This has got to change. Boards needto become much more multi-functional, with representation from legal,information technology, and human resources sitting right next to moretraditional finance and operational groups.


With the implications of new regulations, new listing standards from NYSE andNASDAQ, and the new penalties associated with corporate failures, whatshareholder wouldn’t want a multi-functional team with the required corecompetencies in place–thereby ensuring their investment is being properlyprotected?


It’s an unprecedented time in corporate governance. Shareholders will needto quickly separate the wheat from the chaff in directors who presently aresupposedly representing them. They’ll need to find directors who areindependent and up-to-date on true benchmarking analysis. They’ll also needboard members committed to creating and sustaining company values and areinterested in strategic planning and willing to make the time commitmentsnecessary. Gone are the days where board members come in the night before, havedinner, and then attend a one-hour committee meeting, a two-hour board meeting,and quickly hop on a flight back home by noon.


Despite the corporate cultures of greed and bad board members we’ve seenand read about of late, there is no shortage of ethical board members andcandidates to protect shareholders from the type of inappropriate behavior thathas led to all of these recent corporate failures.


The remaining bad board members will need to be weeded out and those guiltyof such behavior will need to serve the time befitting the crime.


Those most qualified to serve as guardians will need to ask a simplequestion:


“Is it worth it?”


To attract, retain and motivate these guardians, shareholders will need to bemore willing to pay what is necessary.


However, even pay packages for directors will need to be designed to maintaina true “guardian” status. Cash for retainers and meeting fees shouldcertainly go up–and I believe that board members should own stock. However, Istrongly believe the use of options should be discouraged, with the use of stockawards being their replacement. I also believe better SEC reporting for boardmembers is in order to once again minimize specific temptations that arise as aresult of lax or weak disclosure. Finally, we need limitations on how manyboards are feasible for a person to sit on and be productive as a guardian.


Times have certainly changed. I remember when you had lines as far as the eyecould see of board member wannabees. Today, the pickings are much scarcer–butnever has this been as important a decision as it is today.


Workforce Online, November 2002 — Register Now!

Posted on June 24, 2002June 29, 2023

Congress, Lies, Stock Options & the Common Worker

As each day goes by I’m more and more convinced that several members of ourUnited States Congress have no clue on how to run a profitable, on-goingbusiness. This is somewhat disconcerting when one reads about all the proposedlegislation many are politicking for post-Enron.


Of particular concern is this whole issue around the accounting for stockoptions. The dotcom boom gave rise to the idea of making stock options anintegral part of employee compensation. The practice proved a double-edgedsword, making millionaires of some and paupers of others.


For its part, Congress seems clueless on addressing the accounting and taxramifications of this practice and how best to level the playing field.


Senators Carl Levin and John McCain would like to change the way you expensestock options. They want you to do it through your company’s income statement.This way is different than the way it’s done now. Now, you typically do notexpense stock options at all, because of accounting rules that have been in theplace since the 1970s.


The problem with the income-statement approach is this:

  1. Right now the accounting treatment of stock options is very favorabletoward businesses.

  2. As a result of this favorable option accounting, companies have workedhard at giving options to as many rank-and-file employees as possible; and

  3. In so doing, have made companies more productive than ever before. Studiesperformed by WorldatWork in the 1990s show a direct link between one’s abilityto drive option grants lower in the organization and enhance productivity.

I’ve personally always struggled with how to value options at the time they’regranted. Apparently, options are not worth anything when they are granted. Ifthey were, then (1) the IRS would immediately tax you (which they do not) and/or(2) you could borrow against them at your neighborhood bank (which you can not).Further, if one really could value options, it would mean you would have acrystal ball on your company’s future stock price — and if I could do that, Isure wouldn’t be writing this article.


Then there is Sen. Joe Lieberman, who has proposed corporations give optionsto rank-and-file employees in lieu of pay. Lieberman’s strategy is great forexecutives who are making key strategic decisions, but unless your CEO plans oncalling on the mailroom to get your opinion on a possible merger, this wouldprove disastrous very quickly.


In any event, it sure would be nice if Congress would actually study what itis they plan on proposing on before making it a campaign issue. They count onthe general public being ignorant, which is a poor assumption considering today’sworker and his/her access to credible information.


Workforce Online, May 2002 — Register Now!

Posted on October 5, 2001July 10, 2018

Discrimination Against Dads

On a recent Friday night, I made a presentation to a group of accounting andfinance professionals in Florida on behalf of my company.Towards the end of the seminar, one man from the audience asked me what I hadplanned to do afterwards. I enthusiastically replied that I had made plans tofly out to Dallas to see my daughter play basketball, as she was playing inthe state all-star tournament.


    As I thanked my audience for its time and preparedto leave for the airport, the same man approached me and spoke of his amazementthat I was able to escape work for the night to go visit my daughter. My immediatereply was, “Who wouldn’t be able to leave on a Friday night to visit withhis child, especially to take part in such an important day of her life!”


    “A lot of people,” the man answered. “Takeevery man at my office as an example.”


    He then proceeded to go into great detail about howhis employer prohibits putting family before work, and even refers to spendingtime with children as “the woman’s job.” He said he and the othermen he worked with would be prohibited to do what I was doing. He reminded meonce again how lucky I was, and he set off to work the night away.


    As I sat on the plane later on that night, I couldn’thelp but think how sad this man’s situation was. I realized that though thisparticular example might have been extreme, most fathers in the workplace todaydo not feel able to take time off for their families at leisure. I even thoughtback to my past working environments and how often times those of us who wantedto take paternity leave or just time off to be with the kids, were referredto as “wimps.” Getting involved in coaching was frowned upon and althoughnot spoken, it truly was inferred than men should let the wives take care ofthe children.


    It’s amazing — we’ve come a long way in our societyin recognizing a woman’s role in the family unit is not limited to mother andhomemaker. It is common, if not standard today, for women to contribute 50%of the household income along with her husband. Employers have been responsivein accepting this trend, offering many female employees extended maternity leave,flextime, in-office childcare and the ability to telecommute. And though wearen’t at the end of this road yet, we are well on our way.


    But it starts to beg the question — what about Dad?Just as society has finally recognized that financial support for the familycan, or even should, be an equal contribution from both husband and wife, soshould the role as caretaker and parent. Not spending time with Dad is justas detrimental to a child’s well being as not being with Mom. Today’s typicalemployers are not only oblivious to a father’s need to spend extra time withhis children, they actually discourage it behind the scenes — even discriminateagainst it.


    We need to increase awareness of this issue that seemsto have been brushed aside for so long. Just as we are far down the path forrespect for a mother’s equal role in the workplace and family, we have yet tostart the journey for the father. Fortunately for me, our CEO is a good dad,which sets a standard for the others. But to other employers: Are you discriminatingagainst Dad? If so, what do you propose to do?

Posted on August 3, 2001July 10, 2018

Rank & Yank The Problems With Forced Ranking

Recently The Wall Street Journal ran an article on merit pay and the process several companies go through. They spent a good deal of time talking about forced ranking and actually talked about one company where the process was nicknamed “Rank and Yank.”


Forced ranking, as most of you know, is the performance management process where everyone in a company, division or department, is ranked “best to worst” in an effort to determine how to allocate pay and/or the implementation of a reduction of force. It is easy to rationalize forced ranking when the economy is down, when your industry is hurting, and/or when your company has had a bad year.


However, when a company is expected to do well, how does it explain a process whereby it is admitting that some of the people it hires “aren’t up to snuff”? Would it not be better simply to attack hiring on the premise of only hiring “A” players thereby eliminating the need to ever force rank?


Merit pay, as it was meant to be, is the concept that employees should be paid different rates for various levels of competence and performance. The underlying criteria of a merit pay system can be summarized as (1) the employee’s performance in relation to pre-established, understandable job responsibilities and (2) the employer’s financial ability to pay.

Merit pay is oftentimes only a catchy cliché.

In the 1980s, it was much easier to differentiate performance when merit budgets averaged 8 percent to 10 percent. In the ’90s, however, we have seen the merit budget erode by as much as 3 percent to 4 percent, making it much more difficult for companies to distinguish exceptional work using performance-based merit increases. When this occurs, it is difficult to truly link an individual’s compensation and benefits to his or her efforts to improve the company’s bottom line.


Does forced ranking really reward merit?
Today, forced ranking can actually encourage average or mediocre performance. Once performance evaluation time rolls around, over half of the workforce typically will be force-ranked as average (or very close), while remaining employees will be ranked below and above this standard.


In order to stay on track with the merit budget, employers, who force-rank, generally align employees in accordance with the pre-assigned performance distribution percentages. As you can imagine, this scenario results in intense internal conflict and can destroy any resemblance of employee teamwork and cooperation. Consider the employee who improves his or her performance; presumably, someone else will, in turn, be “squeezed down” to maintain a balance “fit” within the guidelines.


Forced ranking forces evaluators to make determinations on a person-versus-person basis rather than a person-to-established-standards basis. In my opinion, this also causes management to move away from focusing on pre-established, objective job standards, and toward evaluations based on personal attributes. A Pandora’s Box subsequently opens to all sorts of problems, including corporate infighting, person-rater bias, management subjectivity, and even lawsuits (all demotivating factors), which negatively impact the overall productivity of the organization. In the final analysis, “merit pay” is oftentimes only a catchy cliché.


A solution
I like what Herb Kelleher and Don Murray (CEOs of Southwest Airlines and Resources Connection, respectively) have done. They propose, from the outset, to hire the very best and train all hires to the fullest extent possible. Both believe they hire only on the “right-side” of the curve, so there is never a need to force rank. It is actually part of the cultures these two companies have developed, and as a result, the motivation of their workforces are higher than most other employers.


Based on the company’s performance of both companies, they may be on to something. As opposed to “rank and yank” they appear to “bank” on hiring the right people. And hiring and retaining the right, quality people is a lot more efficient than hiring a large quantity of people to be laid off in slow times, based on ranking systems. Corporations ultimately can increase productivity by following this smart hiring philosophy: Hire and keep the best in order to reap the best performance.

Posted on October 13, 2000July 10, 2018

Boom to Bust, Financial Planning A Must

Wow! We continue to hear some amazing things about the financial times we areliving in. Unemployment is at record lows with overall unemployment hoveringaround 4%, and skilled worker unemployment at less than 1%.


The capital markets (until very recently) were hanging in at historically high levels, with the Dowin the 11,000 area and the NASDAQ continually playing with 4,000 plus. Homes arebeing purchased in record numbers and it seems that everyday we read aboutanother 20-year-old who just became a millionaire.


I want to know who is going to take responsibility for the fact that, whilewe are going through these great economic times, the average American is savingat a record low. One study I recently read said the average 40-year old has only$46,000 saved toward retirement. Assuming that 40-year old has been in theworkplace for 20 years, he/she is saving only $2,300/year.


If my calculations are right, and I make a few conservative assumptions, ifthey continue saving this amount through age 65, they will only have only$180,000 — inflation adjusted. Assuming at age 65 they can get 3% interest (netof inflation) and they live another 15 years, they’ll need to be able to liveon what amounts to $14,638/year or little more than $1,200 per month! Twelvehundred dollars! In Texas, half of that goes to the air conditioning bill.


From a workforce perspective, this is not good. For unless you are hoping fora large inheritance, winning the lottery or being the next “survivor,”the average American isn’t going to have enough money saved — at age 65 — toretire. To make matters worse, Social Security as we know it may not even be inexistence.


Caring about the future of their people — and not saddlingsomeone with unmanageable liabilities — is the mark of substance over style.


And if, as a logical result, a person decides (i.e. needs) to stay inthe workforce, imagine the bottleneck with regard to career progression. Forexample — a company has an “up-and-comer” who is counting on apromotion to a job presently held by someone about to turn 65. That’s OK untilthe 65-year-old informs everyone they cannot retire just yet because they havenot saved enough. The up-and-comer is stunned and threatens to leave if he/sheis not promoted.


How does the company react? Terminate the 65-year-old? An age discriminationlawsuit will probably result. Don’t like that? Then you lose the up-and comerand have the news spread throughout the company that advancement is limited, ifnot non-existent. Imagine how that’s going to impact your ability tosuccessfully attract, retain and motivate talent needed for the future.


What’s the solution? I believe financial planning for your whole workforce(not just for senior executives) could prove the answer if done right. Imagine aworkforce that truly understands their company benefits, the 401(k), lifeinsurance, Section 125 plans, etc. A workforce that understands the differencesbetween stocks, bonds, mutual funds; a workforce that comprehendsdiversification and asset allocation based on one’s goals and objectives. Aworkforce not susceptible to predatory phone calls promising riches if theyinvest in Hades.com.


Companies can begin with quarterly gatherings where financial planningeducation is stressed. The human resources department could take the lead andbring in the appropriate experts. They could tape the meetings and disseminatethe information discussed either via video or cassette. They could even put iton the corporate Web site.


Twelve hundred dollars income a year? In Texas, half of that goesto the air conditioning bill.


To the extent we can proactively address this issue, chances are we canalleviate some of the “would be” logjams of the future. But a companyneeds to incorporate this into their overall work experience or culture. It hasgot to be seen as a key necessity and put into place like othercompany-sponsored training programs.


And think about the “splash benefits”of such a move. A moreeducated employee is a more productive one. Their trust and appreciation of thecompany will increase multi-fold. In addition, imagine the retention savings,since it costs anywhere between one and two times one’s base salary to replaceand re-train for a vacant position.


I actually believe that Fortune magazine should not hold anyone up asa “Top Company to Work For” unless they are addressing this issue. Ithink this issue, along with programs centering on diversity, and men and womenin the workplace, are critical to a company really being “tops.”


You see, companies are a lot like politicians — they can get a lot of publicrelations to make them look good. But really caring about the future of theirpeople — and not saddling someone else (or this country) with unmanageableliabilities — is the mark of someone (some company) having substance overstyle. That is the mark of true leadership. Let’s just hope and pray that we,as Americans, can win on all counts, soon.

Posted on August 28, 2000July 10, 2018

Lessons Learned From the Kursk

I am sure each of you have watched in horror over the last few weeks as the disaster around the Russian submarine Kursk unfolded.


First, just hearing that a submarine had gone down made those of us who are claustrophobic shudder. Second, we then heard all the different assumptions as to what caused the catastrophe. Finally, we watched as egos and pride delayed any chance of a successful rescue for the trapped sailors.


One can only imagine the lack of morale in the Russian Navy. Who wants to go out on maneuvers?


As the story unfolded, I could not help but wonder how many times that this type of situation is played out in our U.S. workforce. How many times do companies have an important situation regarding their most critical asset — their people — which never gets resolution due to political infighting, inflated egos, pride, etc.? I know for a fact it happens daily.


For example:


  • A company is being bought, people are nervous as to their future, but no communication is forthcoming because different departments are arguing as to who the communication should come from.
  • A great candidate eagerly awaits an offer, but now it seems “everyone and their brother” wants to give you their two cents. By the time the dust has settled, the next Bill Gates is elsewhere having grown weary of waiting.
  • A great solution to an old problem resides in the winds of a new set of outside advisors that have just left your offices. However, once they are mentioned to the “powers that be,” they are quickly discarded for the old advisors due to their long-term relationship with “key people;” an advisory group that, by the way, has no solution to solve the problem.

Human death is a tragic situation and one not to be trivialized. Each one of those sailors had a family and loved ones that mourn for them now. Corporate death, on the other hand, although not so unforgiving, can take on a variety of forms — none the least of which are caused by political infighting and oversized egos.


Remember though, like the Kursk situation, every mistake we make with our workforce that we do not rectify is a mistake that usually affects those close to them as well. Add to that the fact it often is a mistake that lingers and festers indefinitely in the minds of these key assets and you clearly can affect workforce psyche.


The morale of a company can vanish as a result. And one can only imagine the lack of morale in the Russian Navy. Who wants to go out on maneuvers? Well, ask yourself the same question about your workforce. Do you have an environment that is conducive to rectifying mistakes quickly? Are you open to outside solutions? Do you want your business to survive?


While you ponder the above, let our prayers and thoughts be with the families of those who found the answers to the above to be “no.”


 

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