The Mintzberg Debate on Executive Bonuses December 30, 2009

One of the most scrutinized causes of the financial crisis in 2008 is executive compensation and bonuses. An analysys at the Evolving Excellence blog of a Wall Street Journal column by Henry Mintzberg spells out a solution clearly and succinctly: Scrap bonuses altogether.

Esteemed social scientist Henry Mintzberg believes that bonuses aren’t necessarily the best way to elicit outstanding business performance. In fact, handing out bonuses can be poison to a company because it places success or failure squarely on the shoulders of a few people. That pushes aside unity and teamwork. Mr. Mintzberg notes:

“A robust enterprise is not a collection of ‘human resources’; it’s a community of human beings. All kinds of people are responsible for its performance. Focusing on a few—indeed, only one, who may have parachuted into the most senior post from the outside—just discourages everyone else in the company.”

A common defense of the bonus system maintains that without bonuses, you won’t get the right person in the CEO’s office. But Mr. Mintzberg asserts that you may get the wrong person in the CEO office with the bonus system:

“At the worst, you get a self-centered narcissist. At the best, you get someone who is willing to be singled out from everyone else by virtue of the compensation plan. Is this any way to build community within an enterprise, even to foster the very sense of enterprise that is so fundamental to economic strength?”

Only engaging employees at every level will the business be a productive community. But do executive bonuses have to be done away with in order to bring together a workforce?

Adam Zak thinks demonizing the executive bonus isn’t the answer. After all, paid-vacation days, base salaries, perks and other benefits might well also be targeted and condemned. Community or not, Mr. Zak makes the point that each individual will be contributing something different to the company, of various values.

“If we eliminate bonuses from the compensation package we’re still going to need some way of differentiating the value each individual contributes to the organization. Perhaps this can be accomplished via the salary mechanism, but this just implies a much wider range of salaries. And salaries present the disadvantage of being, typically, fixed for the duration of a year or so.”

How to fix that?

“…we could make salaries variable, adjusting them periodically based on someone’s perception and interpretation of the value contribution for each individual. But if we get to that stage I’m thinking that all we’ve really accomplished is simply engage in word play, creating a fixed and ‘variable’ component for salary. Sounds like a bonus to me.”

Instead of eliminating bonuses –after all, they might well be inseparable from a more demanding job –Mr. Zak suggests “a more accurate and transparent way of measuring and valuing the contribution each individual… makes to the organization, and then rewarding her for that contribution. This is the real challenge which needs to be addressed and, unfortunately, Mr. Mintzberg offers us no guidance in this area.”

To read the Evolving Excellence analysis, go here.

To read Adam Zak’s analysis, go here.

To read Mr. Mintzberg’s WSJ editorial, go here.