Tuesday, February 16, 2010

Return on Investment

On February 12, 2010 a writer in The Sydney Morning Herald, Michael Pascoe made the following statement about the past CEO of Telstra in Australia. In an article entitled "Sol Trujillo was worse than he looked" Pascoe wrote: "When Trujillo and Co departed, it wasn't immediately possible to rank his performance. Parts were obviously bad, parts had promise. By the look of yesterday's interim results, the bits with promise were nowhere near enough to make up for the bad. More hat than cattle, as the saying goes, looking at where Telstra stands 5 years later."

The Sydney Morning Herald's "Good Weekend" of February 13 (p.14) had a similar theme. In an article entitled "Outrageous Fortune", Jane Cadzow points out that in 2003 Sydney University researcher John Shields concluded that the 20 best performing Australian companies paid their CEO's substantially less than did the 20 worst-performing companies. Shields is quoted as saying that "Against three criteria - return on equity, share price change, and change in earnings per share - statistical analysis shows that high executive pay levels actually coincide with a lower bottom line." Shields is quoted as saying that the 2003 research is still broadly true in 2010.

When I talk with Directors and senior executives I hear a lot about for need for measuring return on investment. It is one of the justifications I hear when companies are considering laying off staff or reducing their workforce by using part time workers. We do a lot to measure the return received for work done by lower level echelons on most organisations and the drive for increasing the use of technology is based on the premise that the company will obtain better returns.

Why don't we apply this to the top echelons? If it can be done for the lower levels (and it both can and is) then surely it can and should be applied at the top - including Director remuneration.

For almost 20 years I have been arguing that remuneration at the top should be genuinely performance based. Although the the myth is that this currently happens, the fact of huge bonuses and termination pays being made when the company is going backwards illustrates the discrepancy between myth and fact.

I suggest that the time is right for leaders - Company Directors, Legislators, Regulators, and Owners (shareholders) - to make a stand and insist on measuring return on investment at all levels and paying accordingly. By all means pay huge amounts (well into the $millions) if you believe that is what it takes to get the people you want at the top or anywhere else. I've no argument with that. But pay the bonus components on what happens to the organisation in the subsequent 5 years - especially in the event of a termination pay.

I'm not convinced that there is enough intestinal fortitude around for this to happen. Those executives who actually do provide long-term positive benefit to their companies - ie those who actually do provide a value-added component - have nothing to fear. I suspect its the others who will prevail.

I think that's the point Pascoe is making, too.

More information about Doug Long and how I may be able to help you at http://www.dglong.com

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