Thursday, December 11, 2008

New Business Models in the Same Old Environment

To say that the recent downturn in the economy has gotten many to think about how businesses are run would probably be an understatement.  However if there is one principle that seems operative in this environment, it is that the more things change the more they stay the same.  In the past week we have seen stories highlighting Merrill Lynch's CEO, John Thain,lobbying to receive his $10M bonus.  The reasoning seems clear, he wanted to receive adequate compensation for orchestrating the sale of the 94 year old firm to Bank of America, widely considered to have been the only reason Merrill will continue to exist, at least in some form, for more years. Nonetheless that deal was made after Merrill had already lost about $11 bilion in 2008, though most of that loss has been attributed to Thain's predecessor in the job, Stanley O'Neal.   Thain had already received a $15M signing bonus upon taking the position.  Thus, argued New York Attorney General Andrew Cuomo, in a letter sent to Merrill's board of directors, "Clearly, the performance of Merrill's top executives throughout Merrill's abysmal year in no way justifies significant bonuses for its top executives, including the CEO."  But the same old ways of doing business, whether they are outdated or inappropriate approaches to the marketplace still seem to be the most widely practiced.  

According to the Corporate Library, the nearly 2000 CEOs of major corporations will still receive about a 7.5% raise overall in 2008.  Although this is far smaller than the double digit gains in previous years, this still seems out of step with the experience of employees of many corporations who are seeing unprecedented numbers of layoffs.  Indeed the average raise for a U.S. households routinely falls below 3%.   Ironically, after the CXO-led financial scandals at Enron, WorldCom and Adelphia, the Sarbanes-Oxley Act was passed in 2002 to, among other things, hold senior executives at companies accountable for the accuracy of financial statements. One of the provisions also highlighted what was thought to be one of the significant causes of these abuses--options compensation and large bonuses that were contingent upon good financial performance that, it was claimed, pressured executives to commit fraud.  Though Sarbanes-Oxley has been widely credited for the elimination or reduction of stock options as a means to provide incentive compensation, the increasing gap in CEO versus line employee pay as highlighted by this continued divergence in salary increase percentages as well as continued evidence that boards of directors have not really changed compensation practices at the highest levels of companies, reinforces again that companies are managed  no differently than they ever were.  And add to that the result of these compensation practices in 2008--scores of major investment and retail banks collapsing, economic recession and the loss of many jobs.  But there is more to this story than simply that outdated compensation practices continue and corporate malfeasance of a sort continues to have a negative impact on the economy.  Outdated practices for running business, what we'll call "operating models," also continue.  Peripatetic executives and location-locked line employees continue to be the rule, even as technology should be changing this model. Like outdated compensation packages, outdated approaches to running businesses will not improve our productivity and the work experience that most employees have, leading to unprecedented levels of job dissatisfaction.  

Other changes to operating models and incentive compensation could be adopted as common practice.  Businesses no longer have to be relegated to giving total credit for the accomplishments within companies to single individuals like CEOs.  In fact one could argue that the average CEO is getting too much credit for what amounts to creating the proper environment for great products to be created, for example.   How often can one directly attribute the performance of a company to the direct actions of its CEO?  With our abilities to now collect and analyze data it should be more possible than ever to quantify the actual contribution every employee makes to the success of the company and to reward the highest contributors accordingly.  

Likewise other aspects of business might also be improved through re-engineering operating models to accommodate a workforce that now actually has the ability to work in virtual environments without the loss of access to data or to corporate information systems, thus leading to reduced commuting times, better work-life balance, more satisfied and fulfilled and therefore more effective employees.  This is a direct result of the accessibility of broadband and mobile technology.  We are no longer in a world where a 1.5 Mbps data connection costs thousands and on-the-go access to email and business applications is costly or unprocurable.  So why haven't more companies adopted virtual workforces and eliminated capital costs associated with providing most employees with on premise office space and data connectivity?  Because the market has not yet had a competitor that outcompetes other similar businesses though the use of these new technologies.  Most businesses are still doing business the old way-by emphasizing face time, rewarding employees who have more of it under the delusion that that equates to more productivity. 

However that doesn't have to continue to be the case; but it will take rare leaders with the vision to challenge traditional approaches to business and who can win in the marketplace to change businesses everywhere.  

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