Managing Leadership^®

Pay schemes for CEOs are becoming as convoluted as the tax code, loaded with special provisos, exemptions, sanctions, entitlements – all designed to dissuade this behavior, and reward that, hoping to mold executives into good corporate citizens. The most obvious way to do this has often been seen to enfranchise them; to make them owners, by awarding them actual or potential stakes in the companies they steer. It has been hoped that this would encourage CEOs to adopt a long-term view that was healthier for the organization and its shareholders.

Of course, we all know that the effort to influence citizen behavior through manipulation of the tax code often leads to unintended – even counter-manipulative – consequences. And so, it appears, is the case with executive compensation schemes. On the one hand, an overly long-term emphasis can give CEOs an unwarranted pass for current under-performance. On the other, and of curious interest here, is the suggestion that a long-term orientation may pose a disincentive for executives to undertake needed initiatives right now (when these initiatives might appear to have a negative influence on the share price in the relevant time-frame).

As a result of this thinking, according to a recent WSJ article, Verizon is adding a “pay-per-project” element to its payment scheme for its CEO. The effort is to provide a meaningful incentive to undertake necessary but risky initiatives that might otherwise be avoided for their threat to the longer-term potential of the company’s stock price.

What’s especially interesting about this isn’t really what it says about CEOs (which, by the way, is that they are hired managers who act out of self-interest). It’s what it says about boards – or, at least, Verizon’s board: It is taking more detailed charge of the nitty-gritty direction of the company. It doesn’t see itself as existing merely to hire some sort of executive titan, and then to simply turn over the organization to the unimpeachable individual leadership of this champion. That really is the traditional approach, and one that is still widespread, even by many boards currently being pressured to dump their CEOs.

Rather, the Verizon board appears to be establishing firm and detailed control of both general strategic policy and specific strategic goals. They are then setting in place structures designed to encourage their accomplishment. Moreover, this particular element (of pay tied to project progress/accomplishment) requires the continued close interest and evaluation by the board of managerial activity. This is well within the purvue – indeed, the fiduciary duty – of boards. A most interesting development, and one that bears watching.