Canadian HR Reporter

Strategic capability Network'S paNel of thought leaders brings decades of experience from the senior ranks of Canada's business community. eir commentary puts HR management issues into context and looks at the practical implications of proposals and policies. Canadian HR RepoRteR december 15, 2014 executIVe serIes 11 www.scnetwork.ca What are the skill sets? It's interesting that in listening to a panel consisting of two expert consultants and one expert hr leader on "what's equitable in executive pay," no one ventured to validate what the in- dispensable skill sets are for an ef- fective, "best fit" ceo in a global marketplace that warrants a shift in equitable executive pay. And nobody identified definitive performance measurement criteria for the ceo role. "Equitable" typically means fair, reasonable and even proper, un- biased and impartial. So not only am I curious about how "pay for performance" is actually deter- mined for the CEO role, but also, how would the same process mea- sure up to the pay for performance strategy many organizations use for employees' pay? In simple terms, a CEO's job is to drive an organization's profits and growth. But might you also subscribe to the notion that to- day's CEO needs to focus on how an organization's current business models need to change in order to be better equipped for unexpect- ed future trend? Yet, despite a brief comment on the North American practice of scrutinizing quarter-to-quar- ter results, there was no actual discussion on the dichotomy be- tween delivering today's per- formance for short-term profit versus building an organization's capacity to deliver tomorrow's profits and organizational growth. All three panellists agreed on how complex the CEO role is and the need to be a transformational leader. What exactly does that mean, though? Emerging tech- nologies alone require a CEO to understand how to harness and leverage social media channels and increase speed-to-market innovations. Yes, today's CEOs face continu- ous uncertainty and are expected to resolve the most challenging issues while at the same time be- ing inspirational leaders. Surpris- ingly though, nobody actually de- fined what the behavioural traits or cognitive criteria are for such a mission. Bearing in mind that the CEO role is unique, I did not hear any description as to what a CEO should be doing and how different the role is from any other execu- tive team member. So is it accepted that for a CEO, equitable pay is based on driving the successful transformation of an organization by being person- ally involved and showing up as the role model for the requisite behaviours, belief systems and mindset changes? Does it require a CEO to communicate the im- portance of the desired transfor- mation clearly, consistently and in a way where employees un- derstand where their role fits and how important their contribution is in making it happen? Does it require that the CEO builds a strong and effective top team of leaders who are willingly open to promoting innovation and prompting employees to take risks? e reality is the CEO owns the top position in any hierarchy, no matter how flat the organization. Everybody looks to the CEO first for clarity around vision, strategy, direction and "proper" behaviour. e CEO is the ultimate boss with the absolute authority to ensure the right people are in the right jobs with the best possible skills. He has to make tough decisions about who has the ability and mo- tivation to drive essential changes efficiently and successfully. He has to set an example of excellence others emulate. All things consid- ered, the CEO needs to have a track record that proves he knows how to increase profits, talent, trust and commitment in an uncertain growth environment. Perhaps both HR and the board could find inspiration from Leroy Eime: "A leader is one who sees more than others see, who sees farther than others see and who sees before others see." I wonder how different the final choice could be if in selecting a "best fit" CEO, both parties used this quote to create two powerful behavioural questions: How might this increase your employees' innovation, com- mitment and trust? How different might your organization's future profits and growth be? Trish Maguire is a commentator for SC- Network on leadership in action and founding principal of Synergyx Solutions in Nobleton, Ont., focused on high-potential leadership development coaching. She has held senior leadership roles in HR and OD in education, manufacturing and entre- preneurial firms. She can be reached at synergyx@sympatico.ca. trish Maguire Leadership in action avoiding the black hole can organizations develop capabilities to keep them from spiralling into a "hot ceo market" black hole? ree assumptions about ceo compensation seem to be driving organizations, rather than orga- nizations driving their own futures. assumption 1: e world is now so complex that fewer people can successfully function as a CEO, causing the market price for these individuals to skyrocket. CEO compensation has moved from 20 times that of the average worker to 200 times since the mid-60s. Given the shift to knowledge work and the typical worker having a higher skill set, even in manu- facturing environments, how can this ratio be justified? And, even if it can, is it a sustainable approach? Possible responses: • Aggressively look at what is needed to sustain the organiza- tion and plan for success in the future. This requires a disci- plined approach that does not rely on opinion but on facts and documented research. • Look at leadership as a team ef- fort. Can other members of the executive team cover what is needed? What leadership capa- bilities are needed to create com- prehensive team capabilities and how should gaps be filled? • Isolating the CEO and putting all the weight on his shoulders will not work. e world is too com- plex for that. e board needs to view the leadership team as one accountable entity with the CEO as team leader. • While being sensitive to the market, adhere to a compensa- tion structure that makes sense internally. Money isn't the only reward sought by senior leaders. assumption 2: Organizations more frequently go outside for a CEO rather than promoting inter- nally. is is often rationalized by a need for new thinking or skills. Possible responses: • Take a team-based approach to allow for a much broader set of skills to be leveraged. • Use business scanning and strat- egy to develop skills not present within internal talent. • Develop out-of-the-box meth- ods to give internal talent op- portunities to broaden capabili- ties important to the future of the business, to draw out latent abilities and gain practical ex- perience. For example: second- ments to not-for-profits; use of a coach or mentor from a differ- ent business to develop a needed capability; and participation in Karen Gorsline Strategic Capability not $1 more e panel at the recent strategic capabil- ity Network event on equitable executive pay dodged the big question within the question: "equitable to whom?" While the panel was true to the fine print of the session descrip- tion, ultimately, the audience did not get a satisfactory answer to any question. From an organizational effec- tiveness perspective, the equita- bility of executive compensation is made manifest by CEO effec- tiveness: "Does the candidate have what it takes to develop and execute strategy?" Within that context, and from the perspective of shareholders, the answer to eq- uitability in executive pay is easy: Equitable is what it costs to hire someone sufficiently effective — and not one dollar more. But many feel compensation levels are not fair and sharehold- ers are paying a lot more than one dollar more. Why do we feel this way? Research into human behav- iour has shown that "felt fair pay" directly corresponds to levels of work and the associated time span at each level. In a properly strati- fied organization, the CEO of a medium-sized firm is expected to be planning out five to 10 years. If we compare that to the time span of, say, a director (one to two years) two levels below the CEO, then the CEO's compensation "feels" fair if it is four to eight times the compensation of the director (one year x two x two, or two years x two x two). Based on the rising disparity between increasing CEO pay and the flat-lined pay for the middle ranks and below, it's no wonder things don't feel right . And yet, at least one panellist cited "supply and demand" — some combination of scarcity and desperation has driven compen- sation into the stratosphere, and that's just the way it is. How do we square that with the fact that 40 per cent of CEOs fail in the first 18 months? What is so concerning is why neither of the two compensation experts on the panel dug into that. Robert Levasseur of McDowell Associates at least alluded to eq- uity — and performance-based compensation — but would not drive to a discernible point. And while he clearly knows CEO packages tend toward "hedging" — where the candidate succeeds whether or not the shareholder succeeds — he prescribed no solution. ere may be very good reasons not to attach performance to com- pensation or to tolerate hedging in negotiations, but the panel did not provide any cogent argument for or against. Ultimately, what we learned is not what is equitable in executive pay but executive pay just is what it is. Michael Clark is director of sales and marketing at Forrest & Company in Toronto. Forrest is an organizational transformation firm, with more than 25 years' experience in developing the organizational and leadership capac- ity in organizations. Michael Clark organizational effectiveness deVeloP > pg. 21 Join our professional community of Canadian HR & Organizational Leaders: • Connecting @ monthly events • Collaborating with peers • Challenging conventional thinking The Power of Human Capital CULTIVATING LEADERSHIP FOR 35 YEARS Great Leaders GROW www.scnetwork.ca

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