Why The Dike Leaks

Why The Dike Leaks: Problem solving and executive compensation, by Mark Chussil
When a dike leaks, the problem is not that someone has to stick a finger in it. The problem isn’t that the obvious response — stick a finger in the leaking dike — is only effective for a little while. The problem is that the dike is leaking.

Executive compensation is top-headline news these days. It commands the attention of the President and Congress. It’s an attractive problem, full of righteous indignation, handy villains (“them”), and clear action plans. And although I’m not against “solving” it, I suggest that it’s not the important problem.

Let’s imagine that the executive-compensation problem has been solved to your satisfaction. Legislation has been enacted, paychecks have shriveled, remorseful CEOs have issued their mea culpas, defiant CEOs have left the building, resilient CEOs have gotten back to work. Or CEOs remain free to negotiate whatever deals they want with their boards of directors. Or something else. Whatever you believe is the perfect solution, so it shall be done.

Now that we’ve handled executive compensation, is the economy back in order? Are we all back to work? Are our retirement funds healthy again? I don’t think so.

Whatever we do with executive compensation, it is the equivalent of sticking a finger into a leaking dike. Giving executive compensation the finger may stop a disturbing (cash) flow, but the dike is still structurally unsound.

(We may want to cut compensation and super-sized bonuses on other grounds, such as the impropriety of using taxpayer money to make bailout beneficiaries rich. That’s a different issue. Let’s not think, though, that cutting compensation makes executives more competent, or less.)

The economy is not in trouble because executives got paid too much. The economy is in trouble because executives (and others in their companies, and people in government, and even we the consumers) made bad decisions. Not just a few executives and not just a few times.

Why did so many people make so many mistakes?

I have written eloquently about problems in corporate decision-making. (See, for example, “With All This Intelligence, Why Don’t We Have Better Strategies?,” “What You Pay For,” “It’s Working!,” and “Suffering was Optional.”) What those essays have in common is that they describe ways in which sober, dedicated business professionals are systematically misled by the tools of the trade. Spreadsheets, for instance, say nothing about competition. Trend lines extrapolated from the past are irrelevant if the future is unlike the past. Doing whatever it takes to make the numbers makes us look good and the performance targets look reasonable even if we hit them by eviscerating the company. (Update to this post: see “When Goal Setting Goes Bad,” an interview with Professor Max Bazerman of the Harvard Business School.)

As I suggested in “To Bail or to Bail Out,” it would be useful — more useful than capping executive compensation, though they are not mutually exclusive — to require the auto industry to use techniques such as business war-gaming as a condition of receiving public funds. War-gaming and other strategy simulations help companies create better strategies, and they would raise the odds that taxpayers will be repaid. I would advocate the same for other industries wanting public assistance. I believe in business war-gaming because I’ve seen it work in the 100 or so that I’ve conducted for Fortune 500 companies.

The point isn’t business war games, though, and if you prefer a different technique that’s fine with me. The point is that we need to get better at decision-making, not dike-plugging. More of the same, only better, won’t do. (See “Precision In, Garbage Out.”) Sticking a finger in the executive-compensation dike merely guarantees we’ll be the first to go underwater when the dike breaks.

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Chris Holtom

Mark, how come this blog does not attract the wide debate it deserves? I have looked at several of your articles and its refreshing stuff, particularly at present. Decison making is tough and getting tougher because of lots of stuff buthaving too much data and information does not help, the immediacy of news panics the bosses, group pressure expects that there is a high tempo of response to do something….etc. Question is, did we ask for the data and information that is flying at us in the first place? Do we have a process of logic to capture information that is relevant, check it for accuracy, identify key “players”, assess their reactions and then review the possible consequences – good and bad (in the context of our intent) and finally measure the effect of actions as they become apparant.

I suggest there are ways to help us act in this information anarchy that seems to surround us. War games is certainly one tool, using the OODA (Observe, Orient, Decide, Act – Boyd) loop to manage ad hoc events helps, Orient requires relationship intelligence (CI) as a feed, “player analysis” in planning is another tool and finally accurate, shared situational understanding using simple visuals also helps. This is what the military do – trouble is none of their coalition fellow-travellers appear to use the same logic, and most unfairly of all nor do the enemy…… We have tried to apply some of the best bits of military thinking and delivery to business strategy and operational management (Some success in opil and gas in Nigeria!). I would like to share our ideas with you. Chris Holtom PS we are old kids on a new block so our rules are largely unknown yet!



While I agree with many of your ideas I think in this particular instance you are off the mark a bit. I agree that fixing executive compensation wont fix the problem. However, I believe that Incentive Compinsation strategy is a significant part of the crumbling dike. Key personnel (executives, traders, loan officers, etc.) are incented and driven to maximize their personal wealth and this does not always align with what should be the overriding strategy of maximizing and securing shareholder value.

Mark Chussil

Thanks, Jeff. I appreciate your comments, and I agree with you. Incentive compensation is a big part of the issue. We get what we pay for. I think that it’s not so much high compensation that we object to; it is the combination of high compensation and poor performance. In other words, we have paid for but we haven’t gotten. (Please see my blog post “What You Pay For.”) Moreover, as you also said and with which I also agree, personal incentives may be at odds with corporate objectives. Finally, there’s the problem that we humans use backward-looking metrics (e.g., profit trends) to gauge success, but those metrics may tell us little about forward-looking expectations. (See my blog post “It’s Working!“)

Thanks again for your comments.