Pay Czar

On June 10th, the associated press reported that President Obama appointed Kenneth Feinberg to be his Pay Czar to oversee executive pay for the highest paid employees in those companies that have received TARP assistance.

Reuters reported that the Pay Czar will have the power to reject compensation plans for top employees at companies receiving "exceptional" government aid. The Obama administration will also call for "say-on-pay" legislation that would give the Securities and Exchange Commission authority to require public companies to hold non-binding shareholder votes each year on executive pay.

It was also reported that the Obama administration would propose legislation that would require compensation committee members at companies listed on national securities exchanges to be independent from management and answerable only to the compensation committee and its independent advisers and legal counsel.

This raises the question concerning whether or not executive compensation controls executive motivation. Apparently, the Obama administration believes that compensation is the primary motivating factor for executives. I don’t believe that this is true.

Dr. Larry Repucci, a psychologist and chemical engineer, who was responsible for an industrial innovation program during the 1960s and 1970s, developed a motivation equation.
Motivation is proportional to Importance (to the individual) x Personal self-worth (Ego) x Program (program strength) x ps (probability of success).

Motivation = Importance x Ego x Program x ps.

Importance concerns all factors that are important to an individual such as family, career, benefit to mankind, market value, creative challenge, the assignment, geography, compensation, etc. Today, people don’t have time nor want to work on assignments that don’t help them with everything that is important to them. Compensation is only one small component of importance.

It should also be recognized that most people believe that compensation is rarely, if ever, a positive motivating factor but compensation can demotivate.

Personal self-worth (Ego) is proportional to successes ÷ failures. Successes have a half-life and failures never go away. Ego describes a person’s performance for all similar assignments. For example, if someone has succeeded on similar assignments with no failures, he/she will have a strong Ego for that type of assignment. If someone has had failures on similar assignments or has no experience, he/she will have a weak or undeveloped Ego for that type of assignment. People will generally avoid assignments that remind them of past failures or don’t relate to their experience. Senior executives with strong Egos, who have a track record of success, will very likely not be motivated to accept assignments that have a high risk of failure.

Program Strength is determined by means of rational arguments. All business puzzles ought to involve rational argumentation to prove or falsify propositions. Hence, we should know how to construct propositions and develop syllogisms to show how we have proven our conclusions and forecasts. Strong programs are based on rational arguments that prove with certainty that the goals will be achieved. This will happen if the rational arguments are based on knowledge blocks that are known to be true. People are motivated to work on strong programs and treat weak programs with caution, indifference and avoidance.

Probability of Success (ps) deals with the probability that the rational arguments that prove with certainty that a project’s goals will be achieved are valid. This will happen if the rational arguments are based on knowledge blocks that are known to be true. People are motivated to work on action steps that have a high probability of success.

The bottom line is that I believe that a Pay Czar is not required and may even contribute to ultimate failure.