Countering CEO Disengagement in the Age of TARP

Organizations are wrestling with a strange duality: the need to rethink high CEO compensation while trying to keep chief execs engaged

Tell members of the general public that 1) CEO compensation is likely to decline in the near future; and 2) this drop may compromise the self-esteem and morale of these chief executives, and most would reply 1) it's about time; and 2) who cares?

But for corporate HR officers and boards, it is something to worry about. According to a new study from the Corporate Executive Board, human resources officers are deeply concerned that the increased scrutiny CEO pay packages will receive—as well as actual cuts in compensation levels—will cause CEOs to become disengaged and even more likely to quit, imperiling the organizations that need their vision and confidence to make them strong despite a weakened economy.

"A lot of leadership teams are thinking about what to do to retain their senior leaders," says Jean Martin, director of the human resources practice at the Corporate Executive Board (CEB), an organization in Arlington, Va., that provides research and support for executives. The 2009 CEB study, Executive Compensation, found that the percentage of senior leaders who demonstrate high levels of discretionary effort (defined as the willingness to go above and beyond normal duties) dropped from 29% in 2006 to 13% for the second half of 2008.

At the same time, the CEB is seeing "100% of organizations visiting whether CEO pay is deserved," a tenuous situation because compensation is more crucial to senior executives' engagement than it is to that of lower-level employees, according to Martin.

Another problem: Many CEOs already have stock options under water.

With many organizations set to reexamining the metrics used to determine CEO compensation, and with the turmoil over executive compensation in general, it's definitely enough to be of concern to CEOs, says Pearl Meyer, the senior managing director at Steven Hall & Partners, an executive compensation consulting firm based in New York City, who adds that "I don't necessarily think executive pay will decrease significantly."

Ken Blanchard disagrees. "I think it's almost an ethical imperative that CEO compensation come down," says Blanchard, the author of numerous management books, including the classic The One-Minute Manager. "In the old days, the rule was CEO compensation was five times that of the lowest-paid employee." Even by the $500,000 minimum TARP standards, the formula isn't relevant today.

Regardless of whether the threat to CEO pay is grounded in reality or overhyped speculation, human resources officers and board members should be on the lookout for CEO disengagement and learn what they can do to remedy it, according to Meyer.

The signs of CEO disengagement are fairly easy to identify, says Neil Jacobs, head of Northeast America for YSC, a global business psychology consulting firm in New York.

When Thick Skin Becomes Thin

"Body language tells you what mode your CEO is in," says Jacobs. "Look at posture and whether the CEO sounds defeated in meetings." Indeed, CEOs who seem uncharacteristically scared or oversensitive to criticism may be heading for a disengagement crisis. "People who manage to graduate to CEO level are pretty thick-skinned," says Roy Cohen, a career counselor and executive coach in Manhattan. "They tend to be confident. They believe in themselves and that they deserve to be in the CEO role. If they don't [act that way], there's been a breakdown."

You may notice the CEO seems psychologically disconnected as a team member. When CEOs become disengaged, "the shift of their leadership starts to move to leading more for themselves than for the organization," says Jacobs. "Engaged CEOs will use the word 'we' a lot. They show honesty and responsibility. They'll say, 'I'm the head of this organization, and we're going to get through this.'"

Vanishing Acts

The next sign of disengagement is a lack of visibility, conspicuous absences especially during times or in places that call for the CEO's attention. "I was working with a client company in Britain, and they thought one division was inviable," Jacobs recalls. "One of the people who was involved in trying to save the division went on an unrelated side trip. That was a very bad sign. The CEO who is committed to bringing an organization through difficult times has a high degree of visibility, being a role model and making sure his or her voice is heard within the organization."

Little signs, too, can mean a lot, according to Jacobs. If the CEO starts taking a bit longer to return phone calls or messages from anyone in the organization or isn't as quick to set up meetings as usual, it could mean he or she is looking around at other employment opportunities.

For those CEOs who prefer to remain in their jobs, however—while at the same time recognizing their own growing disengagement—there is much they can do to reinvigorate their own morale.

"CEOs need to go back to the front lines of their business," says Jacobs, "and see the people who are manufacturing the cars or bottling the fizzy drink at the plant, so they can remember who they're working for and why. That's very powerful."

Accepting Blame

A commitment to honesty on the part of the CEOs can bring about a morale-raising renewal of the trust between them and employees at all levels of the organization. Blanchard points to the U.S. President's willingness to accept blame as a good example. "Obama has already apologized three time times to the U.S. people. That's the first time I know of that happening since Kennedy," Blanchard says. "[Likewise], CEOs need to get real with their people."

Another route to reengagement: a better attitude toward feedback. Whether it's a factory worker complaining about poor working conditions or the board president announcing a proposal to reduce the CEO's salary, the CEO should respond by saying, "Tell me more. How might that help?" Blanchard suggests.

Of course, not all chief executives can be counted on to heal themselves. It's the board's job to counsel the CEOs and guide and teach them, particularly when they see leaders exhibiting another dangerous type of disengagement: an unwillingness to take chances in order to stimulate stagnant business.

"CEOs should not be so paralyzed by the pressures society is putting on them today that they don't take risks in their roles as managers," says George Davis, a Boston-based partner of the executive recruiting firm Egon Zehnder International. "Good engaged CEOs and boards know how to gauge the risks and opportunities."

"Boards need to think about how to encourage senior leaders to take well-thought-out risks," says Brian Kropp, senior director for the human resources practice at the CEB. "And they should look at whether CEOs are making the right decisions—not necessarily whether those decisions are getting results [right away]."

In addition to encouraging the CEO to take well-thought-out risks, the board may also want to hire an executive coach. "Coaches can engage CEOs by unlocking their blind spots," says Jacobs.

A Measure of Success

And one way or another, boards have to let their CEOs know that they don't subscribe to the negative generalizations made about chief execs because of the financial crisis.

"Pitchfork populism has gone too far," says Davis. "The public is painting the CEO population with too broad a brush. A lot of good CEOs are underappreciated."

Even when economic necessity compels the board to reduce some component of compensation—salary, bonus, or stock and stock options—that they award the CEO, the board should know it won't necessarily disengage the CEO if they handle it correctly.

"If you earn $50 million instead of $70 million, does it really make a difference?" says Jacobs. "Does more money mean more, or is it more important that the CEO feel engaged?"

Cohen believes most CEOs want large compensation packages not because they're greedy for more money but because it represents a measure of their success. "If CEOs believe in their own talent, they're less likely to become demoralized and worried about compensation," he says.

Of course, it wouldn't hurt if the general public's image of CEOs could somehow be rehabbed, says Meyer: "Many people have the wrong image of CEOs, that they're flying in corporate jets and are in the lap of luxury. The reality is these people are in the hot seat, working strenuously to turn their companies around."

Click here to view a slide show of top execs who received a raise or reduction this year.

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