Into the Millennium - Performance Related Pay
Most of us now work with performance related reward systems. Whether we are teachers or car sales persons, an element of our pay will reflect how well we are doing our jobs. Hardly any of us gets rewarded for being a failure. That is unless we are corporate leaders. The media have been up in arms during the past couple of weeks about the alleged amount of pay-off due to Lord Simpson at Marconi. His failure has been astronomic. Under his stewardship, the value of shares in his company has collapsed from £12 to less than 50p. Lord Weinstock's family holdings in the company that he so successfully built have fallen from £500 million to £12 million. He can't be too pleased.
The greatest protests have come from institutional shareholders. Hardly a word from government or trade unions. Not even a word from the great man, Lord Simpson, himself. He may have had a contract but you would think business morality and self-respect would lead him to decline any reward. His misjudgements have badly let down both shareholders and the employees of the company who are paying the price through their job losses. What kind of message do his actions give out? What are the effects for employee attitudes in general? It breeds cynicism and suspicion. Hardly appropriate for generating a high performing, innovative economy.
But it goes further than this. It is the Lord Simpsons of this world who are advisors to government. It is they who tell Tony Blair and his colleagues how Britain should be made more competitive and how the public services can be reformed. It is they who argue the case for greater private intervention in the management of public services. Who argue that Britain will only be competitive with a de-regulated economy, weakened trade unionism and a flexible labour market. But on what evidence and with what credibility when they fail at running their own businesses?
The most innovative and competitive economies in Europe are the Scandinavian. They are the domestic base for such world-beaters as Ericsson, Nokia, ABB, Electrolux, Sandwik and numerous fast growing entrepreneurially driven biotech companies. Sweden has even produced a successful manager of the England football team, Sven-Goran Eriksson! And yet, Finland and Sweden are highly unionised, both have family friendly and working hours legislation in place, large public sectors and high tax regimes. In a word, they are modelled contrary to the economic principles espoused by the captains of British industry who now reveal themselves to be emperors with no clothes. An interesting MBA project would be to calculate the number of CEOs and corporate chairmen who have been fired from FTSE one hundred companies over the past ten years. What has been the average value of their golden handshakes, how many have received knighthoods and how many, at one time or another, have been advisers to government? So much for an era of meritocratic performance related reward systems.
3G And All That
What is shaking the world's stock markets is the Manhatten massacre and the economic downturn partly driven by the downgrading of new technology stocks. First there were the dot.coms and now it is the communication infrastructure manufacturers (including Marconi) and the telcos that have been hit. Business strategies reflect the judgement of CEOs and their management teams. This is why they are paid such high salaries. But on what data did they assess the consumer and market demand for their communication and technology products and services?
There has been at least ten years of digging up streets around the world. The result is a huge excess of fibre optic capacity which, according to some analysts, will never be needed. In Europe, there are six hundred pairs of fibre optic cables linking major cities when only two are needed. Corporate leaders rushed into these investments without preparing basic business plans.
This is also evident in their approach to 3G technologies. Ian Vallance and his colleagues at BT bid megabucks, indebting the company to the tune of £30 billion to win 3G licences. But what for? Is there a business case for 3G? Who will use it, how often and for what purposes? Even the technology has not been proven. Vodaphone has recently announced that for the next couple of years, it will take twelve seconds to download a single still videoclip! Who is going to want this? Will there be any demand except for sports results? Is this a case of major companies exploiting the spending of teenagers and other young people?
Whenever I have asked about the demand for 3G services at corporate events, I get the same answer. That it will allow us to access our bank accounts while on the move! Personally, this is the last thing I want to do. Even if technology can deliver, it does not mean that customers want it, let alone buy it.
Some major companies are investing in a wireless technology known as Bluetooth. This allows for machine -to- machine communication. For the fridge to talk to the cooker, the cooker to the washing machine and the washing machine to the drinks cabinet! Somewhere along this (wireless) line, it will allow us to order our products from supermarkets. Millions of pounds of research are going into the development of this technology. But have any CEOs asked whether we want it or not? Forty years ago, we developed the Concorde. At the time, a fantastic piece of technology. The only problem with this aircraft is that the overwhelming majority of the public prefers to fly cheaper across the Atlantic rather than faster. So much for the capabilities of technological innovation. To be successful, it has to be market driven. My guess is that in the technology companies more corporate heads will roll and more will quit their jobs with huge golden handshakes. Nice rewards for those unable to grasp even the most simple principles of basic economics.
© Professor Richard Scase