Today we conclude our week of reflection on leadership as a tribute to the Veterans Day Holiday. We will return next week with a continuation of the analysis we began on effective decision making.
Until then … we hope you enjoyed our Veteran’s Day Celebration Series!
Ethical Competence in Leadership
(Original post December 2012)
Executives and business thinkers believe that ethical competence in leadership simply translates as leaders having good character. An ethical leader with the right values can set an example for others and resist temptations that may occur. Recent portrayal of business executives however, is often viewed as greedy, competitive and only concerned with compensation. Many of us agree that the basics of capitalism, which include personal gain associated with risk and rewards are ethically acceptable concepts.
Business leaders have become the focus of criticism however, through the revelations of numerous scandals, bad behaviors and outrageous compensation packages. As a result, organizations are under extreme pressure and unparalleled scrutiny to reframe the criteria for what constitutes ethical leadership with emphasis on: (a) behavioral accountability, (b) decisions that affect the enterprise, and (c) establishing reasonable executive compensation – an intensely complex topic that in its simplest terms focuses on the alignment between executive pay and performance. Adding to this is the pay gap between boss and workers that has stretched to such levels, that many find difficult to comprehend as ethical. While incentives intrinsically motivate top executives, arguments and ethical controversies about high sums paid for executive salaries are rarely discussed.
The Ethical Leadership Factor
The demand for ethics in leadership is rising, yet resources remain low as evidenced by the global recsession. This generation of leaders seem equipped to navigate rather than inspire and guide. One such instance is former Home Depot CEO, Robert Nardelli who came under fire for his management style as well as for the emormity of his pay package. His methods and actions during his reign at Home Depot were considered unorothodox which indicates a lack of emotional intelligence and ethical incompetence. He was described as an individual who radiated enormous energy that always had a need to be front and center.
This attitude wore on the board and employees after a while (Grow, et al., 2007). His specific job-centered and production-oriented militaristic approach reflected a leadership style identified as the behavioral theory which is based on production and task centered outcomes (Baack, 2012). For example, Nardelli implemented systems of operation that concentrated on the technical aspects of production goals, keeping costs in line, following schedules and did so in a warmongering manner using fear and intimation as primary tactics for motivation. Although this method of political intelligence can be effective, most would agree it is an old fashioned mode of leadership that wreaks havoc with employee motivation and participation.
The former Home Depot CEO’s militaristic leadership style created a climate of anxiety and coercion as the norm. It was a style he adopted as former head of General Electric that was enforced by hiring as many people from the military as possible to maintain this atmosphere. Although this behavior is not considered unethical, his drill sergeant method of management and philosophy along with his command and control style was viewed by the company’s civilian subordinates as counterproductive in an era where collaboration trumped intimidation in getting the job done (Firms of Endearment, 2006). According to insiders, Home Depot staffers never really embraced his leadership style and everyone’s eyebrows were raised by the staggering compensation package he received, especially given the significant loss in profits Home Depot suffered after his taking the helm.
The Incentive Factor
The emblematic philosophy of nearly every board in America states that executive performance and pay should be aligned. The market for executive labor is highly compliant in paying more for an executive whose performance delivers great results over one who does not; naturally for these reasons incentives matter. Top executives are intrinsically motivated by incentives because they serve as a powerful messaging and focusing device (Ferracone, 2010). The inherent focus is whether there are too many instances when executive pay is high but performance is low.
Within six years of Robert Nardelli’s dynasty, for example, anger stirred among shareholders who saw almost no gains in their share value. Their frustrations were exacerbated by his compensation package that included more than $200 million in salary, bonuses, stock options, restricted stock, and other perks (Grow, et al., 2007). Retired Exxon Chairman, Lee Raymond was reportedly paid $51.1 million in 2005; the equivalent of $141,000 a day, which translates to nearly $6,000 an hour. His salary came with a generous retirement package of nearly $400 million including pension, stock options and other perks like a $1 million consulting contract, two years of home security, personal security, a car and driver, and the use of an Exxon corporate jet for professional purposes. Exxon however, defended Raymond’s compensation as justified, noting that during the twelve years he ran the company, Exxon became the world’s largest oil company shooting their stock up 500% (Hall & Lipman, 2008). Nevertheless, as a result of exuberant compensation packages, executive salaries are now being examined more thoroughly and ethical controversies about the high sums paid are being addressed.
Close Examination of Compensation Plans
When establishing pay plans, experts ask the following questions to help determine the best executive compensation practices: (a) what is considered fair pay; (b) how much is enough; (c) how much is too much, or too little; (d) what constitutes good performance; (e) how much is good performance worth; and (f) how to maintain a fair relationship between performance and pay, particularly when the market for executive talent is tight. According to Robin Ferracone (2010) in her book Fair Pay Fair Pay, median executive compensation is not an issue. Her analysis takes into account inflation and the increase in median company size over a period of time and concludes that real size and performance adjusted CEO pay, has increased approximately 1.6 times since 1995. This implies a compound annual increase in real performance-adjusted CEO pay of 3.6% (Ferracone, 2010). However, as more executive pay packages like Raymond and Nardelli are exposed, executive compensation practices are under the radar from activist shareholders, corporate governance rating groups, the media, and lawmakers for active change and reformation.
Recommendations for Pay Reform
The public controversy over executive pay has resulted from the failure of compensation committees to use better practices in establishing CEO recompense. It also constitutes a failure to adequately explain to shareholders both the methodology used and the growing competition for executive talent with private equity funds (Hall & Lipman, 2008). To bring balance to this subject, board of director compensation committees for both profit and nonprofit organizations, are formulating executive compensation reformation plans that provide comprehensive compensation guidance for all board members.
Restoration in equity to the system is imperative. Some strategists believe that better practice tactics should include thorough strategic plans of the company as well as the year-to-year budget policies as factors in the routine operations of compensation committees to help establish goals and objectives for ideal executive performance. Many theorists believe problems with compensation are symptoms of a larger issue of ethics. If leaders are to be encouraged to perform the role of company stewards, then ethics and ethical leadership skills belong at the heart of compensation discussions. Organizations that are recognized and established as ethical institutions set the stage for effective compensation plans.
The political intelligence displayed by Home Depot’s former CEO limited worker freedom in the workplace and created an atmosphere that lacked joy and pleasure. As a linking pin to employees at lower levels, this style of leadership encourages a certain disconnect within the organizational troops. Although a method that adheres to strict codes of conduct is an excellent discipline, in today’s American society, Nardelli’s outmoded approach left an unethical impression on many who worked for him.
For those of us with a deep appreciation and respect for the many who enroll in the military, where a strict disciplinary code is required, especially in combat situations, as civilians we enjoy a more relaxed environment. In other words, most individuals outside the military will not easily become “an organizational fit” working at an institution spearheaded by a leader with militaristic qualities like those Nardelli displayed. Most organizations thrive with individuals whose leadership skills are more in alignment with a leadership approach that centers on the following five basic personality traits: (a) extroversion, (b) agreeableness, (c) conscientiousness, (d) emotional stability, and (e) openness (Baack, 2012). Nardelli, however, displayed a leadership style that was not the touchy-feely type, nor was he open to evolving from a task oriented strategist to focus developing his skills as a relationship focused tactician. He either was either unable or unwilling to adapt and match his leadership style to the atmosphere created in the Home Depot arena described earlier.
To sum up, while high salaries and incentives intrinsically motivate top executives, leadership behavior (especially with the presidential elections drawing near) is now being more closely scrutinized to reveal those who express management styles that lack ethical qualities and emotional intelligence. Although a militaristic approach to leadership is not considered unethical, Nardelli’s governance style was ultimately a model that did not work successfully for the home improvement industry. In addition, the fairness of his compensation package was highly criticized especially since under his leadership the company yielded considerably lower profits. His inability to self-examine, reassess and make changes in his leadership style to blend with his new environment ultimately brought forth an untimely end to his reign at Home Depot. In the meantime, as we witness the current presidential debates, the jury is still out on what constitutes ethical leadership and the parameters that define it.
“The love of what you do, combined with your belief in what you do, will not determine your success. It will determine how hard you will work and how dedicated you will be to achieving it.” ― Jeffrey Gitomer
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Baack, D. (2012). Organizational behavior. San Diego: Bridgepoint Education, Inc.
Endearment, F. o. (2006, March 29). Home depot CEO Bob Nardelli’s militaristic management style out of date. Retrieved from Firms of Endearment: http://firmsofendearment.typepad.com/srm/2006/03/home_depot_ceo_.html
Ferracone, R. (2010). Fair pay fair play (1st ed.). San Francisco, CA: Jossey-Bass Publishing.
Hall, F. L. (2008). Executive compensation best practices (1st ed.). Hoboken, NJ: John Wiley & Sons, Inc., Publishing.
Multiple. (2007, January 14). Out at home depot. Retrieved November 28, 2012, from Business Week: http://www.businessweek.com/stories/2007-01-14/out-at-home-depot