Paying the Price for Performance

When Your Best Isn't Good Enough

The Board of Directors of Compaq made a change at the top of the company in April. Chairman Ben Rosen acknowledged that the Board was concerned for a year or two that the company wasn't executing well and wasn't fulfilling its potential. So, CEO Eckhard Pfeiffer was ousted, like his predecessor Rod Canion, and a search is underway for a different skill set at the top of Compaq. Is Compaq in trouble because Pfeiffer was ineffective in execution, or is the strategy flawed?

While the Board affirmed that Compaq's strategy is right, there are many doubters. It's tough to balance multiple distribution channels and succeed. Compaq tried to beat Dell in the direct-to-consumer channel building systems to order. They also worked to satisfy dealers with low cost products for dealers to distribute. Compaq tried to beat IBM in bigger systems through the acquisition of Digital and Tandem . Where and how are they choosing to compete? They've chosen to be everywhere from the lowest price point to the highest. A strategy to give a consumer whatever they want wherever and however they want it can sound great in a business plan, but even the best executives can be hard pressed to execute such a strategy. Stay tuned to see if the next Compaq CEO executes the current strategy or derives a new approach.

Does your company's strategy sound good, but can't be implemented? Are you being beaten in the market by focused niche players who are targeting your customers and parts of your business? Is it time to change strategy or change implementation? Would a different skill set make a difference? If so, are you acquiring the skills you need, or are you planning to be replaced with someone else?

Opt for Indexing

An article in the March/April issue of Harvard Business Review makes a strong case for changes in the way stock options are awarded by many companies today. Alfred Rappaport's article, "New Thinking on How to Link Executive Pay with Performance" is available from HBR publications as reprint number 99210. Call 617-496-1449 or download from their website at http://www.hbsp.harvard.edu.

Rappaport makes the case that the current approach to awarding stock options rewards underperforming individuals and companies about as well as superior players are rewarded. When the overall market rises, even the weakest performance can lead to large amounts of income over a long period of time. Selecting the appropriate measure for comparing the performance of a company against its peers can lead to rewarding superior performance lucratively, but avoids high rewards to laggards. An index like the S&P 500 might not be as effective a measure as one containing a company's competitors. We guess that Compaq's board looked at performance of Dell Computer Corporation in relation to Compaq and decided to make a change at the top. Compaq's proxy reports that for the underperformance generated under his leadership, Eckhard Pfeiffer has stock options valued at around $300 million. That's a great example of the dissonance between the current method of stock option awards and what's important to a company and its shareholders.

Are you confident that your methods of using pay for performance are working effectively? Is this an area where you should bring a proposal about indexing to the Compensation Committee of your Board of Directors? There are accounting implications, but we guess that the best performing companies will be rewarded for stepping ahead and indexing stock options.

Managing Analysts Not Earnings

The Wall Street Journal profiled Peter Lewis of Progressive, the Cleveland based auto insurer, on April 16. Lewis expects investment analysts to do their homework, not be spoon-fed information by companies themselves. They should talk to customers, suppliers, competitors, and dig through company filings. Progressive has often surprised analysts with their results, so their stock price is more volatile when compared to companies who tend to keep analysts better informed, or who "do what it takes" to meet analyst expectations. Lewis hasn. t guided analysts for fifteen years, and the company. s performance has been outstanding over time, although the price swings widely in the short run.

Analysts may no longer become privy to information that hasn't been readily available to the average investor with the new open format being used by some companies to brief investors. On April 14, Vcall held an all day webcast that included executives from forty companies making presentations and answering questions from analysts. Around 40,000 users checked into the site for some part of the call. For more information, read Wired News of 4/16/99.

With an increased interest on the part of the SEC to "selective disclosure", are your current conversations with analysts appropriate? Are there other methods you can use to make your company's information available simultaneously to the entire market?

Feedback in Your Face

There's been a proliferation of consumer-created websites and chat rooms that provide focused and clear feedback to consumers and to companies about customer dissatisfaction. It may not be pleasant, but it sure is valuable. And it's very fast moving. Marketers have known for a long time that a disgruntled consumer will tell many others about their experience. The Internet gets the disgruntled consumer. s message around the world in seconds.

Some companies review these sites themselves, while others use firms like eWatch that will monitor websites and assist with damage control when consumer messages flame. Some employees create gripe websites about their own company. Yahoo's "Consumer Opinion" section can give you a sense of what's out there. Try checking to see if someone has set up a site called "yourcompany"sucks.com; that's one of the more popular name selections.

A challenge to executives can be how to separate the valuable feedback that can lead to quick action from malicious, out of proportion complaints. One of our favorite stories about Herb Kelleher of Southwest Airlines involved his written response to a griping, too-hard-to-please consumer. He said something like, "We've tried to satisfy you and we failed three times in a row. I suggest you try another airline." Phil Knight of Nike got focused on sweatshop labor real fast, in major part because of the proliferation of "Boycott Nike" efforts.

How effective are your listening posts inside and outside your company about what. s important to your customers and employees? Who makes decisions about when to do whatever the customer wants? How do you monitor and influence perceptions about your company? What do you do, personally, every day, to stay in touch with customers?

To Boldly Go Where No One Has Gone Before

The prospectus for the initial public offering of Priceline.com makes for very interesting reading. All the disclaimers about the business risks and the dependence on other companies raised caution about whether or not this Internet company will ever make money. In case you. ve missed their pitch, Priceline.com is the place where a consumer can set the price they're willing to pay for flights, hotels or other services and products. William Shatner has done some effective ads for the company. What Executive Times found interesting in reading the prospectus was what would trigger the release of restrictions on the CEO. s stock. Richard Braddock, former president of Citicorp , has been CEO since last August. There's an "at the outside" time trigger, in this case, two years. There's a market valuation trigger. In this case, trading at a market capitalization in excess of $750 million for five consecutive days. Well, as you may have noticed, the IPO hit new records, and came out of the gate the first week of trading with a market capitalization over $10 billion. One would think that all prudent advisors felt that $750 million was a real stretch, given the challenges faced by the company. Investors felt otherwise, and gave a new challenge to Braddock: what to do next? It must have been quite a shock to Braddock and others to hit such a high stock price. Braddock's 14.6 million shares made him a billionaire on paper. Executive Times expects Priceline.com to use its inflated stock price to buy a host of other Internet players. Stay tuned. Even in the context of how successful Citigroup is these days, we guess that Braddock is real pleased to be where he is today.

Surprises can be pleasant as well as unpleasant. How quickly can you overcome the element of surprise and take on the next set of actions? What mechanisms do you use personally to avoid surprises? When they come anyway, what do you do? Is it time to update any of your targets? Do you think your company is over- or under-valued by the market?

Vigorous, Healthy, Happy

There's a great article in the April 1999 National Geographic about how the Gal« pagos Islands have fared following the latest El NiÔ o. At the end of the article, Peter Benchley quotes Charles Darwin: "The vigorous, the healthy and the happy survive and multiply." This quote was a great summary for the article that made clear through many examples the fact that those individual animals that tended to be vigorous, healthy and happy got through the changes of El NiÔ o while other animals died.

Even during the current economic boom, some executives are tired, wealthy and miserable. How are you doing when it comes to adapting to changing conditions? Does each day at work make you more vigorous, healthier and happier? In your workplace, what are you doing to help create an environment where everyone can become vigorous, healthy and happy? To what degree are physical disabilities an influence on success in your workplace? Beyond meeting the requirements of the law, what are you doing to promote and encourage vigorous workers with disabilities?

Good Citizens, All

Marriott Corporation recently made a decision to retain their world headquarters in the State of Maryland. To keep this global company within the state, Maryland chose to equalize the tax structure for Marriott in comparison to what Marriott would pay in nearby Virginia. Chairman Bill Marriott has lived and worked in Maryland for many years and Executive Times is sure he's pleased to have given the state the chance to keep his company as a job-creating tax-paying good corporate citizen. Marriott got a good deal for shareholders through a reduced tax burden and Maryland is pleased to keep a big company and provided unique incentives to do so.

States are always competing with each other to attract companies and jobs, and the varying costs and labor pools can make comparisons and decisions challenging. Around the same time we noted the attractive financial package to Marriott, we read the Johnson & Johnson annual report. As always, this was a chance to re-read the Credo which has been guiding Johnson and Johnson throughout their history. One section stood out: "We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens, support good works and charities and bear our fair share of taxes."

Both Marriott and Johnson & Johnson are global companies acting as good citizens wherever they are. Our guess is that while Marriott did what they considered the right thing by giving Maryland the chance to match Virginia. s incentive package, Johnson & Johnson might have chosen not to ask for such unique tax concessions and might have paid their fair share of taxes.

How do you go about choosing from among multiple good alternatives? Is there some guiding framework like the Johnson & Johnson credo that helps all executives in your company make comparable decisions? Do you have conversations that use the examples of other companies as a way to test the alignment among executives? For example, consider asking other executives what they would have done in Marriott's situation. Does what they say match what you would have done?

Respect and Intolerance

The tragedy at Columbine High School in Littleton, Colorado calls attention to the challenging jobs of executives in our schools, especially in the context of diversity of expression and diversity of values. Many adolescents express outrageous behavior as a way of developing identity and testing the boundaries of acceptable behavior. While it is rare that such behavior leads to the violence in Littleton, as a society we are saddened by what has taken place there and look for what it means closer to home.

Teachers, parents, and all adults all contribute to creating an environment in the community that allows for the safe expression of differences. The pressure to conform is a great one in the middle school and high school years, and in some schools, teasing and cruel expressions to those individuals who are in any way different can cause deep pain in the teased individuals. Some of the finest teachers and administrators allow wide expression of individuality during these years of dramatic individual growth and change. The best listen carefully for any signs of disrespect and refuse to tolerate such behavior. These leaders also exhibit respect for each student as valuable and honorable individuals, worthy of respect, and worth listening to.

Respect and disrespect can also become key behaviors in the workplace. When employees feel they are treated as worthless commodities, chances are they rarely act as if they are owners of the business. When they are acknowledged and respected as individuals, chances are they are willing to become aligned with the direction chosen by management.

Are you a model of respect in your organization? When you come across behavior in others that exhibits disrespect, do you express intolerance of that disrespect? If not respect for each other, what other common values unite your organization? How do you call attention to those values? If you had to summarize the way things are done in your organization, what would you say about respect?

Collaboration Works

For a while, it looked like commercial banks were going to take the back seat as technology companies like Microsoft led changes to the banking system. Not any more. The Bankers Roundtable created a group called the Banking Industry Technology Secretariat (BITS) in 1996, and since then banks have focused on technical standardization and fraud reduction with great success. Together, the banks achieved what no one of them could have done on its own. Costs for everyone are coming down, and the competitive threat is greatly diminished.

For more information, read American Banker 4/21/99. In your business, have you leveraged the opportunities for cooperation? Do your trade associations accomplish this purpose successfully? Are you able to cut through the political agendas of individuals to focus on the critical business issues that need to be addressed for the benefit of all? Are your costs too high because of a lack of collaboration in your industry? What can you do about that?

Legacy

C-SPAN radio has been broadcasting the Lyndon Johnson tapes on Saturday afternoons in many markets around the country. Eavesdropping on the conversations of this chief executive can lead to many reflections about how executives interact with others. We were amazed at how much time President Johnson spent with his press secretary trying to direct with great specificity exactly what the press secretary could and could not say at a briefing about something that appeared inconsequential to the press secretary, but was an important issue of perception to Johnson. Tune in and listen to Lyndon wheedle and cajole behind the scenes of the 1964 Democratic National Convention while pretending to the country to be aloof and distant. The relationship between Johnson and Hubert Humphrey is not all that different from the one between some CEOs and their COOs. These tapes became available around three years ago, and Michael Bechloss' book Taking Charge is another way to access much of this material. Johnson taped his conversations from day one in the White House, and had ordered the tapes sealed until 2023. Access to some tapes has occurred sooner, and can provide some opportunities for executives to reflect how others interact either effectively or ineffectively with each other.

Do you consider all your conversations as "on the record"? If others replayed the tapes of their meetings and conversations with you, what would you and they think about those interactions? Do you find yourself sweating the small stuff, or the wrong stuff?

Reading

If you. re still wondering about the changes that the Internet and networks can bring to companies, go ahead and plod through Bill Gates' new book, Business @ The Speed of Thought: Using a Digital Nervous System. The title comes from his premise that changing current business processes to digital ones will accelerate the speed of business dramatically. He projects that business will change more in the next ten years than it. s changed in the last fifty. Whether you agree or disagree, his stories and illustrations about what companies are doing are likely to help you consider what else your company can do to compete successfully in a more wired world. For those of you who may be concerned, Bill. s share of the proceeds from the sale of this book is donated to charity. His metaphor of the digital nervous system calls attention to what can happen when rich information is available and shared across enterprises quickly.

Reviews of Jean Strouse's Morgan: American Financier have been outstanding. Fifteen years in the making, her attention to the details of J. P. Morgan's life are said to be amazing. Previous biographers have either leaped to the "robber baron" category or to the patron saint of capitalism group. Strouse has dug into all the available material, and lays out multiple dimensions of the complex Morgan for all to see. This 800 page story of a life might well be good summer vacation reading, although a bit heavy for carrying to the beach. At Executive Times, we. ve had Ron Chernow's biography of John D. Rockefeller, Titan, on the "to read" shelf since last year, so we aren't 1-step ordering Morgan at amazon.com right now, but we're thinking about it.

Upcoming Issues

Some of the topics being considered for upcoming issues of Executive Times include:

• Allocating executive time effectively
• Brand success and failure
• Management succession
• Conflicting distribution channels
• Measuring customer satisfaction and loyalty

ã 1999 Hopkins and Company, LLC