October 23, 2007
CFOs Favor Yankees’ Approach with Torre
Joe Torre certainly felt that the New York Yankees made him an offer that he could (and did) refuse, but most corporate financial officers would say the team took the right approach by focusing on performance incentives in its negotiations.
“The Yankees’ offer is entirely appropriate and consistent with current executive-compensation trends in which more money is being put at risk,” Michael Mardy, chief financial officer at Tumi Luggage, told CFO.com.
According to Mr. Mardy, who also serves on the compensation committees of two publicly traded companies, the Yankees’ terms offered “a lot of upside” (up to $3 million in performance bonuses) to its former manager.
The current trend in corporate America is for companies to clearly define business goals and reward executives for achieving them. The key is setting appropriate business goals that advance the health of the organization and don’t simply reward short-term gain while leaving a company exposed over the longer haul.
Executive pay has become a focus of financial market regulators.
“It’s likely that a new Securities and Exchange Commission direction is pushing boards to develop more shareholder-friendly, performance-based packages,” said Mr. Mardy. “The SEC has honed in like a laser on compensation issues.”
I.H. “Chip” Clothier, managing partner at HFC Executive Search, said top executives are motivated by factors other than money.
“Facing business challenges is an intellectual issue for top executives. These managers are emotionally invested in the company – if they aren’t, they shouldn’t be in their position,” Mr. Clothier told CFO.com.
Discussion Questions: What is your view on current compensation practices for top corporate executives? Do performance incentives improve performance in all companies? Is the Yankees/Torre situation uniquely different? What types of performance goals if achieved are worthy of additional compensation in retail organizations?
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I’m a die-hard, dyed-in-the-wool Yankees fan from Topeka, Kansas. Growing up in the 50s and 60s, radio signals of their games were pretty much all we got, except for Harry Caray and Jack Buck broadcasting St. Louis Cardinals games together (totally legendary). I was simply captivated by Yankees Maris, Mantle, Berra, and Ford. The Cards, not so much.
Any viewer/listener of pro sports interviews frequently hears the phrase, “It’s a business.” That’s true to a degree. But, with U.S. government protection, Major League Baseball has become an oligopoly. No other sports league, or business, has this governmental protection. So, are we done with that analogy? (Maybe not–read on.)
To the question at hand: Should the compensation for U.S. business executives be tied to their performance? Of course! Such pay-for-performance compensation benefits are commonly called “bonuses” and “stock options.” You could look it up (that’s a Berra-ism). But, to re-open the baseball analogy, what if a specially-talented executive is reluctant about pitching for your team? Do you provide him/her with additional financial incentives? Yes, it happens all the time, so get over it.
Joe Torre seemed to be unhappy, at least partly, because the contract was only 1 year, and he said that term showed a lack of confidence. He felt that after 12 years, that was inappropriate. He also said that he needed no extra incentive to win the World’s Series, so the $3 million bonus was inappropriate. In the CEO world, very few folks work for 1 year contracts, particularly if they’ve been CEOs for 12 years already. And certain “incentive” plans do not improve performance. Perhaps Joe Torre would’ve felt better about a World’s Series bonus if it was the same amount, but couched as a profit-sharing arrangement for the extra World’s Series profits.
If the goal of Yankee management was to part ways with Torre while leaving everybody’s egos intact, the incentives were a brilliant move. If the goal was to win a World Championship next year, they were stupid.
The Yankees example is an interesting one because of Torre’s strong association with what most would consider a bygone era in baseball–when most did it for the fans, the love of the game and the glory. For Torre, the suggestion that he’d need a monetary incentive to be inspired would be like telling a three-star chef, “There’s a little extra in if for you if my meal is good.” (You’d probably find yourself out on the street in short order).
Torre also had a long history of “emotional investment” with the team, which makes a difference, I believe. When a new CEO is recruited and offered huge incentives beginning their first year, it seems mercenary. If pay for performance bonuses are used, they should be earned after a number of years proving devotion to business objectives and strong leadership by example.
The business world and the world of sports could never be discussed in the same manner. The closest comparison to sports would be the film industry since professional sports is simply entertainment. If a CEO was not performing their company would just can him/her without needing to get into handling the outcry of public perception. The Yankees could not let JT go without some sort of offer to make sure the fans would keep coming in record numbers. Although I don’t know it for a fact, I can’t remember of an example in business where this happened. Again, Sports and the business world are like oil and water.
Reward for performance is no question the way to go in most cases. Unfortunately, a CEO, Coach, or other leader can achieve success “in spite of themselves.”
What is the benchmark at the start, is it clearly defined, and how was it determined?
If they are the only person with the opportunity for large reward, HOW they achieve it should be a factor in determining success. If success is achieved at all costs and diminishes morale, pushes ethics, etc.; what does the company/team/group, really achieve?
When collaborative parts of the “team” are incented on achievements that conflict, how can it be possible for ultimate results to be achieved?
With these questions in mind and not knowing the answers relative to Coach Torre’s situation, I would not comment on the appropriateness of the offer.
Clearly, RetailWire has been infiltrated by The Evil Empire.
Go Sox!
Compensation packages for executives that have a large portion attributed to performance incentives is done for one of several reasons. It may be a way to exit someone out of the organization, as might have been the case with Torre. In a more typical corporate environment, it can be a way to fill the compensation gap for someone who wants to come on board but is looking for a higher comp. Or, and this is more often the case, it is just plain lazy thinking.
If the right person is in the job they should have the motivation and skills set to deliver against the company goals. Heavily weighed incentives connected to performance represent the wrong kind of motivation and can lead to manipulation of the facts…and even the “cooking” of books.
With that said, a well thought through year-end bonus plan and longer-term stock options programs can be structured to reward strong leadership and results, and also help retain executives and compensate them for delivering sustainable results.
The instinct to equate performance incentives for corporate executives with performance incentives for a baseball manager simply doesn’t hold. Corporate executives are held accountable for delivering a bottom line, of which they hold many direct levers of control. A baseball manager can only attempt to create the environment where his players can perform at their best. A baseball manager actually possesses few levers of direct control with which to dictate the outcome of a game.
A more apt comparison would be between the outcome of any given game, and the actual sales level a retailer might achieve. In both cases, external forces are as much a factor as as internal directives.
The concept of compensating Torre based on performance objectives after 12 years, during which time it was deemed that they were unnecessary, is insulting to Torre, and it speaks more about the thought processes of senior management than Torre’s motivation or competence.
Performance incentives, to be effective, need to be carefully crafted around metrics which executives have direct control over. Otherwise, they become capricious and counter-productive. It would be nice if executives could be incentivized to arrive at desired outcomes, but at best incentives really can only focus and direct the inputs.
As a life long, passionate member of Red Sox Nation, I have nothing but the greatest respect for Joe Torre. He is a man of impeccable dignity and character. The long history of baseball makes clear that his 12 years at the helm of the Yankees were 12 of the greatest years any manager has ever had.
The Torre situation was a manipulation to attempt to ease public reaction to a very unpopular move.
First, in any compensation issue you have to know what motivates people and design your program accordingly. If you have any doubt that a top management person needs a large percentage to meet the goals, then you don’t understand your business.
Torre is actually middle management. Top management in Yankee corporation is the President, GM and other top front office staff.
Your key employees are your players in a sport. Their performances on the field is what determines who wins and who loses.
Baseball experts know that top quality pitching is the key to winning playoff and world series. I contend that the reason the Yankees have not won the world series in the last 7 years is more front office fault for not getting the top pitchers in the game. Clearly, with The Yankees $200 million plus payroll, front office management underperformed here and has set the team to fail each year. Let’s fire them.
As with many businesses people who live in the numbers forget the management skills that a field manager needs to be successful.
As far as the Yankee brand goes, Torre did nothing but enhance this brand to the fan base and the merchandise-consuming public.
Top management has not done their job. If they want to win, a new manager alone will not get that job done. Go get some pitching.
Interesting that the issue of pay vs. performance is brought into this. Corporate America is probably not the best to give advice in this aspect–at least from the PR standpoint. The Yankees at least laid out what was expected in return. The article claims this is the trend in Corporate America. If it is, I am not hearing about it.
Many companies still do a poor job of explaining what performance exactly justifies the payouts, even to shareholders. The attitude seems to be that “we will do what we dang well want to.” At some point, Corporate America has got to explain, just as the Yankees did, what the performance is that justifies the large bonuses. Especially when the spotlight is on them.
While I have no issue with ‘pay for performance’ for executives or at any other level, the correlation with Joe Torre is, well, ludicrous. To make their case, far better examples could be used. Further, were those offerings living up to the same standard they expected of someone with lesser control?
Something I haven’t seen mentioned in this story or the comments that have followed is that the offer from the Yankees was a substantial pay cut, somewhere in the neighborhood of 35%. How many corporate executives are taking that kind of cut in pay? Or better yet how many are accepting them? Also, they refused any kind of negotiation. How often does that happen? They knew he would refuse the offer and they did it to try to save face with the fans.
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I’m a die-hard, dyed-in-the-wool Yankees fan from Topeka, Kansas. Growing up in the 50s and 60s, radio signals of their games were pretty much all we got, except for Harry Caray and Jack Buck broadcasting St. Louis Cardinals games together (totally legendary). I was simply captivated by Yankees Maris, Mantle, Berra, and Ford. The Cards, not so much.
Any viewer/listener of pro sports interviews frequently hears the phrase, “It’s a business.” That’s true to a degree. But, with U.S. government protection, Major League Baseball has become an oligopoly. No other sports league, or business, has this governmental protection. So, are we done with that analogy? (Maybe not–read on.)
To the question at hand: Should the compensation for U.S. business executives be tied to their performance? Of course! Such pay-for-performance compensation benefits are commonly called “bonuses” and “stock options.” You could look it up (that’s a Berra-ism). But, to re-open the baseball analogy, what if a specially-talented executive is reluctant about pitching for your team? Do you provide him/her with additional financial incentives? Yes, it happens all the time, so get over it.
Joe Torre seemed to be unhappy, at least partly, because the contract was only 1 year, and he said that term showed a lack of confidence. He felt that after 12 years, that was inappropriate. He also said that he needed no extra incentive to win the World’s Series, so the $3 million bonus was inappropriate. In the CEO world, very few folks work for 1 year contracts, particularly if they’ve been CEOs for 12 years already. And certain “incentive” plans do not improve performance. Perhaps Joe Torre would’ve felt better about a World’s Series bonus if it was the same amount, but couched as a profit-sharing arrangement for the extra World’s Series profits.
If the goal of Yankee management was to part ways with Torre while leaving everybody’s egos intact, the incentives were a brilliant move. If the goal was to win a World Championship next year, they were stupid.
The Yankees example is an interesting one because of Torre’s strong association with what most would consider a bygone era in baseball–when most did it for the fans, the love of the game and the glory. For Torre, the suggestion that he’d need a monetary incentive to be inspired would be like telling a three-star chef, “There’s a little extra in if for you if my meal is good.” (You’d probably find yourself out on the street in short order).
Torre also had a long history of “emotional investment” with the team, which makes a difference, I believe. When a new CEO is recruited and offered huge incentives beginning their first year, it seems mercenary. If pay for performance bonuses are used, they should be earned after a number of years proving devotion to business objectives and strong leadership by example.
The business world and the world of sports could never be discussed in the same manner. The closest comparison to sports would be the film industry since professional sports is simply entertainment. If a CEO was not performing their company would just can him/her without needing to get into handling the outcry of public perception. The Yankees could not let JT go without some sort of offer to make sure the fans would keep coming in record numbers. Although I don’t know it for a fact, I can’t remember of an example in business where this happened. Again, Sports and the business world are like oil and water.
Reward for performance is no question the way to go in most cases. Unfortunately, a CEO, Coach, or other leader can achieve success “in spite of themselves.”
What is the benchmark at the start, is it clearly defined, and how was it determined?
If they are the only person with the opportunity for large reward, HOW they achieve it should be a factor in determining success. If success is achieved at all costs and diminishes morale, pushes ethics, etc.; what does the company/team/group, really achieve?
When collaborative parts of the “team” are incented on achievements that conflict, how can it be possible for ultimate results to be achieved?
With these questions in mind and not knowing the answers relative to Coach Torre’s situation, I would not comment on the appropriateness of the offer.
Clearly, RetailWire has been infiltrated by The Evil Empire.
Go Sox!
Compensation packages for executives that have a large portion attributed to performance incentives is done for one of several reasons. It may be a way to exit someone out of the organization, as might have been the case with Torre. In a more typical corporate environment, it can be a way to fill the compensation gap for someone who wants to come on board but is looking for a higher comp. Or, and this is more often the case, it is just plain lazy thinking.
If the right person is in the job they should have the motivation and skills set to deliver against the company goals. Heavily weighed incentives connected to performance represent the wrong kind of motivation and can lead to manipulation of the facts…and even the “cooking” of books.
With that said, a well thought through year-end bonus plan and longer-term stock options programs can be structured to reward strong leadership and results, and also help retain executives and compensate them for delivering sustainable results.
The instinct to equate performance incentives for corporate executives with performance incentives for a baseball manager simply doesn’t hold. Corporate executives are held accountable for delivering a bottom line, of which they hold many direct levers of control. A baseball manager can only attempt to create the environment where his players can perform at their best. A baseball manager actually possesses few levers of direct control with which to dictate the outcome of a game.
A more apt comparison would be between the outcome of any given game, and the actual sales level a retailer might achieve. In both cases, external forces are as much a factor as as internal directives.
The concept of compensating Torre based on performance objectives after 12 years, during which time it was deemed that they were unnecessary, is insulting to Torre, and it speaks more about the thought processes of senior management than Torre’s motivation or competence.
Performance incentives, to be effective, need to be carefully crafted around metrics which executives have direct control over. Otherwise, they become capricious and counter-productive. It would be nice if executives could be incentivized to arrive at desired outcomes, but at best incentives really can only focus and direct the inputs.
As a life long, passionate member of Red Sox Nation, I have nothing but the greatest respect for Joe Torre. He is a man of impeccable dignity and character. The long history of baseball makes clear that his 12 years at the helm of the Yankees were 12 of the greatest years any manager has ever had.
The Torre situation was a manipulation to attempt to ease public reaction to a very unpopular move.
First, in any compensation issue you have to know what motivates people and design your program accordingly. If you have any doubt that a top management person needs a large percentage to meet the goals, then you don’t understand your business.
Torre is actually middle management. Top management in Yankee corporation is the President, GM and other top front office staff.
Your key employees are your players in a sport. Their performances on the field is what determines who wins and who loses.
Baseball experts know that top quality pitching is the key to winning playoff and world series. I contend that the reason the Yankees have not won the world series in the last 7 years is more front office fault for not getting the top pitchers in the game. Clearly, with The Yankees $200 million plus payroll, front office management underperformed here and has set the team to fail each year. Let’s fire them.
As with many businesses people who live in the numbers forget the management skills that a field manager needs to be successful.
As far as the Yankee brand goes, Torre did nothing but enhance this brand to the fan base and the merchandise-consuming public.
Top management has not done their job. If they want to win, a new manager alone will not get that job done. Go get some pitching.
Interesting that the issue of pay vs. performance is brought into this. Corporate America is probably not the best to give advice in this aspect–at least from the PR standpoint. The Yankees at least laid out what was expected in return. The article claims this is the trend in Corporate America. If it is, I am not hearing about it.
Many companies still do a poor job of explaining what performance exactly justifies the payouts, even to shareholders. The attitude seems to be that “we will do what we dang well want to.” At some point, Corporate America has got to explain, just as the Yankees did, what the performance is that justifies the large bonuses. Especially when the spotlight is on them.
While I have no issue with ‘pay for performance’ for executives or at any other level, the correlation with Joe Torre is, well, ludicrous. To make their case, far better examples could be used. Further, were those offerings living up to the same standard they expected of someone with lesser control?
Something I haven’t seen mentioned in this story or the comments that have followed is that the offer from the Yankees was a substantial pay cut, somewhere in the neighborhood of 35%. How many corporate executives are taking that kind of cut in pay? Or better yet how many are accepting them? Also, they refused any kind of negotiation. How often does that happen? They knew he would refuse the offer and they did it to try to save face with the fans.