Jan 28, 2011

Peter Block says HR's Compensation Philosophy leads to unethical behavior

This is an interesting view. Peter Block, author of the bestselling book on Organizational Consulting, Flawless Consulting, says that HR compensation and benefits systems encourage unethical corporate behavior.

He singles out stock prices and ESOPs along with variable pay for encouraging short term thinking. Here's an excerpt of his thoughts at India's leading HR publication People Matters:

Amplify’d from peoplematters.in
HR is a player in the question of corporate and societal ethics. Most unethical or corrupt behavior starts from the HR/Management philosophy of compensation and rewards; they think that money motivates people and they also believe that variable pay is the way to motivate performance. The extreme version of this is including stock options as a serious component of executive pay. This philosophy creates a context of excessive short-term orientation where unethical behavior is more likely. If companies link payment to stock prices, they are creating a false god. Then CEO will not be incentivized to invest in the long-run, they will be incentivized to cut costs, maximize short-term profits, and postpone development.

What is interesting about this compensation philosophy, especially at the executive level, is that companies are not rewarding for commitment and long-term alignment of these managers but actually creating conditions to encash compensation and leave the organization.

It is not only a question of compensation and motivation philosophy, it is a question of purpose. Leadership needs to look at their business with a larger purpose than shareholder value. Leaders focusing on just making money will not build companies or the country. Asking oneself what is the larger purpose of the organization is the ethical question that managers should pose to themselves.
Read more at peoplematters.in