The one thing leaders need to understand in order to stay in business

Many leaders still make loads of money even when their organization starts to fail. How is this a good business practice? We recently worked with several organizations including call centers, car dealerships and high tech product distributors all of which have severe financial performance. And yet the executive compensation happens to be excellent despite the fact that the organizations have massive turn-over rates and other costly problems. In addition, these organizations are extremely resistant to performance improvements of any kind because surprisingly, they don’t believe it is necessary. In business school students are taught that the traditional view of management is profit maximization or at the very least optimization. Unfortunately, that’s not what’s happening with these organizations. For example, in one of the call centers there is a 40 percent turn-over rate and a 5 percent close rate on sales opportunities. These are shockingly bad numbers and yet the executives are still making loads of money. The complacency of these executives is staggering. There is literally no financial reason for leaders to make more money when their organizations are doing so poorly. On top of that, leadership is convinced that they deserve the extra money because they’re so “great” at their jobs. In my experience, there has only been one circumstance where executives have been willing to change. And that is when a colleague or competitor shows them up and their ego is threatened, not when their financial return is in jeopardy. We have seen this happen in many Fortune 500 organizations, where the leadership is so over compensated based on current business processes that there is no need to try new things. These inefficiencies leave organizations vulnerable to disruptive changes in technology and markets. Just ask pay phone providers, big box retailers, and many other un-viable organizations. The lesson is this, just because you’re making a lot of money now does not mean you won’t be out of business tomorrow. When an organization starts to lose money leaders need to take a pay cut as well, especially if you hope to stay in business.  ]]>