PharmaView: Carrots, Sticks, and CEOs

There is outrage over the, well, outrageous salaries that pharma CEOs “earn.” AstraZeneca’s David Brennan’s salary and bonus package increased 67 percent in 2011, while critics pointed out that AZ, financially, hasn’t done all that well of late, and persists with layoffs and plant closings. In this case, the critics won out, and Brennan is no longer at his post.

J&J’s Bill Weldon was another CEO whose salary, in most observers’ eyes, far outpaced his worth: It was pushing $30 million annually, and is one of the (many) reasons Weldon is no longer in his position. It’s interesting to note that, of the top five salaried CEOs in 2010, only one, Abbott’s Miles White, is still at the helm. (Gone are Weldon, Vasella, Kindler, and Clark.)

Expect the pressure on CEOs to continue, and expect their relative compensation to drop in coming years—if only modestly and for the sake of appearances.

This may be happening already across all industries. Surveys by the Wall Street Journal and consulting firm Hay Group suggest that compensation for CEOs of the world’s largest corporations remained flat last year despite significant rebounds in profits and revenues.

Pharma CEO packages must be held in check and based upon metrics other than financial measurements, especially quarterly or short-term ones, says Matt Gurin, VP of Life Sciences at Hay Group. “The whole point of an incentive plan is to create incentives,” he says. “But the only thing big pharma cares about are financial ratios.”

But Gurin and most critics are missing the point: Does anyone really believe that there’s a direct link between executive compensation and company performance? Would an extra $5 million in stock options, or even non-monetary metrics, have made any difference in what David Brennan did or didn't do?

The notion is silly. It represents “Motivation 2.0” kind of thinking, says Daniel Pink in his 2009 best-seller “Drive.” Motivation 2.0 is a remnant of 20th century corporate thinking, says Pink, in which people perform and succeed based on external carrots and sticks. “We’ve configured our organizations and constructed our lives around its bedrock assumptions: The way to improve performance, increase productivity, and encourage excellence is to reward the good and punish the bad.”

(Motivation 1.0, if you’re wondering, represents the age-old idea that, first and foremost, people are motivated by the desire to feed, clothe, and house themselves, as spelled out in Maslow’s hierarchy of needs. Fortunately for most of the world, says Pink, Motivation 1.0 no longer comes into play.)

In our annual job satisfaction and salary survey, 33% of you told us that challenging work is most important to you for job satisfaction. (“Salary and benefits” were a distant second at 20.3%, followed by “Job Security” and “Opportunity for Advancement.”) This exemplifies Pink’s Motivation 3.0, which recognizes that increasing numbers of us are “Type I” personalities—intrinsically motivated to do good work, despite our compensation.

Not only is Motivation 2.0 an antiquated notion, adds Pink, but it can be counterproductive to individuals and their companies. Carrots and sticks promote bad behavior and myopic thinking, researchers are suggesting. They’re also beginning to understand that financial rewards can dull one’s lust for work. “Rewards can perform a weird sort of behavioral alchemy,” he writes. “They can transform an interesting task into a drudge. They can turn play into work.”

Sounds a bit like Karl Marx, but Motivation 3.0 isn’t about not paying well, says Pink. It’s about paying people what they’re worth and then leaving them alone to do their jobs.

Netflix is a company that embraces this idea. “We attract top talent,” says CEO Reed Hastings, “with top-of-the-market compensation. We do no stock vesting or delayed compensation [what he calls “golden handcuffs”]. We want people who want to work here because they are well paid, challenged, and excited.”

It’s not about effort, says Hastings. “Hard work, like long hours at the office, doesn’t matter as much to us. We care about great work.”

So ask not what your CEO is earning. Ask whether he/she, above all, does good work befitting a handsome salary.

And here’s hoping you’re in a situation where your Type I personality can shine. “The most successful people,” writes Daniel Pink, “often aren’t directly pursuing conventional notions of success. They’re working hard and persisting through difficulties because of their internal desire to control their lives, learn about their world, and accomplish something that endures.”