24 May #174 – Integrity Idea 024: Optimize Compensation
ESSENCE: Integrity Ideas are specific actions a faithful leader can consider in leading faithfully through business a better way.
INTEGRITY IDEA: Optimize Compensation
COVERT-OVERT CONTINUUM (six Continuums for action): Practices
COVERT-OVERT RATING (several levels from Highly Covert to Highly Overt): Highly Covert
STAKEHOLDERS SERVED: Employees, Customers/Clients, Owners, Community, Kingdom
Most Integrity Ideas are practical actions toward implementing a bigger WHY for the organization. “Optimize Compensation” is about (1) reviewing the compensation of all levels of employees (including the ratios between the most highly compensated employees and the median compensation of employees) and (2) prayerfully considering whether the maximization of flourishing and good stewardship of the organization require adjustments. It is not just about reallocating compensation–it is about optimizing the deployment of capital throughout the activities of the organization. “Optimize Compensation” recognizes that faithful leaders are stewards and the purpose of an organization aligned with Biblical beliefs, principles and priorities is to glorify God by loving generously through service and maximizing the flourishing of all creation it touches, particularly people. It also recognizes that all employees were created in the image of God with gifts that contribute in unique ways to the purpose of the organization and, as such, should be compensated fairly and treated with dignity and respect. “Optimize Compensation” puts a spotlight on the importance of Humility in the pursuit by faithful leaders of the “First Things”–Righteousness, Kingdom and Love.
Integrity Ideas are specific actions a leader can consider during the Re-Align step of Integriosity®–actions that will begin to Re-Align the organization with Biblical beliefs, principles and priorities. You can find more Integrity Ideas at Integrous | Integrity Ideas (integriosity.com)
Integrity Ideas are practical actions toward implementing a bigger WHY for the organization. We believe some are critical (and necessary) steps in the RENEW/RE-ALIGN/RE-IMAGINE/RESTORE process. Others are just ideas to be considered if they feel like a good fit based on what leaders prayerfully discern is best for stewarding the organization toward its WHY.
“Optimize Compensation” falls into the “necessary” category. It is central to the purpose of an organization aligned with business a better way and to the responsibility of faithful leaders to be good stewards of the organization.
INTEGRITY IDEA: Optimize Compensation
“Optimize Compensation” is about (1) reviewing the compensation of all levels of employees (including the ratios between the most highly compensated employees and the median compensation of employees) and (2) prayerfully considering whether the maximization of flourishing and good stewardship of the organization require adjustments. It is not just about reallocating compensation–it is about optimizing the deployment of capital throughout the activities of the organization.
“Optimize Compensation” recognizes that faithful leaders are stewards and the purpose of an organization aligned with Biblical beliefs, principles and priorities is to glorify God by loving generously through service and maximizing the flourishing of all creation it touches, particularly people. It also recognizes that all employees were created in the image of God with gifts that contribute in unique ways to the purpose of the organization and, as such, should be compensated fairly and treated with dignity and respect.
“Optimize Compensation” puts a spotlight on the importance of Humility in the pursuit by faithful leaders of the “First Things”–Righteousness, Kingdom and Love.
Stewardship and Flourishing. As we have emphasized through many posts, a leader wanting to lead faithfully through business a better way must understand God’s purpose for work and business as well as their role as a steward of the organization and the capital it utilizes. That stewardship responsibility comes from God’s command in the Creation Mandate:
And God blessed them. And God said to them, “Be fruitful and multiply and fill the earth and subdue it, and have dominion over the fish of the sea and over the birds of the heavens and over every living thing that moves on the earth.” (Genesis 1:28)
In post #041 (Righteousness–More than “Good”), we concluded that leading faithfully means “doing right” by God, which boils down to living generously through loving others and stewarding creation. In post #046 (Lessons from Creation-Why We Are Here), we saw that, as stewards, we have global responsibility to use our God-given creativity and productivity to cultivate God’s creation in order to enable flourishing. We believe leaders of organizations of humans are called to steward in a way that maximizes flourishing by humanizing people, beautifying the world and, in the process, glorifying God.
What is the “creation” that an organizational leader is called to steward? It is everything needed, used or impacted by the organization in carrying out its activities, from the environment to raw materials to finances to humans to the communities that humans create. The “creation” that an organization needs, uses or impacts is the “capital” utilized by the business, and “Optimize Compensation” is stewarding the of use of financial capital and recognizing the importance of all human capital.
“Business as Usual” Compensation. Business as usual optimizes compensation to achieve its purpose–Profit as Purpose in the context of a culture built on assumptions of Scarcity, Self-Interest and “Can We” Ethics. As we explained in post #169 (The “Way” of the World), this often results in senior executives being overcompensated and lower-level employees being paid “just enough” to keep them.
The shift in business as usual from a predominantly stakeholder model to a shareholder primacy model in the 1970’s led to a move to align executive pay with shareholder value; and this, in turn, led to a massive increase in CEO compensation (coupled with stagnation in employee wages) as well as an emphasis on short-term profit management. A 2022 report by the Economic Policy Institute found:
In 2021, the ratio of CEO-to-typical-worker compensation was 399-to-1 under the realized measure of CEO pay; that is up from 366-to-1 in 2020 and a big increase from 20-to-1 in 1965 and 59-to-1 in 1989.
A 2022 report by the Institute for Policy Studies concluded: “The average gap between CEO and median worker pay in our sample jumped to 670-to-1, up from 604-to-1 in 2020. Forty-nine firms had ratios above 1,000-to-1.” This type of growth aligns with the way that business as usual leads to work as usual, which is characterized by attributes such as work becoming an Idol and Identity with people being driven by Money and Power.
This dramatic increase has resulted in significant and growing criticism and public disapproval of corporate compensation practices, as well as elected officials threatening to regulate this disparity through taxes and penalties.
“Business a Better Way” Compensation. The second step toward leading with faithful integrity is RE-IMAGINE. Once a faithful leader understands God’s purpose for work and business and their responsibility as a steward, the path toward leading an organization faithfully in alignment with Biblical beliefs, principles and priorities requires honestly assessing the current state of the organization’s culture and then RE-IMAGINING what it could and should look like with that RENEWED understanding.
As we pointed out in post #079 (Real Culture, Purpose and Values), compensation policies and practices are part of the culture.
In post #082 (Culture and Capital), we suggested that an organization aligning its culture with Biblical beliefs, principles and priorities must steward its capital in accordance with three key principles, Sustainability, Mutuality and Generosity.
• Sustainability. Sustainability applies across all aspects of an organization, including its utilization of all forms of capital that drive the business and its relationships with the stakeholders related to those forms of capital. This includes ensuring that the organization can attract and retain qualified people. But it also requires leaders to assess the usage and the availability and health of ALL the capital it requires to keep operating–natural, human, social and financial. Part of “Optimizing Compensation” is assessing whether overall flourishing would be increased and sustainability improved by reallocating capital being used for compensation.
• Mutuality. Mutuality is about an organization extending its culture of Shalom to all people it touches by managing all capital from a Biblical view of relationships, community, human dignity, human flourishing and the common good. Mutuality is about ensuring that transactions are “fair” to both parties, regardless of bargaining leverage. It embodies the Golden Rule (Luke 6:31). Particularly with regard to compensation, faithful leaders must also remember Malachi 3:5 and Colossians 4:1:
“I will be a swift witness . . . against those who oppress the hired worker in his wages.” (Malachi 3:5)
“Masters, treat your slaves justly and fairly, knowing that you also have a Master in heaven.” (Colossians 4:1)
• Generosity. Integriosity comes from the words Integrity and Generosity. Generosity embodies the first principles of Love and Humility, which are the people-focused priorities that a leader needs to “keep first” in leading an organization with faithful integrity. As explained in post #044 (Righteousness–Living Generously), faithful integrity requires more than “giving generously”–it requires the “vertical integration” of generosity by “living generously”. Living generously is about operating the organization (and, in the process, generating wealth) in a way that generously loves others and stewards creation. Living generously is living sacrificially–choosing to give something up or to forego a benefit because it benefits the common good–because it represents faithful integrity. In this respect, generosity is closely tied to mutuality–treating vendors, employees and customers more fairly than you might need to based on your bargaining leverage is living sacrificially–and it is faithful stewardship.
The Importance of Humility. You might be thinking, “How likely is it that a CEO would ever ‘optimize’ to lower compensation?” The answer in a business as usual/work as usual culture is probably “pretty unlikely” unless the public, employee or regulatory pressure became so great that the CEO feared worse consequences by not optimizing.
But one of the “First Things” of leading faithfully (along with Righteousness, Kingdom and Love) is Humility. We spent several posts (#060-#064) exploring the importance of Humility as being a HOW of Righteousness, Kingdom and Love and a key to Wisdom. Humility is knowing who you are in relation to God’s creation and His plan, knowing who you are in relation to others, and knowing who you are in relation to God.
• Humility in Righteousness flows from knowing who we are in relation to God’s creation and His plan. In order to lead an organization in a way that sacrificially stewards creation and benefits the common good, a leader must have an understanding of their role and the role of the organization in the MUCH BIGGER picture of God’s creation and His plan.
• Humility in Loving Others flows from knowing who we are in relation to other people. By embracing Imago Dei, Humility leads us to treat others with dignity, respect and kindness because of WHO they are. Humility by leaders in Loving Others is incredibly important to an organization because it unleashes the unique contributions each person can make to the organization.
• Humility in pursuing the Kingdom flows from knowing who we are in relation to God–it means recognizing the “smallness of our greatness” and returning to the childlike qualities of dependence and trust on God in making decisions and leading the organization.
• Humility by a leader can lead to horizontal Wisdom (unleashing the unique contributions each person they lead has to offer, which enriches the leader, the organization and its people) and vertical Wisdom (seeking God’s guidance through prayer and trusting His process, timing and outcome). A leader without access to the wisdom, knowledge and experience of other people in the organization CANNOT make the best decisions for the organization.
Indeed, the opposite of Humility is pride and arrogance (and we know that the truly original sin was Lucifer’s pride, which led to his fall). Jim Collins points out that “celebrity” CEO’s do not have what it takes to lead an organization from “good to great”. Leadership without Humility is antithetical to leading an organization with faithful integrity. In his book To Change the World, James Hunter observes:
And so, whether leadership is expressed within the dynamics of celebrity or outright arrogance rooted in a sense of superiority, such leadership is artificial, unbiblical, organizationally unhealthy, inherently corrupting, and all too common in the Christian world—especially in the United States. Christianity needs to rediscover an alternative.
The Integriosity model organizes “heart change” along six Covert-Overt Continuums. There is nothing magic about these categories, but we believe they are helpful in thinking about practical execution of a Re-Imagined Purpose, Re-Imagined Values and a Re-Imagined Culture. The Continuums are Prayer, Proclamation, Policies, Practices, Products, People.
Each Continuum represents an area in which leaders can begin to think about, plan and institute Re-Alignment changes to the heart of the organization.
“Optimize Compensation” is on the Practices Continuum. It is a practice the organization should adopt to affirm its commitment to pursuing a WHY, and curating and reinforcing a caring and compassionate organizational culture, that aligns with Biblical beliefs, principles and priorities.
COVERT-OVERT RATING: Highly Covert
The Integriosity model breaks the Covert-Overt Continuums into six gradations–from Highly Covert to Highly Overt–that we believe are helpful in beginning to pray and think about what is most appropriate for an organization at a particular moment in time.
Most Integrity Ideas will have one place on the scale. Some can vary depending on how they are implemented. We identify “Optimize Compensation” as Highly Covert (An action that would be taken by a secular company) because every organization could and should strive to ensure that its compensation practices align with its purposes and treat employees fairly.
Many secular companies are facing significant and growing criticism over the drastically increasing ratio between CEO compensation and median employee compensation. The Securities and Exchange Commission requires extensive compensation disclosure, and elected officials are threatening to regulate this disparity through taxes and penalties.
In an organization pursuing business a better way, “Optimize Compensation” is likely to be Overt (An overtly faith-based action known generally within the organization) because instituting compensation practices that vary from those of business as usual will be obvious and best explained by anchoring them to a bigger WHY.
STAKEHOLDERS SERVED: Employees, Customers/Clients, Owners, Community, Kingdom
When we categorize faith-based actions, we also consider the stakeholders principally impacted by the action: Employees, Customers/Clients, Owners, Suppliers/Vendors, Community and Kingdom.
While it might seem that “Optimize Compensation” principally serves employees, it serves various stakeholders touched by the organization by reallocating resources in a way that maximizes flourishing. For example, some capital redeployed from executive compensation might get allocated to employee compensation, customer service, vendor pricing, community service or charitable gifts.
Better is possible… if we care enough to walk away from what was and brave enough to build something new. (Seth Godin)
There is no checklist or “right answer” for implementing “Optimize Compensation”. However, we can suggest some questions to begin the prayerful consideration process.
It is about determining whether compensation policies and practices are negatively impacting flourishing. Flourishing can be negatively impacted if capital is over-deployed in one area and under-deployed in another (e.g., executive compensation, employee compensation, community service, charitable giving, environmental initiatives, customer service, vendor compensation). Our focus is “Optimizing Compensation” because it just happens that compensation in many businesses seems to be over-deployed at the top.
The process must begin with an honest assessment of the organization’s current culture, as reflected in its policies and practices related to areas such as hiring, termination, discipline, compensation, training, vacation, family leave, customer service, vendor practices, and community service. Such an assessment must dig underneath the culture to examine the assumptions and motivations (such as Scarcity, Self-Interest and “Can We” Ethics) that may have underpinned the current policies and practices.
An honest assessment of culture and compensation practices also requires an honest assessment of the real WHY behind the organization’s purpose, values and culture.
In considering “Optimize Compensation”, it is helpful to consider:
• Whether you have ways to measure and optimize use of capital other than financial (natural, human, social).
• Whether there are policies and practices designed to recognize the importance and unique contribution of every person.
• Whether less than a ”fair” profit is being given to vendors, less than “fair” compensation is being paid to employees, or more than a ”fair” price is being charged to customers.
• How the organization protects the sustainability of its natural capital.
• How the organization invests in its communities and the broader Kingdom.
Sustainability of the organization requires taking into account the compensation needed to hire and retain qualified employees at all levels. (We are certainly not suggesting a socialist model in which everyone is paid the same.) What compensation is needed to attract and retain a faithful leader who values the organization’s purpose, values, culture and pursuit of business a better way through faithful integrity? Hiring a “cheap” CEO is poor stewardship if they are unable to lead faithfully and effectively.
One very interesting and unique model of CEO compensation is what Alan Barnhart and his wife instituted when starting Barnhart Crane and Rigging. They capped their income (initially $40,000/year) based upon what someone in non-profit Christian ministry would earn and committed to God to be exceedingly generous with profits (with half getting invested back in the business and the other half given to charities). They earned what they needed rather than what they could have received. In a way, it is similar to the difference between “Can We” and “Should We” ethics in a culture. Barnhart Crane has been very successful and the Batnhart’s have given away many millions of dollars. Eventually, they gave away the entire company to a trust.
Another possibility is establishing a ratio between CEO compensation and median compensation or between CEO compensation and the compensation of the lowest-paid employee. Remember, in 1965 corporations apparently functioned with the ratio between CEO compensation and average compensation at 20:1 rather than todays 300+:1.
The American Bar Association’s The Business Lawyer recently published an article titled “Toward Fair Gainsharing and a Quality Workplace for Employees: How a Reconceived Compensation Committee Might Help Make Corporations More Responsible Employers and Restore Faith in American Capitalism” by Leo E. Strine, Jr. and Kirby M. Smith. It describes a secular but enlightened model of stewarding compensation:
In this way, the reconceived compensation committee will become the subset of the board most deeply engaged in all aspects of the company’s relationship with its workforce and in efficiently ensuring that the company has a sensible plan for retaining and motivating human talent to achieve its business objectives. The compensation committee then also must have the clear mandate to ensure whatever obligations society imposes on the company to be a responsible employer—and whatever higher obligations of fairness and concern the company itself undertakes, are taken seriously and infuse the company’s business approach toward all those human beings whose labor is critical to the company’s success. Perhaps most of all, to the extent that corporate America wants capitalism to work for the many and to avoid more intrusive government action, a reconceived compensation committee can position companies to restore fair gainsharing so that the people whose sweat and ingenuity is the largest contributor to the creation of wealth through the corporate form again receive their fair share.
Needless to say, “Optimize Compensation” must be done thoughtfully, prayerfully and with Humility. It is unlikely to be easy. In an organization pursuing faithful integrity through business a better way, faithful leaders must care enough to make it happen. In the words of Seth Godin:
Better is possible… if we care enough to walk away from what was and brave enough to build something new.
PERSONAL NOTE (from PM): Integrous is honored to be involved as Integrity Advisor to the Broadway-style musical His Story: The Musical, which premiered in Dallas last week. It is an amazing musical about the life of Jesus in the style of Hamilton. I highly recommend getting to Dallas to see it. As amazing as the musical itself is the story behind the musical (go to the website to hear it).
I had the privilege of attending the workshop in New York when the musical was in development and speaking with the Tony-nominated Director, Jeff Calhoun. Jeff explained to me a practice of his that reflects the Humility needed in a faithful leader who is leading faithfully. It was a recognition of Imago Dei. A few months later I was excited to see a video clip on social media of Jeff describing the practice. I asked Jeff about it when I saw him in Dallas last week. He told me it just reflects what he wished someone told him as a young actor–the Golden Rule in action. Wisdom. Here is what Jeff said in the video.
I was a performer–I started out as a dancer. When I was young I just thought they were so lucky to have me on stage. And then I got older, and I realized there are prop people and wardrobe people and all those people–Wow! Aren’t they lucky to be working in a show that I’m in. Its like “Who am I?” And so now, as a director I am lucky enough to work with a lot of young people. I did High School Musical and Grease and Newsies–shows where I get to bring young people into it. And what I do the first day in the theatre is we get everybody in the theatre–everybody–if you’re in that theatre you’re in the circle this first day, and we go and we say our names and I teach the young kids, I say “listen, everyone here is just as important as you are–everybody–because it takes everyone here for you to look good. All those dance lessons–well if they’re not hitting you with the spotlight, no one is seeing you and if they can’t hear you, you know”. So I explain that, and the crews are so grateful because they say “no one ever does that.”
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Photo credit: Original photo by Priscilla Du Preez on Unsplash (photo cropped)