Conscious Compensation Parable From Auto Parts Manufacturing Companies

Fred WhittleseyConscious Compensation: The Impact Compensation Blog0 Comments

As a compensation consultant, I work with three auto parts manufacturing companies.The first, Company A, is a traditional company and has been in business for many years.  They market to all of the auto manufacturers, plus aftermarket suppliers.  Being a disciplined business, they seek the lowest prices for raw materials, labor, and capital that allows them to make parts within their defined range of quality and price point. They obey the law in their conduct of business.  They have published a Code of Conduct and Statement of Corporate Ethics on their website. The company has never had a major corporate scandal, major lawsuit, or any criminal investigation.  They’re a good company. Their executives are good guys (yes, they are all guys).  They sell parts to the big three – GM, Ford, Chrysler – and have some business with smaller companies including some of the “green” firms like Tesla.  Like any company, their shareholders expect management and the Board of Directors to make decisions that maximize profit and shareholder value.  Their executive compensation plans reflect those priorities, with their long-term incentives comprised of stock options and performance-based equity based on TSR (total shareholder return).  Very mainstream design.

Company A knows that they also have to do some “politically correct” stuff to keep down the noise level with investors, customers and the community.  They in fact are quite generous in their financial donations to various charities and community organizations.  They are a sponsor of the annual community 10-K run which is a fundraiser for breast cancer research.  The CEO of the company even wore a pink ribbon on his  blazer this year at the event. The cost of these expenditures are classified as “marketing” expenses in their budget because it is good advertising to be associated with these causes.

Company B is much more progressive than Company A.  Company B is fully committed to the concept of sustainability and has built the concept into business operations.  They have realized that the reduce/reuse/recycle methods actually do improve short-term profitability.  They have suggested to suppliers and customers that this is an effective approach, but haven’t put themselves out there, stood on the soapbox, preached the ethic.  They just make more money by their reduce/reuse/recycle theme, employees like it, and they promote it on their website. They consider these factors in many of their business decisions.

Company B created the position of Director of Sustainability who is responsible for ensuring that the company is continually exploring ways to reduce/reuse/recycle and use environmentally-friendly products.  The company has considered escalating this role to a Chief Sustainability Officer and has discussed the concept of a “triple bottom line.”  This company also encourages employees to donate time to community efforts and provides five hours per year of paid community service time for each employee.

Company C is a conscious company.  They believe that optimizing for all stakeholders is more than being “politically correct” or “sustainable” but a value-maximizing business strategy.  They commit a percentage of their revenue to charitable giving, of course.  Reduce/reuse/recycle is embedded in their daily life at the company and no one ever mentions it unless you’re a new employee and don’t understand the difference between the recycling bin and the compost bin.

But Company C does business differently.  They select suppliers based on the conscious value system.  They will turn down customer relationships.  They will hire and not hire employees based on the value system.

It goes further.  They believe in employee ownership but don’t grant stock options like many start-ups because they aren’t seeking short-sighted venture capital funding and don’t believe in an “exit” strategy.  They don’t want sales reps selling to customers that do not have consistent value systems, even if the sales rep, and the company, could make a lot of money from that customer.  They passed on a low-cost supplier because they believe they’ll make more money on the back end with the higher-cost supplier and that supplier’s ways of doing business.  They pay employees to stay home when they’re ill because they know that ill employees in the workplace spread illness to other employees, customers, and suppliers – reducing value for the entire value chain, and affecting the quality of home life as the kids catch the bug.  Contrary to the “paid time off” trend, they provide “sick days” and “vacation days” because the Company believes both are important.

This is difficult.  The lowest-cost supplier that has the ideal mix of product but does not meet their profile, so they pay more for materials from another supplier.  Their sales reps are not allowed to approach certain companies and those companies they are denied would in fact produce the highest sales commissions.  They often turn down candidates in the hiring process when those candidates are the absolute best in skills, experience, and fit with the position, which is difficult for hiring managers and peer employees. Some employees abuse the sick pay system, with more”sick” absences on Fridays and Mondays, and a rush of “sickness” during December, just before those sick days expire.

Why do they engage in these business practices?  Because it produces the best long-term outcomes (and even short-term outcomes in many cases) for all stakeholders – shareholders, suppliers, customers, employees, the community, charities.  Company C has learned that they can actually make more money by having a longer-term view with all stakeholders in mind.

Sounds touchy-feeley?  Sounds politically correct?  Sounds left-wing?  Not at all.  It’s hardcore capitalism, with sensibility.  And it’s huge.  Stay tuned to this blog for more detail on what this is, what it means, and how to do it when it comes down to the most difficult business issue of all: Employee Compensation.

(By the way, I don’t really work with three auto parts manufacturing companies, but you knew that because I’m a West Coast guy and we don’t have much of that here.  I actually don’t even know any auto parts manufacturing companies.  I do know where one auto parts store is nearby, which is what caused me to think of this as a parable for Conscious Compensation,  as I stood in the aisle looking for a tail light bulb and discovered that there are ordinary bulbs, and “green” bulbs (not green-colored bulbs).  Aha, the light bulb came on.)

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