The Wall Street Journal accidentally connects the dots between two current scandals making it plain that compensation issues are at the heart of management problems with US organizations: non-profit and for-profit, small and large.
The October 16 Wall Street Journal (online) juxtaposed two stories, seemingly unrelated, one covering voting registration irregularities at Acorn and the other about new restrictions on executive compensation at the financial institutions that just received injections of capital from the US government. I found the two stories practically right next to each other at noon on Thursday, though by later in the day they had moved (they remained together in the Asia edition, which is the screen shot you can click to see full size).
The Acorn story ("Probes Focus on Advocacy Group's Voter Registration", Evan Perez) was a straightforward report, explaining how the problem arose due to lapses in interal controls at Acorn:
Last year, Acorn canvassers in Washington state and Missouri admitted to falsifying voter registrations. In response, Acorn switched its canvassers to an hourly wage with goals for number of registrations by each canvasser. Previously it paid workers by the number of registration forms turned in.
The group also started its own antifraud program, requiring all voter applications be reviewed by supervisors and then verified by call-center employees who make as many as three attempts to reach each voter signed up by a canvasser. Acorn's internal program flags potentially fraudulent registrations. Then, as many but not all states require, it turns them over to election officials.
The article is so reasonable and even-handed in its approach that I'm surprised it hasn't received more attention. It doesn't show up in web searches or in a version outside the WSJ subscription walls. So I've made a copy of the article available here.
The other story ("Lower Salaries Could Cost Wall Street" by Joann S. Lublin & Aaron Lucchetti) mostly reported reactions from various compensation consultants, voicing various concerns about driving away "top performers" and turning away from the pay-for-performance concept.
The contrast in noteworthy: Acorn, the nonprofit organization, pretty quickly acknowledged that incentive compensation was a mistake and produced unintended consequences that were not desirable.
But the large corporation compensation consultants completely skated past the notion that incentive compensation for CEOs had produced unintended consequences leading to the meltdown on Wall Street. It didn't even occur to them, or so it appears.
The flaws in executive compensation setting are not limited to for-profit companies. The IRS (under the direction of Congress, of course) has spread the poison of excessive CEO compensation to the nonprofit world by establishing the principle that executives can get away with unlimited salaries, so long as other organizations are making the same mistake. And there are nonprofit advisers who seemingly refuse to question the judgment of any nonprofit board who caves to salary demands based on what others make (an issue I have with Jack Siegel of Charity Governance, for instance).
I've written before about the need for better standards for nonprofit CEO compensation ("Independent Sector Releases Watered Down Principles for Nonprofits," October 28, 2007). Acorn's resolution suggests three conclusions that could be carried over into the compensation discussion:
- It calls into question the use of simplistic performance measures as a basis for incentive compensation.
- It supports the establishment of strong cross checks and internal controls regarding any measurement of performance outcomes. And
- It serves as a warning that any consideration of incentive compensation should include a thorough reflection on how the measures could be gamed by the unscrupulous.