Suzanne Nora Johnson’s Views on How to Change Corporate Culture – Including Compensation

At the recent World Economic Forum in Davos, Wharton management professor Michael Useem talked with Suzanne Nora Johnson, vice chairman of Goldman Sachs until 2007, about the global crisis, executive compensation, the Goldman Sachs culture and CEO succession, among other topics. Johnson currently serves on the boards of AIG, Intuit, Pfizer, Visa, Women’s World Banking and the American Red Cross, among others.

While the whole interview can be read here, KnowledgeToday highlights several observations by Johnson that seem especially relevant in light of the latest financial crisis-related controversies.

For example, asked about what many people consider to be outsized compensation packages for top executives — or as Useem put it, “a strong public criticism that for too many people at the top, as their company is heading south, their compensation is going north” — Johnson replied: “You can use internal equity as a good touch point, and what I mean by internal equity is looking at the differentials, from top to bottom, in an organization. No matter how good somebody is at the top, if you see that stratification getting too significant, it is a warning signal. It is a red flag. And the other thing I have found – [supported by] a fair amount of academic literature – is that the more unequal you make your compensation structures, the more you pay in total. Because often people are willing to take lower pay if they think there is real equity, parity and fairness. The more they think there’s unfairness in the system, the more they are chasing somebody who has a higher comp level who they are perceived to be a lot like.”

In response to Useem’s question about the need for a culture shift in the corporate world, Johnson again touched on compensation: Changing a culture “often revolves around compensation structures, [which] will likely be more transparent, rather than less … and more long-term focused. For example, I can see compensation structures making incentives multi-year. I don’t mean stock vesting. I literally mean that your revenue targets – your earning targets – are multiple years, not single years. I could see clawbacks. I could see looking at internal rates of equity – meaning how much differentiation there is from the top to the bottom. All those things would have significant culture changes.”

By long-term compensation, “I actually like seeing multi-year timeframes,” Johnson said. “Clearly, you need to have some annual timeframes, because often budgets and investors are on that timeframe…. So you [need] some annual metrics. But I think two-, three-, five-year metrics can be very, very healthy protocols to go through. It generally lets you live in and out of business cycles. It gives you a sense of who performs particularly well in adverse conditions.”

Asked at one point whether she saw any signs in the financial services industry that we were headed for a global disaster, Johnson noted: “The most important warning sign was the fact that if you look back several years ago – and even as late as 2007 – the only undervalued asset class that you could find was risk. Literally, you could go to traditional asset classes, whether it was real estate, commercial/residential, whether it was emerging market debt or equities, whether it was private equity alternatives from venture capital to private equity – clearly the risk premiums were mispriced. Why I say they were mispriced literally [is that] there were no differentials from one very sterling credit to one lousy credit. That was a warning sign.”

On the subject of CEO succession planning, “companies that do the best are the ones where there is a very strong sense of succession planning, and there are multiple internal candidates who could assume the role,” said Johnson. “Because I do think understanding the culture, having been part of it, having paid your dues, having done the right thing, being rewarded, has incredibly powerful commercial impact – and also has very powerful incentives inside, organizationally. That’s not to say that, at times, you don’t need to go outside and find the best, because there are circumstances where you need to do that. But on the margin, where you can go inside, I think it’s very powerful.”