Chapter 12: Compensation: A Troublesome Lead System in Organizational Change

Source: Reprinted by permission of Harvard Business School Press from Ledford, G.E. & Heneman, R.L. Compensation: A Troublesome Lead System in Organizational Change. In M. Beer & N. Noria (Eds.), Breaking the Code of Change (pp. 307-322). Cambridge, MA: Harvard Business School Press. Copyright 2000 by the Harvard Business School Publishing Corporation; all rights reserved.

While preparing this chapter, we heard the following story from a consultant. The CEO of a Fortune 500 firm was a turnaround specialist, and he had plenty of work to do in his new company. The firm he now headed was losing money and market share while its peer companies were not. The firm’s strategy was ill defined, tentative, and ineffective. The previous chief executive had badly overpaid for a major acquisition, causing financial problems, then compounded the difficulty by overhyping the deal, which gave the firm a bad reputation in the business press. The organizational culture was toxic: highly political, bureaucratic, full of meaningless turf battles. There was no shortage of organizational and human resource problems. After surveying the landscape, the new CEO decided that the place to start in changing the organization was the compensation system. He decided that his first change had to be big enough to capture the attention of managers and employees to shake things up in a rigid, political, uncreative organization. Was the pay system a wise place to begin in changing the company? The story is still unfolding, so the case does not yet give us a definitive answer to our question. This paper explores the question and takes the position that the CEO was mistaken to begin organizational change with pay.