Lots of talk this week on executive compensation, with fascinating trajectories for American culture, business, society and public policy. I followed the debate so you don’t have to.

As you might expect, much of the conventional wisdom has focused on a potential Wall Street brain drain should comp restrictions be put into place (examples here, here and here).

The week’s best commentaries came from The Economist and compensation expert Frank Glassner.

First, The Economist points to big investment bank bonuses and introduces the concept of “employee capture:”

Such rewards, in the face of public protest, feed the impression that banks are victims of what some call “employee capture”. The top ten investment banks at the start of 2008 made an average return on equity of just 8% between 1999 and 2008. Four made cumulative losses. Staff got four times as much as shareholders did in profits. In 2008 Merrill Lynch paid cash to staff equivalent to over 100% of the capital left by the year-end.

Normally, this would be just a problem for shareholders. But because the public had to get involved, it’s now everyone’s problem. Next, the newspaper debunks the banks’ revisionist protests that, because they’ve repaid public subsidies, their bonuses should revert back to those of 2007. Fact is, they continue to operate on public support:

It is not just that they were saved from destruction. They got public capital (much of it now repaid), short-selling bans on their shares and rescues of counterparties, such as American International Group, which the public otherwise had no interest in saving. Today they enjoy laxer accounting, loose collateral rules at central banks, explicit debt guarantees and asset-purchasing schemes. And, critically, they can borrow cheaply because they are deemed too big to fail. All of them-from comparatively healthy Goldman to the nationalised weaklings-are being subsidised by the rest of us. As a way to keep cash flowing to the wider economy and help banks rebuild their capital, this subsidy made sense; nobody intended it to go to employees.

The heads-I-win-tails-you-lose aspect of all this has got America steamed. But The Economist argues that the answer is not simply to tax the banks’ highest earners:

In the longer term the bonus mess underlines the importance of getting the state out of finance: setting a time limit for the explicit guarantees and finding ways to lessen the implicit promise of support through living wills and the like…. Retrospective taxes are usually bad news. They distort incentives, and scare investors in other industries who fear they may be next. A wholesale cap on pay would lead regulators further into the swamp of micromanagement. And symbolic caps on a few top executives, as the White House is threatening, are too feeble a response.

The resident expert on pay on CNN, Bloomberg, and elsewhere is Frank Glassner, who’s been omnipresent this week on TV, newspapers and across the blogosphere. Frank is CEO of Veritas, the top pay consulting firm to Fortune 1000 companies. Because our firms share clients in common, I’m on his private email list. Frank this week sent his clients a manifesto advising that when it comes to pay, it shouldn’t be a matter of “how much,” but “how.” I sought his permission and bring that note to you here. An excerpt:

[G]overnment regulation will probably have unintended consequences, without curbing excessive pay. For example, if the maximum ratio of CEO pay to worker pay were mandated, companies would likely respond by outsourcing the work of the lowest paid workers, rather than curbing CEO pay.

For the rest of us who are not recipients of public largesse, the lesson we can take away is the delicacy with which we should approach compensation, and how it needs to be situated within a broader human capital strategy. Company directors will be under greater scrutiny than ever. Says Frank:

[C]ompanies should design compensation packages to attract the right people for implementing the company’s strategy. For instance, below market salaries coupled with aggressive incentive pay linked to individual performance is likely to attract self-motivated entrepreneurial individuals, however, that very type of pay strategy may create increased risk taking as well, and would need to be designed with appropriate checks, balances and controls.

Companies also need to assure their executives longer tenure and horizons – without the necessity of pay guarantees. A CEO who is afraid of being fired for not making short-term financials will not focus on the long term. A board that is actively engaged in strategy formulation and implementation and compensates a CEO for strategy implementation milestones, along with monitoring long-term performance, is more likely to understand, appreciate, and encourage a CEO’s efforts, even if they yield short-term financial results that are below expectations. Thus there is an urgent need for boards to evaluate their executives’ performance annually to determine their progress on long-term goals.

What I like most about Frank’s note is the premise that when it comes to compensation, one size does not fit all. When business strategies differ between companies, their compensation strategies ought to differ as well.

Companies should have the fortitude to set their compensation strategies according to their corporate strategies, not simply based on external markets for pay, and not simply based on internal ideals of what’s “fair.” To accomplish this, you’ll need first to identify how pivotal to your company strategy an executive really is.  For my earlier post on how to do that, click  here.

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In case you didn’t get the memo, hugs have replaced handshakes in the new American workplace. Here’s your how-to guide for the new hug protocol:

• The Full Frontal: Your standard bear hug. Total body contact, heart-to-heart embrace and firm squeeze. For parents, children and good friends.
• The Ass-Out Hug: Nothing touches below the shoulders. Appropriate for the office and bad first dates.
• The Hip-Hop Hug: A.k.a. the man hug and the hetero hug. A manly shake-and-squeeze combo. Shake with right hand and hug with left, two slaps on the back. Favored by President Obama and demonstrated in the photo at right.

If you are still in hand-shaking mode, I’ve got a goody for you too. From the wise and wired John Kobara (that’s John in the photo), handshaking instruction from President Clinton:

1. Slow down and take your time.
2. Direct eye contact and smile.
3. Firm grip and little or no shaking.
4. Take the other hand and grab the forearm or elbow of the other person.

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UPDATE: For how to chest-bump like President George Bush, Jr., click on the Comments section below. Thank you to JoyofHC reader Richard Lai for the tip.

An article entitled “Managing Your Career as a Business” in today’s New York Times business section discusses my career experiences and what I’m seeing in the job market:

Joy Chen followed her own entrepreneurial career path. Ms. Chen, with a master’s degree in business administration from the Anderson School of Management at the University of California, Los Angeles, had been a deputy mayor of Los Angeles and then went to work for Heidrick & Struggles, the management search firm. She left to start her own recruiting firm, Chen Partners in 2007, just as the economy started to slow. Business was initially scarce, she said. “Many employers were even then hunkering down.”

Then this year, Ms. Chen said, things changed. “Many companies noticed that after all the layoffs and uncertainty, skilled people were available at lower salary demands than in former years. And now business is very active.” The lesson of the economy’s ups and downs, she said, is that workers cannot let hard times or lower pay discourage them. “It’s a change in the market, not a depreciation of who you are as a person.”

The article points out that you need to develop a more entrepreneurial mindset about managing your own career.  The recession has laid to rest the notion that your company will take care of that for you. I’m always meeting people who make the mistake of being highly strategic on behalf of their companies, but not at all strategic for themselves.  Certainly, when a company gives you a set of responsibilities you should identify with your job and try to excel in it. But just as the recession is forcing companies to innovate, people should innovate on their own behalf.

One way to be entrepreneurial, of course, is to go out and create your own company. My very first boss, Yue-Sai Kan (靳羽西), is China’s most famous woman, having built a media and retail conglomerate there over the past 30 years. When I started Chen Partners, I recalled her advice: “Never just work for other people. They could fire you!”

Candidates sometimes ask me what it’s like to own a small business. I never discourage them from exploring it, though if everyone ran off and started a business, I myself would be out of business. Being an entrepreneur is an exhilarating experience, and headhunting is a special joy. It’s exciting to help great people grow their companies.

This recession has turned many of our previously-held assumptions upside down. One lesson we may take away is that now, we’re all working for ourselves. That’s true whether we’re doing so within a larger company or in one that we’ve created ourselves.

• What jobs are companies upgrading?
• What jobs should I consider upgrading?”

These are the two most common questions people have been asking me following my last blog post “Behind the Layoff Numbers, Companies are Upgrading Their Talent.”

The answer in both cases: jobs that require “pivotal talent.” “Pivotal” is not synonymous with “important.” Pivotal talents are those game-changing employees whose performance can make or break the bottom line.

Two of the best thinkers on this subject are John Boudreau and Pete Ramstad, whose book, Beyond HR: The New Science of Human Capital, has helped shape my thinking on how to connect business strategy to human capital strategy.

In a workshop I once attended, John and Pete offered a fictitious case study involving FedEx and pivotal talent. The board of FedEx pronounces Asia as their #1 growth market and key to the company’s future. Many companies make such pronouncements, and then fail to put in the people they need to succeed there. FedEx next analyzes their Asia growth processes, identifying the most important bottlenecks to that growth. (You may recall from business school that a “bottleneck” is a key constraint which, if removed, causes the entire process to work better.) A major bottleneck is the periodic assigning of landing rights at key airports in the region. By securing those landing rights, FedEx could grow in Asia; without those landing rights, growth of the entire enterprise would be compromised.

FedEx realizes that the people who secure those landing rights are pivotal to the future growth not only at those airports, but of the enterprise as a whole. Those community liaisons are pivotal talents.

How much compensation should FedEx pay to recruit and lock up the few individuals in each market with the knowledge, skills and connections to secure those landing rights? Further, what if they could poach those individuals from DHL or UPS and not only secure their competitive advantage for years to come, but also neutralize their competition?

This chart demonstrates the talent pool of pilots versus community liaisons:

Pilots are unquestionably important to the business of FedEx. Assuming the pilots have a basic level of competence, though, improving pilot quality yields little additional value. But at key airports where landing rights are at stake, the difference in value to FedEx between the worst and best community liaisons is huge.

Who are the FedEx community liaisons at your company?

Before reflexively deploying traditional strategies like across-the-board layoffs and pay cuts, evaluate your approach to “pivotal talent,” those game-changing employees whose performance can make or break the bottom line. As market conditions evolve and business objectives quickly change, you’ll need the right blend of critical skills to succeed. Focusing on your pivotal talent can provide you a major competitive advantage over the next 18-24 months.

Consider:

• What processes does your company need to win in your marketplace? Which are potentially pivotal? What are the key bottlenecks?
• At those pivot points, which are the jobs where performance quality will determine success?
• Do you have the people you need in those pivotal jobs?

If not, now is the time to upgrade. The job market, while brutal for job-seekers, has never been better for employers. You can access talent now that will set up your company for years. If you’d like to discuss whether Chen Partners can help ensure that you get the right talent in those pivotal roles, shoot me an email.

If you do have the right pivotal talent, invest in them now. Wrap your arms around them. Lock them up with incentives. Focus on their development. Otherwise, the next call they take could be mine.

Bullies. We know they exist. We know we should fire them. But can we afford to? And what happens if we don’t?

A friend from a major law firm in town recently told me about a senior litigation partner of hers who was famous for being rude. No secretary wanted to work for him. It was always f- this and f- that, and f- this person and all that. Not only did this guy cuss, but he was a mean cuss.

His partners sat him down and told him to shape up.  His response? As a litigator, he needed the f-word to do his job.

You know the type.

What did the firm do?  Decided he brought in too much revenue to reprimand too harshly.

He’s a classic “Destructive Achiever.” That’s a great term coined by retired management professor Chuck Kelly in his 1988 book of the same name.

Chances are you’ve met a Destructive Achiever. The typical American worker has a 50 percent chance of working for a bully in his or her lifetime, and one in five Americans works for a bully right now.

Bullies thrive during a recession, and have thrived in this one, because in bad times companies especially focus on their achievements while forgiving their bad behavior.

But new research shows that in fact, bullies cut a swath of destruction far worse than anyone imagined. Management professors Christine Pearson and Christine Porvath conducted a study of 4,000 employees at the receiving end of bullying behavior and found:

48%  decreased their work effort,
47%  decreased their time at work,
38%  decreased their work quality,
66%  said their performance declined,
80%  lost work time worrying about the incident,
63%  lost time avoiding the offender, and
78%  said their commitment to the organization declined.

Turns out that it’s during a recession that companies should beware the collateral damage caused by bullies.

My primary message regarding that megalomaniacal jerk in your ranks is: Cut Him (or Her) Loose.  That said, I understand that, like the law firm above, you may conclude that your bully brings too much benefit to cut loose, at least in the short term. It’s a recession, and revenue is revenue.

It’s a deal with the devil.  But if you have to make it, you don’t have to lose your soul – or leave your colleagues in harm’s way. Focus on gaining the benefits of the ‘achiever’ – such as his ability to bring in new business or solve technically demanding problems.  Meanwhile, remove his management responsibilities.  Reassign his direct reports and otherwise isolate him to minimize his destructiveness to the rest of the organization.  You’ll be doing your people, and yourself, a favor.

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For more on this subject, read:

• The Cost of Bad Behavior: How Incivility Is Damaging Your Business and What to Do About It
• The No Asshole Rule: Building a Civilized Workplace and Surviving One That Isn’t

A growing body of research on happiness in the workplace finds that optimism and cheerfulness have a measurable effect on the bottom line.

The chart below is from Wharton finance professor Alex Edmans, who has found that companies with happy employees perform better than other companies.

Makes sense that happy workers are motivated, and that efficiency ensues.  The good news is that happiness is a muscle you can strengthen.

The happiest employees are those who believe they get to do what they do best every day. Only one-third of working people feel that way.

Ensuring that people’s jobs are well-aligned to their strengths is an ongoing process. As your employees grow and broaden their skills, seek to evolve their work to ensure a continued fit with their skills. To achieve “flow” — complete absorption in a task — their workloads should be challenging but not too tough for them.

For those among you who are recruiting amidst this recession, hire for people’s strengths, and not just for their resumes. I will address how to do this in future blog posts, but in the meantime, you can see an overview on our website here.

Robert Aliota, founder of parts-maker Carolina Seal, says happiness science has led him to make lasting changes at his company. He regularly analyzes his own moments of triumph, “times when I was truly in the zone, utilizing my natural strengths and having fun,” as a sort of happiness fuel.

That’s the sort of fuel that can power the success of your company.

Companies everywhere are trying to reinvent themselves for a future they could not have imagined a year ago. Problem is, their human capital practices are not keeping up with their shifts in strategy.

I was out drinking with a senior partner at a well-known global consulting firm. He was leading a campus-recruiting project to hire students from China as they graduated from American universities. After all, it’s the era of the global consumer, and 53% of executives say that China and India will be vital to their success in the next five years. This project sounded like a good way for his firm to stay ahead of their clients’ needs.

He and his team had just been to UCLA. I asked how things went. Not well, he replied. Now I happen to know that UCLA is commonly called the “University of Caucasians Living Among Asians,” so I wondered why all those Chinese students didn’t fit the bill.

He said that they were uniformly smart and ambitious, but lacked “cultural fit.” In fact, he complained, one student came into the interview in a pastel suit, his hair in a pompadour. Elvis on top, Miami Vice below.

Research shows that, as a matter of human nature, when we meet someone, we size him up within five minutes, and then that initial impression colors not only our entire meeting, but also our recollection of that meeting. In recruiting, we call it the “Halos and Horns Effect.”

A Brooks Brothers model would have had a better chance getting past those crucial first minutes with my friend’s firm.

But this begs the question: What culture is this firm is recruiting to?

The Chinese students at UCLA now are China’s brightest, richest, most connected, best English-speaking, young people. For a firm that has tied its future to winning and executing China business, these candidates could be exceptionally well-equipped to helping the firm execute on those strategies.

It’s in the boardroom that companies announce new strategies and organizational structures, but it’s on the frontlines of people-management that the rubber meets the road.  Companies should routinely review their human capital practices to ensure they’re aligned with their strategies.

Otherwise, that Elvis lookalike who gets away could be the one who walks across the street to help your competitor eat your shorts.

Next time you make a hire, do not rely solely on the interview process. Research shows that what we know about ourselves is fairly limited, with many of our impulses, traits and beliefs residing in our subconscious. See photo.

The current recession only further increases the business risks of each new hire. To reduce those risks, conduct good reference checks, since reference checks are the only way to verify what a candidate is really like. Do not ask the most commonly asked reference question: “Tell me about Laura’s strengths and weaknesses.” It prompts bland generalizations, and leads nowhere.

Here’s how to make reference checks count:

1.  Create a roadmap. The goal of referencing isn’t to dig dirt, or to get gossip, but to verify a candidate’s fit for the position.  Identify the specific skills, competencies and personal characteristics required for the position, and reference against those.

2.  Focus on references from the past five years. People grow. Studies show that the best predictor of future behavior is immediate past behavior.

3.  Conduct 360° references.  Don’t just speak with former bosses. If the candidate you are considering has already had some career success, she’s already shown some skill in managing upwards. Often, the most revealing references are provided by direct reports and peers.

4.  Always go off-list. Inform the candidate that it’s your policy to identify and call people not on her list, and ask if she has any concerns with that. If yes, those concerns can be revealing. When speaking with her references, always ask if there are others who might have different perspectives on what it was like to work with her. Then call them.

5.  Take control of each call. Avoid wasting anyone’s time. Start each call knowing exactly what you’re after on that call.  Could be one thing, or four, based on your referencing roadmap, and when and in what capacity this referee knows your candidate. Perhaps you have a question around a candidate’s departure from a certain job, or how well he manages his peers. If the conversation veers off-topic, promptly steer it right back to your agenda.

6.  Get specific examples, then drill down. Don’t ask present-tense questions: “How does she…” Rather, get specific examples from the past: “Can you remember a time when Susan actively mentored a member of her team?” When you hear generalizations, get examples. For each example given, drill down to find out the original Situation, what Actions she took, and the Result of each example. S-A-R.

7. Identify developmental areas. One of my favorite questions, at the end, is: “If you were his executive coach, what would you have him working on in the next three years?” More effective than asking for the candidate’s weaknesses, and opens the door to further probing.

8. Hit Pause. If the reference ever hesitates, wait. People do not like breaks in conversation. By pausing, you’ll often get the most revealing insights.

9.  Take notes. Research shows that memories of conversations always are faulty, and are colored by one’s own opinions of the candidate. I always tap along on my computer, taking near-verbatim notes. When I review and type them up, I always see things I forgot were said. Try to take down nearly everything that’s said on your call, so you can later assemble your notes from all the calls to get a more rounded view of your candidate.

Five or six reference checks like this, lasting 45-60 minutes each, and you’re done. Yes, that’s a serious investment of time, but it pales in comparison to the cost of a wrong hire. And, if all works out, you’ll gain excellent insights for onboarding your newest hire.

Was this helpful? What are your experiences with referencing? Let me know if you have questions I should address in future posts.