Leading From Below

The Wall Street Journal published a great article on leadership, “Leading From Below,” in its March 3-4 weekend edition. Executives and managers below the “C-suite” level must look at themselves for leadership initiative and risk-taking because senior managers may be distracted by “demands from investors and analysts for immediate results.” The authors, James Kelly and Scott Nadler, studied managers in two areas that are rarely at the top of a company’s agenda: environment, health and safety and corporate social responsibility. The authors found certain “common threads” among those lower-profile managers who shifted to leadership positions.

The bullet points for the aspiring leader include:

• Make the decision to become a leader.

• Focus on influence, not control -- do your job with your colleagues. “[G]etting people to act on their own to achieve the goals you have in find is far more effective than having them react to your direction.”

• There may never be a “perfect” time to risk taking the lead, so just look for situations where you may be assert your leadership and do not wait for an invitation from the C-suite.

The authors note that in many of the cases they studied, the managers were able to demonstrate leadership without any support from the C-suite. But the authors also recognize that senior executives can take steps to encourage leadership development such as:

• Seeking a broader range of perspectives and encouraging managers, especially those aspiring leaders, to do the same.

• Creating vacuums by identifying important issues without “dictating the source or nature of answers.”

• Posing “what-if” questions that require others to think through the consequences of each step of a proposed course of action. Different approaches may prove to be preferable and managers will become more comfortable with exercising critical thinking skills, rather than merely accepting a decision and executing directives from above.

In my view, the ideas presented in the article apply to all aspiring business leaders regardless of their area of managerial responsibility. At the macro level, the business world may be moving towards a more collaborative model (e.g. Wikinomics: How Mass Collaboration Changes Everything). At the micro level, a collaborative model may be even more powerful because, as the authors note, "[p]eople simply react more enthusiastically to being enlisted in a common cause than they do to being ordered around." The complete article is on the website of the MIT Sloan Management Review, a “journal of management research and ideas.”

More on Potential Limits to Deferred Compensation

Gretchen Morgenson's "Fair Game" column in the January 28 edition of the New York Times highlights the potential problems for executives who participate in deferred compensation programs if the Small Business and Work Opportunity Act passes in its current form. The proposal would apply both to initial deferrals and to earnings on those deferrals and will affect even executives who earn substantially less than the $1 million maximum cap. As the article states, "'[t]he vast majority of people affected by this will be in the $100,000 range.' And it is unlikely that their companies will cover taxes generated by exceeding the limit."

• Example: If your salary is $100,000, and you have $1 million in your deferred compensation account, your savings would have to earn only slightly more than 10% to push you over limit. If that happened, your entire account would be subject to taxes and the penalty.

• Example: A start-up company pays a small salary but has a generous equity-based deferred compensation program. If the value of the deferred equity in one year fails the annualized compensation test, the entire account becomes taxable and subject to penalty.

From a policy standpoint, it is unfair to impose a tax on money that you have not yet received and have no control over. But the Senate Finance Committee would argue that employers can easily solve that problem by paying higher (taxable) salaries if they want to maintain a certain level of compensation for key employees. Or, they can limit deferral amounts to essentially 100 percent of salary, which is far more than the average worker can defer in 401(k) plans.

There is no specific reason to limit deferrals to 100 percent of yearly compensation, other than it is a convenient measure and one the probably tests well politically. Perhaps the final proposal will be modified to raise the limit, but in the wake of the various executive pay controversies and scandals (e.g., option backdating, enormous severance packages), Congress is unlikely to feel substantial pressure to drop the proposal entirely from the bill.

Wal-Mart Discounts Severance Package to $0?

As reported in Advertising Age, Julie Roehm, the former Wal-Mart senior VP-marketing communications, filed a lawsuit alleging that Wal-Mart breached her employment contract when it fired her in December 2006. Roehm has a high profile in the advertising world and her dismissal garnered much attention. There were allegations of ethical misconduct in the selection of an advertising agency and an "inappropriate" relationship with a subordinate, all of which Roehm denies. Her dispute with Wal-Mart over her severance, however, is one that any executive might encounter.

Roehm's contract provided that she would receive base pay of $325,000, a signing bonus of $250,000, annual incentive-based payments and restricted stock worth up to $300,000. The agreement also included severance in the amount of one-year of base pay in the event her employment was terminated. According to Roehm, Wal-Mart fired her ostensibly because she had not "been fulfilling the expectations of an officer of the company." But she claims that Wal-Mart never identified any conduct that failed to meet that standard. She has not received any compensation from Wal-Mart since she was fired, according to the complaint. Presumably this includes the promised severance payments.

Typically, a "failure to meet expectations" is insufficient to qualify as a reason not to pay severance under a termination for "cause" provision of an employment agreement. That kind of language would give the employer far too much leeway to avoid paying severance. It is likely that this case will settle fairly quickly unless there is some unusual language in Roehm's employment contract that gives Wal-Mart more leverage.

Note for Pennsylvania executives: In Pennsylvania, the employer's failure to pay severance due could open the employer up to a lawsuit under the Wage Payment and Collection Law ("WPCL"). If the executive can prove that severance was owed, the court could order the employer to pay the executive additional damages equal to 25% of the severance amount plus the executive's attorneys' fees.

The Ad Age article with more details is here.

When is the Company's Lawyer Not Your Lawyer?

As reported on Law.com, a former Citigroup executive, David H. Trautenberg is suing Paul, Weiss, Rifkind, Wharton & Garrison, "claiming the law firm was conflicted when it advised Citigroup on [his] severance package." Trautenberg was involved in the litigation that ensued after WorldCom imploded because he had approved large personal loans for former WorldCom CEO Bernard Ebbers.

Paul Weiss represented both Citigroup and Trautenberg in his capacity as a Citigroup employee during that litigation. Trautenberg claims that the Paul Weiss lawyers obtained confidential information from him which they then used against him in subsequent negotiations over a severance agreement. Trautenberg claims that he lost $20 million because of Paul Weiss's involvement and is seeking $80 million in damages.

The lawsuit is a cautionary tale for executives:

• First, if the company's lawyer represents both the company and you in litigation, you should remember that there may come a time when your interests diverge from those of the company. Consider seeking independent advice from another lawyer and asking your company to reimburse you for the expense.
  
  
• Second, when negotiating an employment contract or severance agreement, the company's lawyer is not your lawyer and is committed to achieving the best result for the company, not you.