Red Hat CEO Addresses Disconnect Between Company’s ‘Meritocracy’ and ‘Out of Whack’ Executive Compensation

Don Tennant

Last week, I wrote a post that stemmed from an interview with Jim Whitehurst, president and CEO of Red Hat Software, perhaps the most influential open source software company in the world. In that post, I noted that in his new book, “The Open Organization: Igniting Passion and Performance,” Whitehurst championed a new corporate structure that eschews the traditional top-down design in favor of a more inclusive approach that values merit over hierarchy. But there’s more to the story. There appears to be a glaring disconnect between that very untraditional management approach, and a compensation practice adopted by Red Hat that is all too traditional in its inequity.

In a chapter of the book titled, “Choosing Meritocracy, Not Democracy,” Whitehurst writes:

At Red Hat, some of the seven thousand voices inside the company have far more sway than others. In most cases, decisions aren’t made by executive fiat, nor are they arrived at through consensus. Rather, those people who have earned their peers’ respect over time drive decisions. Associates who make a positive impact on the business and on the culture find that they gain more influence than those who do not. That’s why we call our culture a “meritocracy.”

DonQuote20150608Interestingly, what appears to fall outside of this meritocracy is executive compensation — unless, that is, the merit of, for example, Brian Stevens, Red Hat’s former CTO (who left the company last September to become vice president of cloud platforms at Google), was truly 100 times that of the company’s average software engineer. According to Red Hat’s Schedule 14A Proxy Statement filed with the SEC, Stevens’s fiscal 2014 compensation was  $7,940,307, while according to PayScale Human Capital, software engineers at Red Hat make, on average, $80,436. Another way to look at this, of course, is that in Red Hat’s corporate culture, the livelihood of the CTO’s family was worth the livelihoods of 100 software engineers’ families. So I felt it was important for Whitehurst (whose fiscal 2014 compensation was $6,692,552) to address the issue.

I pointed out to Whitehurst that he stressed in the book that Red Hat is not a top-down organization, and that it’s very untraditional in that sense. But I noted that the company appears to have a very traditional compensation structure, in the sense that the top executives are paid in the millions of dollars, while the employees down in the trenches are making a small fraction of that. So I asked Whitehurst if he thinks that’s something that will ever change, or if it’s just a fact of life. He said it’s just reality:

Well, look. I mean, the whole compensation structure in corporate America is pretty far out of whack, right? That’s the reality that we live in. We have a board of directors and a compensation committee, etc., and so we try at all levels to pay competitively. We benchmark from the junior engineer all the way through the CEO, and pay competitively. Now, I do think we win people not just because we pay competitively, but because we’re on a mission that people want to be on, in an environment where people want to be. So we do focus on why, and extrinsic motivation and passionate people. But yeah, at the same time, we do have compensation structures for everybody that mirror others in our industry. Whether that changes or not is going to be much more of a [matter of finding] a broader structural fix for that for corporate America, and governance more broadly.

I followed up by asking Whitehurst if he thinks there’s a disconnect at all between the open organizational structure he writes about in his book, and the traditional compensation structure. He acknowledged that the traditional compensation structure is too often tied to scope of responsibility rather than contribution, which is something that needs to change:

I’m thinking of the disconnect in this regard, and we’ve tried to fix this at Red Hat: Often, the only way to move ahead in an organization is to move up the corporate ladder. We’ve tried really hard to build what we call “careers of advancement” and “careers of achievement.” Careers of achievement are primarily for engineers who’ve done an extraordinary job, and should continue to build their influence and their compensation, etc., but have no desire to become a people manager. In most companies, you’re stuck. You’re either stuck at a certain pay grade because you don’t want people working for you, and your influence is capped by the fact that you’re an individual contributor; or you can decide to manage people, even though you may not want to. We’ve tried to break that, because some of our greatest leaders are people whose influence is much broader than most of our people managers. They’re individual contributors who contributed a long time to do extraordinary things, and we look to pay them appropriately. I do think the traditional structure misses that, because pay is too often tied with scope of responsibility vs. contribution. That’s something that does need to change over time.

At that point, I asked Whitehurst if he could have one do-over as CEO of Red Hat, what it would it be. After the executive compensation discussion, I wouldn’t have been surprised if he was thinking, “Agreeing to do this interview.” But he had an interesting, candid response in any case:

Probably the single biggest one is the way we approached a technology area called virtualization. We bought a company called Qumranet that had a technology that wasn’t open source, and to get to market faster, we rushed out with it. They had a management platform it sat on that was proprietary, and we decided to use that vs. write our own. That was a mistake, and we ended up having to rewrite the whole thing in open source. We’re nowhere near as far along in virtualization as I think we would have been if we’d made a different decision there. It put us back probably two years in virtualization. I really wish I had a do-over on that one.

Finally, I asked Whitehurst what Red Hat will look like five years from now. He said it will look like the Microsoft of the cloud/mobile world:

I think what you will see is Red Hat, and our technologies, will be the default choice for the next generation of computing, in the same way that in the client/server era Microsoft was the default choice. I think in the cloud, mobile world, open source and Red Hat’s technologies will be the default choice for that next generation of computing.

A contributing writer on IT management and career topics with IT Business Edge since 2009, Don Tennant began his technology journalism career in 1990 in Hong Kong, where he served as editor of the Hong Kong edition of Computerworld. After returning to the U.S. in 2000, he became Editor in Chief of the U.S. edition of Computerworld, and later assumed the editorial directorship of Computerworld and InfoWorld. Don was presented with the 2007 Timothy White Award for Editorial Integrity by American Business Media, and he is a recipient of the Jesse H. Neal National Business Journalism Award for editorial excellence in news coverage. Follow him on Twitter @dontennant.

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