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December 18, 2008 11:13 AM Age: 8 yrs
ACCOUNTABILITY AND COMPENSATION IN THE SPOTLIGHTCategory: CG Commentary & Opinion, Exec Comp Commentary, Eleanor Bloxham
Source: Eleanor Bloxham
Besides the standard reasons, i.e. unfairness and misalignment, for conflagrations over executive compensation payments and perks, if we dig deeper, compensation is a torch point because at its core, compensation is a public statement about what is important.
Compensation defines the character of the company by defining its values in tangible terms: what it is willing to pay for.
Generally speaking, in the executive compensation world, most practices regarding what companies are willing to pay for are like every other practice.
The economic crisis has made tangible the reality that in defining their pay philosophies, most boards have been as thoughtful as the board next door – and most stakeholders agree that level of insight is inadequate. The crisis has demonstrated the failure of the past, of responsively accepting what everyone else is doing and what most every compensation consultant is selling -- and the impacts and results of these actions in terms of the behaviors that have been encouraged.
Although powerful government and investor intervention in this area is more than likely, insights into business context and human nature, influencers, and character will be important to shape compensation regimes that do their job in both the public and private interest.
And insight requires thought and introspection.
For any board considering the character of its company and what it is willing to pay for, here are some uncomfortable questions to address.
Would executives receive pay for:
1.) Profits made, which were not in the best interests of customers (for example, as we’ve seen in some financial services firms with both institutional and individual clients -- or in other products that harm the customer)?
2.) Profits made, which were not in the best interests of investor rights and the capital markets generally (for example, as we’ve seen in some investment banking businesses)?
3.) Profits made, which are not sustainable?
4.) Profits made, without recognizing the risks taken or the other follow-on impacts in generating those profits?
5.) Profits made, with no recognition of the capital required to generate them?
6.) Profit made or increased, by laying off employees or eliminating or reducing their hours, pay, healthcare or retirement benefits?
7.) Profit made or increased, that others, not they, were responsible for (for example: changes in accounting or in governmental tax policy)?
8.) Profits made, through actions which hurt the community or country (for example: environmental damage or other actions that harmed national interest)?
9.) Stock price increases, which are not sustainable?
10.) Stock price increases, which are driven by investor demand, unrelated to the executive’s real creation of long term sustainable value?
The push for and adoption of changes to pay plans related to numbers three and nine above is already underway. In the years ahead, government and investors will be asking and answering more and more of these uncomfortable questions if boards do not.
While it is debatable whether or not the labor market for executives may have been competitive in the past, the current climate provides a unique opportunity to structure pay programs that recognize the true values of the company -- aligned with the statements the company wants to make about itself -- and what it is willing to pay for.
It is time now for introspection, insight, schooling, and understanding so that the solutions (whether by government, investors or the board) reflect the scalpel of a surgeon rather than the axes or hatchets of those who are understandably outraged.
Eleanor Bloxham, an authority on corporate governance and valuation, is the Founder and CEO of The Value Alliance and Corporate Governance Alliance, a board education, information and advisory firm. She is the author of two books, Value-led Organizations and Economic Value Management: Applications and Techniques, which discuss ways to address pay for performance questions and the stakeholder issues involved in overseeing a corporation, anticipating change, managing risks, and awarding executive compensation. She may be reached at firstname.lastname@example.org
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