How to Answer the Compensation Question
• William F. Browder • Laura M. Cha • Rakesh Khurana • Mark Mactas
Moderated by • Robin Buchanan
Nota: de-abia in seminarul asta s-a pus putin degetul pe rana si unii si-au pus capul la contributie despre cum ar trebui platiti executivii de top si despre o re-definire a rolului liderului si a “corporate board”-ului.
The current financial crisis has magnified and increased the urgency of solving the problem of how to best structure executive compensation. Even as the remuneration of top corporate officers exploded upward throughout the past decade, a public outcry intensified over irresponsible salaries, obscene perks and unearned golden parachutes. Executive compensation consultants, corporate boards and business school academics have failed to come to a consensus over how to tie compensation to performance. Meanwhile, compensation scandals undermine public confidence in the markets and amplify the disenfranchisement felt by many shareholders, rank-and-file employees and other stakeholders in private enterprise.
The average chief executive of an S&P 500 company is paid US$ 14.7 million a year. In 1960, the average chief executive earned twice as much as the president of the United States. Today, the average chief executive is paid 62 times the current president’s salary. During the same period, the real wages of a chief executive’s employees have failed to come close to matching the pay rise given to the corner office. Studies have failed to find any correlation between performance and the chief executive salary, except as measured against market capitalization. Indeed, studies have shown that the most richly paid chief executives perform worse than their less compensated peers.
Key conclusions
• Corporate boards are broken. Meeting on average only eight times a year and stripped of expertise because of rules meant to guarantee the independence of board members, corporate boards have neither the knowledge nor the motivation to halt skyrocketing compensation trends. Benchmarking exasperates this trend, as leading corporations seek to recruit new executives by offering top percentile salary packages.
• The ideology of corporate boards – that they exist solely to ensure the maximizing of shareholder value – needs to be changed. Boards should understand that companies derive their legitimacy from abiding by the highest standards of corporate citizenship, such as not harming the environment and fostering better communities, and hold top executives to a balanced scorecard of achievements. Boards also should align chief executive pay with a timeline that exceeds the chief executive’s actual tenure. Currently, board members seek social and professional approval by rubber stamping managerial decisions.
• Corporate consultancies should serve either the board or company management, but not both.
• Chief executive compensation should be put up to shareholders’ non-binding approval.
• Corporate boards, in their hurry to satisfy calls for reform, should not overshoot and impose rushed or ineffective solutions. Ideas must meet the test of efficacy or they may give rise to undesired, unintended consequences.
• Corporations with diffuse and numerous shareholders should re-examine how to better empower their shareholders – the goal is to forge a more democratic and responsive shareholder community that can evaluate and take action on executive compensation. To further this, companies should reveal the compensation of more than the top three corporate managers.
• Chief executive compensation could be structured like private equity and venture capital distributions. Compensation funds are diverted into a five-year account. Receiving the compensation requires meeting the company’s goals over those five years.
• Leadership across the business world should be re-examined. Few visionary leaders are motivated by their compensation alone. Rather, good leadership is inculcated by highly ethical company values and the belief that the task at hand is bigger than just the individual people involved.
• Corporate leaders should do scenario planning to at least start to create a roadmap for a new era in executive compensation.
