All in executive compensation

I like envisioning pay transparency using the idea of windows. There is a great reason we created windows many ages ago. They let light in. They allow us to look out. They can be designed to let in the fresh air, and they can provide coverage for those things not meant for the eyes of others.

Could it be that we are designing and communicating incentives for our highest performance all wrong? A recent study titled “Reappraisal of incentives ameliorates choking under pressure and is correlated with changes in the neural representations of incentives” appears to show that the fear of losing a reward allows people to perform at the edge better than the desire for earning more award.

As we fly through another holiday season let’s take a look at some of the stockings hanging on the executive compensation mantle. This is the time of year for gifts and coal. Some are based on lists and requirements, others are a tad bit more…discretionary. In the end, like every year, most get something nice, some get more than they deserve, and others finally get a reminder that being bad has a cost.

Pay has been in the news so often lately, it can be hard to choose a topic to write about. But on November 12, 2018, I read an article titled Setting a maximum wage for CEOs would be good for everyone.” The author was Mark Reiff, a person with an impressive academic resume who asks if setting a maximum wage could “be the long-awaited solution to economic inequality?”

I’m not going to bury the lead. The answer is no. No, a maximum wage is not a solution to economic inequality. In fact, it isn’t a solution for anything

I began my compensation career in 1994. People still typed things (on typewriters). Email was a new thing used by only a limited few. Equity compensation was the wild west. It cost companies nothing. It was used as liberally as salt at a corner burger joint. Few companies knew all the rules and fewer followed them. Gains were expected and repricings were performed without much thought. Importantly, equity was used to fill sometimes massive gaps between cash compensation expectations and cash compensation realities. Stock options were a secret weapon of startups and IPOs to asymmetrically compete for talent against the tech titans and other big companies of the day.

Here’s the skinny. Investment advisers have a fiduciary responsibility to their clients. This means they have an obligation to act, and vote, in their clients best interests. The letters let advisers meet this responsibility by blindly voting however the proxy advisers recommended. It was easy. It was fast. It was protected (kind of.) Most of all it was generic and required no real thought or research. The advisers may have put some time into the big, media worthy companies, but the smaller companies were often voted along “party lines.” This often resulted in confusion and angst on the part of companies and poor results for clients.

Performance Equity in Uncertain Times

With performance units investors, individuals, rule-makers, and regulators seemed to get what they wanted. Investors got assurances that payouts were linked to their own success. Individuals received awards that had upside potential, like stock options. Rule-makers thought they had found a key to slowing the growth of executive compensation and regulators had a framework of established processes that they could apply without too much hassle. But, companies and compensation committees had a real challenge.

As compensation professionals, all we can actively do is provide data and guidance with a blind eye. But, we can also be a reminder of the opportunity each company has to fix this issue at any time they wish. There is no rule that says we must wait until next year.  There is no reason that, with every new CEO hired or promoted, this situation can’t improve. Done with simple intent without upheaval this issue can be corrected over several years, and certainly less than a decade.