Executive salary update
Sign up for myFT Daily Digest and be the first to learn about executive compensation news.
Charlie Munger, Buffett’s partner in business maxims, once joked: “Show me the incentives, and I’ll show you the results.”
Therefore, in the decades since the consensus that the chief job of the CEO is to create value for shareholders has been established, it is not surprising that the board of directors has begun to add more and more stocks to the CEO’s compensation package. Some people say that this is a way to match the interests of managers and owners.
However, in the two years since the American Business Roundtable was held, some strange things have happened. Symbolic rest Shareholders are paramount.
First, investors whose executives are said to be very aligned with their interests have begun to vote against the CEO’s compensation package, and the number is increasing. Second, despite Munger’s mantra, executives’ incentives are still overwhelmingly focused on shareholder outcomes, even though they have been busy declaring that they are excellent stakeholder capitalists.
Therefore, the company’s current way of paying senior managers can neither satisfy shareholders, but also undermine the credibility of senior managers as guardians of the interests of other stakeholders.
This week, one Learn Shareholders across seven European countries have increased 18% in the number of dissent to compensation resolutions this year.
In the United States, protests against executive rewards have also reached a climax A record high, The once-quiet agency hesitated over the $230 million granted to the CEO by GE Larry Culp And the $155 million Bobby Kotick bring home Used to run Activision Blizzard.
You don’t have to be Bernie Sanders to know how much compassion a 9-figure CEO has for employees and other stakeholders who barely make ends meet.What’s surprising, however, is that three-quarters of investors now believe that executive compensation is too high, just as the recent London Business School Polls Established.
Only 18% of investors agree with the familiar view that “recruiting and retaining” the best executives requires such high salaries. But what about non-shareholders?in a Controversial analysis Actions by members of the Business Roundtable since signing the 2019 Stakeholder Pledge last month, two scholars from Harvard Law School Established The remuneration of directors has not yet been linked to the interests of stakeholders.
It seems unlikely: other Learn It shows that more than one-fifth of US companies now include some environmental, social or governance indicators in their incentive plans, such as the goal of increasing diversity or reducing carbon emissions.
But the stakeholder indicators used by the board usually focus on annual bonuses and hardly put the CEO’s total compensation at risk. Investors suspect that the board is just adding complexity to a package that is already conveniently incomprehensible.
At the same time, because the accounting standard setters have not yet reached an agreement General definition For most ESG measures, it is also worrying that the board is selecting pet indicators and setting targets that are hard to miss, thereby further exaggerating the package.
So, the conditions for reconsidering the remuneration standard are ripe, but can incentives be redesigned to produce results that satisfy shareholders and other stakeholders?
The answer lies in persuading so many executives to support the economic logic of the stakeholder agenda in the first place: at least in the long run, doing the right thing for employees, customers, and the environment can create value for shareholders.
This has made investors increasingly eager to see more CEO plans adopt simple equity grants, holding for at least five years, said Alex Edmans, One of the authors of the LBS study.
Most environmental and social goals cannot be achieved between annual bonus awards. On the contrary, it is best to include only the most relevant and clearly measured in long-term stock awards. If the goal is not achieved, a large part of them will be at risk.
If more stocks sound like a bad prescription for a stakeholder-driven era, the board does not need to take two more steps.
First, the directors need to ask if they can justify the potential payments to all stakeholders. It is becoming more and more obvious that the most serious executive compensation excessively damages relationships with shareholders and trust in capitalism more generally. Controlling them not only avoids conflicts with investors or rival politicians seeking to implement salary caps — it may just rebuild some trust.
Second, if the board really believes that equity is essential for executives to focus on creating shareholder value, then they should extend this logic to other employees.
As a Harvard Business School Learn It was found that companies with extensive employee ownership “have higher productivity, faster growth, and less chance of bankruptcy compared to their peers”.
If there is anything that aligns the interests of investors with the employees of the most important stakeholders that most CEOs consider to be the most important, it is to make more employees become shareholders.
Given that most CEOs are already multimillionaires, the board of directors might even think that if they take away most of the stock reserved for executives and allocate it to those who would become a transformative incentive even for small stock payments, it would what happened.