April 8, 2019
Rethinking “Pay-for-Performance”
– Liz Dunshee
Pay-for-performance is currently the “Holy Grail” of executive compensation. But a growing number of people are questioning whether we’re making things too complicated. In his keynote address at last year’s “Proxy Disclosure/Executive Compensation Conference,” former CEO Steven Clifford recommended reductions to CEO base pay and restricted shares that vest sometime after the executive leaves the company.
Similarly, this Bloomberg article reports that the world’s largest sovereign wealth fund – which owns 1.4% of the world’s stock – favors pay caps and time-based restricted shares that can’t be sold for 5-10 years (Broc’s blogged about this fund before). And although pay caps might be a bridge too far (for the three reasons described in this blog from Dan Walter) – there are some points to consider. Here’s more detail:
Following a string of corporate scandals in the century’s first decade and the 2008 financial crisis, several large institutional investors — including BlackRock, Vanguard and State Street — began pressuring companies to link compensation more closely with firm performance. The Norwegian fund, by comparison, questioned the very idea of using incentives for “complex undertakings such as managing a listed company.”
“Designing a robust set of CEO targets is notoriously difficult on a multiyear horizon,” the fund said in its position paper, adding that “engineered incentives crowd out the intrinsic motivation of the CEO.” It also pointed to research that suggests there’s currently no definitive correlation between overall levels of executive pay and firm performance.