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compensation, Otten explains: “They
benchmark their remuneration, typically
by using consultants to determine what
their competitors are paying, but essentially
they have the power to set their own norms
and tailor their package to suit the executive
they want to hire or retain.” Eager not to
appear less generous than their competitors,
companies pay slightly above the
benchmark, which perhaps explains why
compensation levels have been ratcheted
up. Measures such as salary caps will only
have a limited impact, argue Carberry and
Otten. Whichever part of the compensation
comes under attack, companies will simply
shift to other forms of remuneration,
exploiting any loopholes in legislation. The
total compensation will remain broadly the
same, or at least not decrease.
Would greater transparency help? Only
up to a point, say both. Interpreting the
disclosure of individual companies is
highly complex, and wide variations in
rules between different countries are likely
to persist. But the key point, argues Otten,
is that, “even with disclosure, it just shows
the outcome of a complex process, but says
little about the process itself. The way a
firm is governed really determines how, and
how much, an executive is paid. Reforms
should be aimed at changing the processes
themselves. What’s needed is some
responsibility on the part of boards of
directors, and a real hard look at what
measures are used to determine pay levels
and pay mix.”
Getting the right combination of
performance measures is, Otten admits,
a tricky business, given the plethora of
potential instruments. “What really
matters is finding out what drives overall
corporate performance. You need a
carefully balanced mix of different types
of compensation and different means of
linking pay to performance. Part of the
pay might be linked to stock price, part
to profits, part to some type of productivity
measure, and part to employee safety, or
whatever else may be important. It will
depend, too, on what industry you are in,
and on the firm’s strategy. “Settling the
debate on paying for ‘bad’ performance
RESEARCH FOR BUSINESS EXECUTIVE COMPENSATION
Jordan Otten: “What’s needed is some responsibility on the part
of boards of directors, and a real hard look at what measures are
used to determine pay levels and pay mix.”
can only be done by disclosing what
performance measures the firm is using
for its executives,” he adds. “That would
give everyone a clear view of how they
measure performance and to what extent
parts of the pay mix relate to a given type
of performance measure.”
The incentives to date, like stock options,
have favoured short-term perspectives over
longer-term vision, argues Carberry. And
the research to date on executive pay and
corporate performance has proved
somewhat ambiguous: “Even if you find
research which shows there is a strong link
between executive pay and corporate
performance,” points out Carberry, “then
the question is, is that type of performance
measure really the long-term goal and does
that provide maximum benefit for different
stakeholders of the corporation?
“If we really want to take executive
compensation seriously in terms of how
we can structure these plans to have
long-term benefits for the stakeholders –
whether that be just shareholders or a
broader group of stakeholders within
the corporation – that needs to be
fundamentally debated and examined.”
Reforming executive compensation,
Carberry concludes, will certainly be
difficult but not impossible. What is needed
are better ways of linking compensation
practices to robust measures of corporate
performance, and for governments to
develop more serious regulation – however
unpopular this may be with the world’s
corporate and financial leaders.
More information on the Department of
Business-Society Management can be found at
www.rsm.nl/bsm
RSM OUTLOOK SUMMER 2009 33