Richard Epstein’s article “Steering Clear of The Executive Compensation Bog” in Forbes on June 15, 2009 offers a number of good reasons why direct government regulation of executive compensation will “sow more confusion than it eliminates.”
In short, excessive executive pay is a symptom, not the cause, of our economic woes, which essentially stem from corporate and individual greed and carelessness. Despite a shared understanding by both company and executive of the executive’s expected role in guiding the company to success, self-interest will rear its ugly head.
“Conflicts of interest always exist between the welfare of the executive and the welfare of the firm,” notes Epstein. “In principle, a firm may minimize the conflicts of interest by a range of compensation and through reputational and monitoring devices. But this side of financial paradise, conflicts are sure to remain.”
True to some extent, but correctly designed rewards systems can use incentives to turn a CEO’s “self interest” into a drive for company success. Of course, any well designed programs would simultaneously minimize risk to shareholders.
And while executive pay incentives will continue to take the form of “both fixed salaries and contingent payments,” the article asks, “who decides the proper mix? It is here that government has no comparative advantage.”
Yes, incentives do matter. But it ain’t just the mix, it’s the motion – the use to which the executive puts the power invested in him or her. Like any other employee, the executive must perform according to plan. If the money is there, the reward mix is right, the performance messages heard loud and clear, then all that’s left is execution.
Each organization needs its own carefully crafted executive rewards strategy tied to the specific business roles the executive is asked to play and designed to drive appropriate behaviors. The ideal result is a fair reward for the executive‘s performance as part of the organization’s drive to succeed.
And disclosure? Epstein calls it a “mixed blessing at best.” We want a solution that works, not one that creates work, and to little avail. Disclosure doesn’t get to the heart of the matter.
In discussing another possibly “doomed” attempt to solve the problem – “the fool’s errand” on which he says Ken Feinberg has been sent – Epstein explains, “Each firm operates in its own distinctive environment in which compensation formulas have to interact with the patterns of shareholder control, the type of direct regulation in place and the rapid movement in product markets. In employment compensation cases, incentives really matter.”
Ken Feinberg has the authority to make significant decisions and changes to compensation for 175 folks at seven of the nation’s largest companies, but “fixing” compensation can be like putting lipstick on a pig. The problem may be the total rewards strategy – with its component money, mix and messages – which has employees “running hard in the wrong direction.” Or perhaps the rewards strategy isn’t aligned to the business strategy or to the people strategy. And even if seamlessly aligned, maybe the business or people strategies aren’t working.
Remember company vision statements and mission statements? Are these published “guiding principles” no longer relevant? The fact is, they were designed to apply to all employees, executives included. These statements might be one of several good starting points in creating an effective executive rewards strategy.
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