Business and Markets

2015: ‘Let’s Ask the Right Questions About Corporate Compensation’

January 8, 2015  • Judy Samuelson

This post originally appeared in The Guardian and The Huffington Post.

Fresh winds are blowing through both boardrooms and MBA programs these days, stirring up debate about the fundamentals of doing business. Some of the key questions on the minds of executives weren’t even on the syllabus when I attended business school in the early ’80s. I think these questions will continue to grow in relevance in the year ahead. And how the business sector answers will determine whether the health of the planet — and the health of society — will make it onto a company’s list of strategic priorities.

First off, executives are questioning the purpose of the corporation itself. From Tim Cook at Apple to Mark Zuckerberg at Facebook, business leaders are challenging the old-line mantra about “shareholder value maximization” as the organizing principle for the enterprise. These leaders and many others from outside the tech sector understand that long-term success depends on a host of critical inputs: creative talent, skilled labor, a secure supply chain, license to operate on the ground, and — of course — reputation with consumers or customers.

A second question naturally flows from the question of purpose. If, indeed, this quarter’s profits are no longer the best — or only — metric of success, how should we measure progress in business? How do long-term investors (versus traders) and discerning consumers define the performance of corporations today?

In the last year, we have witnessed big growth in concepts like “integrated reporting,” taking into account other constituents besides investors. There is more talk of environmental profit and loss, and frameworks like the circular economy, which connect the success of the business with the systems on which life depends.

In 2015, I think we will see some real progress on the question of metrics and measurement. The best models won’t be generic; they will allow the company to express — and its real investors to understand — the vital signs of the corporation’s health. And robust measures of future success will naturally connect back to the natural resources and human conditions that are critical to the company. The right metrics will help executives and boards assess risks to the enterprise as well as business opportunity. New ideas about what “quality management” means will take shape.

As I look forward to 2015, I see a third critical question beginning to take root. It is the linchpin between the questions about purpose and measuring success: how should we incentivize the key executives and officers who set the agenda in boardrooms and the C-suite? What should dictate executive compensation? In essence, what should we pay executives to do?

With large company CEOs earning something close to 300 times the wage of the median American worker, it is no surprise that the public connects business execs with growing inequality and that most of the buzz about pay in the last year has been about runaway executive compensation. But for all the ills associated with outsize pay, it’s how we pay executives that matters most.

A few decades ago, executives were paid mostly in cash. Today, the typical executive receives two-thirds of his or her pay in stock-based compensation. While there have been attempts to build long-term focus into pay packages by embedding future targets and conditions, they are largely unsuccessful. With the vast majority of pay based on the stock price, all the noise in the boardroom and executive suite is about the stock and total shareholder return, not the long-term investments that are key to achieving goals aligned with environmental and social sustainability — and to identifying future risk.

As we close out 2014, activist investors looking to mine companies for quick gains are drawing attention. They want to reduce corporate investment in research and development, and in environmental innovation. They continue to put the squeeze on employee wages and benefits. Sadly, when company management is paid in stock, executives may have more in common with the activist than with more reliable contributors to the long-term health of the enterprise — employees, host communities, and truly long-term shareholders.

There’s good news, however: experts are taking a fresh look at the unintended consequences of “pay for performance” and experimenting with better strategies and protocols for building long-term value.

Today, society needs business at the table as a partner and innovator. But to make improvements on global challenges requires executives who think about the long-term consequences of their decisions outside the company’s four walls. These three questions — purpose, how we measure success, and how we compensate the managers of the enterprise — shape the discourse and the potential for real engagement with the business sector.

I can’t predict how quickly a shift might come, but here’s my wish for 2015: let’s ask the right questions in the boardroom (and MBA classroom) about corporate compensation. The first step requires connecting the dots between how we reward top talent and our aspirations for a healthy planet.

Judith Samuelson is the executive director of the Business and Society Program at the Aspen Institute.