Principles are designed to advance fresh thinking in boardrooms about executive compensation given new market priorities, public attitudes towards equity, and changes to the role of the CEO and executive teams
The Aspen Institute Business & Society Program
New York, NY, Sept. 16, 2020 – The Aspen Institute Business & Society Program, in partnership with Korn Ferry (NYSE: KFY) today released “Modern Principles for Sensible and Effective Executive Pay,” outlining a new path for executive compensation that moves from a shareholder-centric approach to including other priorities, such as fairness, employee well-being and other commitments to ensure long-term business success. The report points to key areas that must be addressed to align pay and incentives with Board responsibility and the changing role of the CEO.
“From the Business Roundtable to the World Economic Forum, the leaders of America’s largest corporations have committed to serving the interests of workers, communities, customers and the environment, along with shareholders” said Judy Samuelson, Executive Director of the Aspen Institute Business & Society Program. “Yet the strongest signal in the pay packages of C-Suite executives is overwhelmingly the stock price. Fixing this misalignment is possible, but it will require a fresh conversation in board rooms about real value creation – for the company but also the society that offers the license to operate.”
Don Lowman, global leader of Korn Ferry’s Rewards and Benefits Practice, states, “CEOs are increasingly understanding that in these incredibly uncertain times, they are not just leading a business. They are leading a more integrated community of employees, partners, investors and those acting on behalf of significant and growing environmental and community needs.”
Today, most executive pay programs are firmly aligned with total shareholder return (TSR) as the center of their performance measurement universe. However, a recent Korn Ferry analysis of proxy statements of 150 large U.S.-based companies found that approximately 20 percent now have some form of purpose-driven strategic objectives, including ESG measures (environmental, social, corporate governance) as key performance metrics for executive pay.
The first principle ties CEO pay to the company’s purpose and the drivers of long-term value.
“While much more needs to be done to align purpose with pay, we are absolutely seeing a trend toward a more holistic view of what defines executive – and corporate – success,” said Lowman. “When Boards consider what is needed for organizations to flourish over the long term, non-financial drivers of performance become more apparent.”
The second of five key principles calls for boards to define “fairness.”
“Executive pay is a lightning rod for public criticism because CEO compensation is seen as disconnected from the real value creators and employee well-being. Fairness impacts more than company reputation, it also can erode company culture. Boards that are concerned with the health of the enterprise focus on the relationship between the pay of the chief executive and a philosophy of compensation that ensures rewards for company performance are shared appropriately across the organization,” said Samuelson.
Another principle recommends incentive plans based on credible goals that are difficult-to-manipulate outcomes.
Goals should be achievable and clearly aligned with core strategic priorities. However, the financial rewards for achieving/exceeding targets should not encourage excessively risky behavior. In addition, incentives should include a meaningful financial downside for under-performance.
The final principles state that the executive pay program should be fully described in clear, jargon-free language; and the Board bears ultimate accountability for making executive pay decisions and aligning pay with the long-term health of the enterprise.
“The goal of the Modern Principles of Sensible and Effective Pay is frank conversation among directors working to align pay with key drivers of long-term success: integrity in goal setting, greater simplicity and fairness,” said Samuelson. “Pay policies need to resonate for a new kind of a leader being recruited to the frontlines of business but also make sense in the employee cafeteria and host communities. The Principles serve as a guide for those who are responsible for creating successful, future-looking pay programs.”
About the Principles:
The Modern Principles for Sensible and Effective Executive Pay have emerged from more than two years of research and outreach to directors, executives, investors and asset managers, and in consultation with experts in corporate governance, executive compensation, labor relations and the behavioral sciences. Aspen staff worked in close partnership with the leaders of Korn Ferry’s Executive Pay & Governance team to articulate and define five key principles and to hone questions that boards should ask when evaluating executive pay programs.
The Aspen Institute Business and Society Program works with business executives and scholars to align business decisions with the long-term health of society. Through dialogue, curated networks and working groups, the program inspires leaders to challenge conventional ideas about capitalism and markets, to test new measures of business success and to connect classroom theory and business practice. For more information, visit www.aspenbsp.org.
The Aspen Institute is a global nonprofit organization committed to realizing a free, just, and equitable society. Founded in 1949, the Institute drives change through dialogue, leadership, and action to help solve the most important challenges facing the United States and the world. Headquartered in Washington, DC, the Institute has a campus in Aspen, Colorado, and an international network of partners. For more information, visit www.aspeninstitute.org.