Clawbacks for Executive pay : should Executive variable pay go down as well as up ?

 

Clawback for Executives

Clawbacks for Executive pay ?

 

The Executive Compensation & Benefits Summit will take place in Amsterdam on September 6 and 7, 2017. If you want to attend, enjoy a 20% discount exclusively for my readers and followers by using code COMPIN20.

To celebrate this upcoming event, today’s post will focus on Executive Compensation.

There was a question on Quora recently :

If corporate Executives expect to be rewarded with bonuses for good company performance, then why shouldn’t they be docked pay for poor performance ?

Here’s my answer, slightly edited for his post.

They should. That’s the basic concept of Pay-for-Performance : achieve your targets, get what we promised. Go beyond, get more reward. Don’t reach the targets, get less or even nothing. It’s called “pay at risk”.

For making Executives “care” more about the long-term success of the organisation, in the US and western economies mostly, a significant portion of their income is “at risk” and with “deferred payment”, which are the main aspects of “Long-Term Incentive Plans”.

It means you earn it in 2017, you may be paid your incentive in 2020, 2021 and 2022. There may even be clauses that if Executive (or corporate) performance in 2020, 2021 or 2022 is not at the expected level, then there may be a “clawback”. The principle is : reimburse what you’ve already received, or don’t get what was due to vest (ie for payment at that point in time).

All good things… in theory. As usual, the devil lies in the details, and in this case, in the actual implementation and levels of these targets, minimums and maximums.

A few of the challenges :

  • Board members, who decide CEO pay and targets, sometimes set targets that are more “lax” in the under-performing section, i.e. it will take more “failure” to receive the non-payment than it will take success to be granted the extra-payment. There’s been a lot of academic research on that. I think it boils down to the fact that the Board doesn’t want to “upset” the CEO by implying too much that they might fail. CEOs tend to have large egos…
  • There might be an unease to publicly “shame” the CEO when things go wrong. These things can destroy a career. And, there is often a lot of debate on whether the causes for the apparent lack of performance were under the CEO control, or not. Which means for the Board : “Should we make an exception and still grant more reward than the pure mechanics of the scheme would suggest, by letting him/her get the pay earned way back 3 or more years ago ?”
  • Only recently did “Say on Pay” become more important and impactful. Say on Pay is the process whereby shareholders can vote for or against the Board decision in terms of Executive pay. Unfortunately, in many jurisdictions, this vote is not binding – though it does carry weight and many companies fear a negative vote.
  • Plus, many Board members are “buddies”. Mr Smith might be on the Board of Company A where Mr Jones is CEO… and Mr Jones is on the Board of Company B where Mr Smith is CEO. If Jones “hurts” Smith’s pay, what will Smith do to Jones ? Or maybe they went to the same school (such as Harvard or MIT) and are bound by the unspoken  “buddy” mentality of alumni. There’s also been a lot of research and articles on this network effect. It seems the lack of diversity, and especially including more females on Boards, may also have an impact.

Since the global crisis in 2008, regulators, especially in the Finance and Insurance sectors, have tried to impose more rules to make Pay-for-Performance more effective, and to tie payouts to the long-term success of the organisation.

More work needs to be done, but I believe the most important one is a change in mentality.

Yes, the CEO job entails more work, risk and pressure than most jobs in the same company, and it has more impact than most positions on the company.

But, since the 80s and Ronald Reagan’s deregulation, there is a growing divide between average worker pay and that of CEOs. The risk is that, with wealth, a mentality of “everything is due to me because I am successful” and “I am above the rules that apply to the common man” may develop. When the CEO and Board are all part of that same world, it’s more difficult for them to recognise that one may not, always and every time, be a “superstar”.

My 2 cents :-). What do you think ? Should CEO pay be impacted by negative company performance ?

If you are interested in Executive Pay topics, don’t miss the Executive Compensation & Benefits Summit in Amsterdam on September 6 and 7, 2017. I have obtained an exclusive 20% discount for my readers and followers – use code COMPIN20 when you register, and let me know if you will attend. I will be there and would love to meet some of my community members at the conference 🙂 !

 

Join me and get 20% OFF with code COMPIN20

 

 

 

 

 

 

 

 

 

 

Clawback image first posted on That’s My Bank blog – great creativity !

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