Balancing the “What” and the “How” of Executive Compensation

I recently traveled to New York to participate in a panel discussion hosted at the New York Stock Exchange. I joined Marty Evans, board member and compensation committee chair for Office Depot and board member of Weight Watchers, and Gary Hourihan, senior vice president of Farient Advisors, LLC, a compensation consulting firm.

Together, we explored the challenges boards face in attracting, retaining and incentivizing executives of major companies. It is certainly a delicate walk to find the right balance between creating competitive compensation that stands market tests in the war for the retention of top talent while being mindful of the growing gap between those at the top and those on the front lines.

Compensation systems should always be linked back to the basic foundation of the business:  mission, vision and values. That is to say, compensation is a means to an end and not an end unto itself. The ultimate end should be to provide appropriate incentives for achieving business goals that include perpetuating the purpose of the business within certain behavioral standards.

Incentive systems should be aligned with the shareholders’ interests. Those who have made investments in the business have a right to a fair return, but so do the other stakeholders in the business: employees, customers, suppliers and community. These other stakeholders contribute to the success of the business, and their interests should be looked after as well.

The pay of executives has to be linked to their impact on the performance of the business. But it should not stop there. “How” the results were attained is just as important as “what” results were attained. Results need to be achieved within the boundaries of the law and behavioral standards expressed through the shared values and codes of conduct of the business.

This post is by Ron James, President and CEO of the Center for Ethical Business Cultures from the Business Ethics Exchange