The crisis in executive compensation levels does not appear to be diminishing. Every day brings a new story of investor revolts at executive pay levels. How can we row back on overly generous pay schemes whilst ensuring the best talent is hired into leadership roles? This HBR article proposes a solution.
When a corporate scandal breaks – like the recent one at Wells Fargo or earlier ones at Lehman, Enron, or Qwest – the question is always raised: what was the board of directors doing while the managers in these companies were involved in such unprofessional behavior? The answer is that, like most of us, directors respond to incentives. Director compensation typically consists of a cash component, smaller cash amounts paid for attendance at board meetings, and incentive compensation in the form of stock and stock option grants which vest over a period of a few years. During the past decade, the prevalence and importance of stock ownership guidelines has increased significantly for the S&P 500 companies. But the gradual evolution of director compensation doesn’t go far enough. I propose that compensation of corporate directors should consist only of restricted equity.