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The real impact of corporate governance isn't about compliance or structure or policies, it's about the conditions that impact decision-making. Sound-Up Governance features fresh perspectives to help boards and executives to be a bit better tomorrow than they were yesterday.
Executive compensation is just the way that senior executives get paid for doing their jobs. Honestly, if this were like 50 years ago, we could have ended this definition after that first sentence. The thing is, executive compensation has REALLY become a super big deal in the last bunch of years.
The main reason why executive compensation is a big deal is that senior executives – especially in North America – get paid waaaay more money than basically anyone else. And it’s not because they work harder or better. They just have weird jobs with lots of authority and accountability. The gap between what senior executives get paid and what everyone else gets paid is huge and it gets bigger all the time. To a lot of people, that gap feels super unfair. Take two people who work just as hard and good as each other except one of them makes $10 per hour and the other makes $1000 per hour and you can start to understand why some people might find executive compensation to be kinda provocative.
Another reason why executive compensation is a big deal is that it can be obnoxiously complicated. Ground-Up Governance doesn’t usually use judgmental words like “obnoxiously,” but in this case it’s pretty apt. Imagine that, as the CEO of Reallie Steilish, your board comes to you with the following proposal for how they'll pay you this year:
- $1000 in cash just for existing
- Another $1000 in cash if Reallie Steilish makes more money selling hats than at least 75% of all other hat selling companies over the next year. $500 if you make more money than 60% of those companies. A decent egg salad sandwich if you make less money than all of them but don't lose any money. An offensively ugly pair of shoes if you lose money.
- Another $1000 in cash if the Reallie Steilish share price goes up at least 5% more than the average share price of a list of 10 other fashion companies, but $0 and a wet willie if the share price goes down.
- $2000 worth of Reallie Steilish shares if you successfully launch OliveYeah Rodrigoil in 400 stores this year, except you only get the stock if you win a go kart race against your brother in exactly 5.34 years. If you launch in fewer than 400 stores but more than 100 then you get $50 in stock as long as you remember to wear green pants two September 24ths from now. Otherwise: wet willie.
- Two tickets to roller derby if you remember to give Janice a card for her 6th wedding anniversary.
- And 20 additional things like that, only even stupider.
Why is executive compensation so complicated, though? The full answer is too long and boring for Ground-Up Governance. The short answer is that lots of different stakeholders, including shareholders, can be affected by the stuff that executives do. For instance, if executives do things that make the share price go up, then shareholders are happy. So shareholders sometimes make it really clear to boards that they think executives should be paid, at least partly, based on whether the share price goes up or not. Now imagine that different shareholders want different things at different times, and other stakeholders want still more other stuff at other times and, well, here we are.