When I started The Delves Group back in 2002, what is now accepted practice in executive compensation governance was considered unnecessary and possibly radical. Practices common today in major U.S. companies that were considerably less so then include:
- Boards soliciting, interviewing, selecting and contracting directly with their own advisors
- Advisors providing data and advice directly to the board (without review and, often, cleansing by management)
- Boards selecting or approving peer groups and reviewing data from peer proxy statements
- Comparing pay and performance to the peer group (hard to believe, but this was a radical concept at the time)
- The use of tally sheets that allow the board to see the whole picture (another radical concept once)
- Advisors attending the full compensation committee meeting, rather than just being called in to present data and then depart
- Advisors counseling the compensation committee on effective process, decision-making and the like.
Eleven years later, the world of executive compensation governance has changed dramatically in the United States. Most of these practices are now so well accepted that it’s hard to remember when they were seen as radical. And, while there’s certainly no dearth of critics of executive compensation today, the most egregious practices of the past are now relatively isolated, executive pay governance is vastly improved and total executive pay in the vast majority of companies moves up and down with stock performance. That’s the good news.
NOW FOR THE BAD NEWS
The bad news is that executive pay governance has become increasingly regulated and compliance-driven. Making sure you pass the say-on-pay vote and get a good score from the proxy advisors has become the mantra of the day. In some respects, we’ve seen the “pablumization” of executive pay. What once was a strategic tool used to drive business performance has been turned into a race to the middle. Compensation advisors, working with compensation committees that are always looking over their shoulder and subject to Monday-morning quarterbacking, have been forced into the role of cops in an overly regimented governance system. Personally, I don’t want to spend the rest of my career being a cop (no offense to our fine men and women in blue).
Many boards may be very happy hiring a good compliance cop as their advisor. That’s their prerogative and is not a bad practice. However, we need to remember that executive compensation and incentives are much more than a check-the-box compliance exercise. They’re immensely powerful tools that can help drive impressive performance — if properly used.
A BROADER VIEW
I believe that boards and management will increasingly need to look beyond compliance to a broader array of perspectives and insights, informed by global data, up-to-the-minute market intelligence, in-depth research and cross-disciplinary critical thinking. As a new generation enters the board room, a different value set will infuse the governance agenda with a broader view of human capital that goes far beyond the top five or 10 executives to focus increasingly on:
- Global pay and performance
- Fully integrated pay plans that incorporate most or all employees
- Incentives and motivation at all levels in the organization
- Total cost of management and return on investment in management
- Total investment in people and return on investment in people
- Employee engagement, quality of the work experience, employee development and the overall employee value proposition
- Sophisticated models of performance measurement and pay that both drive value creation and truly motivate people.
I may be wrong about this, but I have been right before and accurately sensed where corporate governance was headed more than a decade ago. My sense of where we’re heading today is the primary reason I joined Towers Watson this summer. If I am even partially right, boards and management need advisors with a broad and deep human capital perspective. Helping those board/management partnerships master today’s broader human capital agenda is how I hope to spend my next 11 or more years.
Founder of the The Delves Group, Don Delves joined Towers Watson as a director in our executive compensation practice in Chicago July 1. Email firstname.lastname@example.org or email@example.com.