Governance, Risk Management, and Compliance: It Can't Happen to Us—Avoiding Corporate Disaster While Driving Success

CEO Compensation

Let's start with the obvious. For years now shareholders, especially large institutional activist investors, have been openly angry about the state of CEO compensation. Some can relate to the news anchor in the film Network screaming, “I'm mad as hell and I'm not going to take it anymore!” Others are merely ticked off. As one executive at the California Public Employee Retirement System said, “We're not against pay, but we are certainly against pay for failure, or for just showing up.” Not only are shareholders upset about the relationship between pay and stock price, they point to increasing disparity between the pay of the CEO and rank-and-file employees, raising questions about its effect on employee morale as well as the broader social implications.

Recognizing the widespread attention to management compensation, evidenced not only by shareholders but also by a range of government officials and the public, directors have strived to walk the line between meaningful incentives for performance and what appear to be huge paydays for taking excessive risk or otherwise failing to achieve established corporate goals. But putting the concept of true pay-for-performance into action and avoiding short-term focus at the expense of long-term success, all while motivating and retaining good performers, is easier said than done. And with ever-expanding regulatory disclosure mandates, these decisions increasingly are made in a fishbowl environment.

Certainly there are traps ...