Most corporate mission statements include commitments to their key stakeholder groups: shareholders, customers, employees, partners, sometimes even supplier networks. "When they do well, we do well", say the mission statements.
However, compensation for those most influential to carrying out the mission statement is often completely detached from any results that those stakeholders might see.
Usually compensation is designed with 3 or 4 main components, tied to various time frames -- salary for current value, bonus for periodic measures of results, stock options with deferred vesting to ties to future values reflected in the stock price and outright stock grants intended to build ownership values.
Nonetheless, the risk to executives' compensation is much less than the risks to stakeholder outcomes. This unfortunate fact results from the much greater driving force in compensation values which is the competition for these purpotedly highly skilled, unique individuals. This is a small cohort of individuals who have risen to the tops of organizations and enter the bidding process for services as members of the elite few. This would say a few things: that rising to the top is driven by merit and likelihood to succeed at the executive level, that the merit required to get to the top is not widely shared, and that companies need to assure high compensation to be able to secure this level of talent.
Ok, so let's test those propositions. Is merit the singular, or even the main driving force to promotion up the ranks? There is a lot of evidence to the contrary, both statistical and anecdotal. How good is the predictive value of rising to the top of an organization to success at the next level? Once again, there is evidence on that the predictive value is low, both statistical and anecdotal -- that there is a Principle named Peter that is well-known and oft-observed gives the lie to prediction.
Looking further, is merit required to get to the top not widely shared? Once again, organizations' pyramids (so to speak) narrow very rapidly as they go to the top and compensation increases at a much greater rate. A reasonable question would be is the merit or ability of the person at each successive level represented proportionally to the increase in compensation? That's tough to answer objectively, but this one's more a test of reason than measurement of merit. Let's go with "Probably not" as reasonable people. Going from compensation in the hundreds of thousands to millions is a factor of 10 -- is a person at one level 10 times more capable than just one level below? Come on, that's simple, especially if one believes that merit got them there in the first place. If anything, the compensation gap should narrow as more chaff gets culled from the wheat.
Finally, is the assurance of high compensation needed to acquire and retain individuals of merit? People will obviously chase the money. So, does that leave no one of merit to hold lower-paying executive jobs? Once again, statistics and anecdotal data give the lie to that proposition. That proposal says that compensation is proportional to ability, or that ability is proportional to compensation. The variability in both corporate results and executive ability prevent correlation in these factors.
So, what would be better?
As I stated in the introduction, corporations spend a lot of time on corporate mission statements. They drive their employees to adopt these values in their activities and goals. Compensation for employees is often tied to evaluations that include these factors. Oddly, senior executive pay is almost never tied to these factors in any substantive way to these measures.
A reasonable person might suggest that executive pay be tied to the stakeholders' outcomes. Stakeholder outcomes include shareholders' stock values, employee compensation (including stock holdings), customer satisfaction, partner success measures and even, possibly, supplier network financial success. It's hard to see how executives at a company should benefit more from the enterprise than any of those key stakeholder groups. A reasonable compensation plan should include a balance of factors that compensate the executive in proportion to the success of stakeholders over both the short and long term.
A plan of this type would allow for pay proportional to merit, to success of the enterprise by its own measures and for a moral connection between the top of the organization and its stakeholders, most of whom are not as well off as the executives. If the argument is to tie compensation to value, then here is a proposal to cause that to happen.