Supporting Stakeholder-Centricity Through Compensation
Liz blogged recently about purpose-related pay goals as discussion about shareholder vs. stakeholder primacy continues. A recent Directors & Boards article from Seymour Burchman and Seamus O’Toole of Semler Brossy says COVID-19 is accelerating the move toward stakeholder-centricity. Creating accountability to all stakeholders sounds great, but it’s obviously a bit of a balancing act. The article walks through an example of one company that prides itself in its stakeholder-centric approach, and it outlines four key principles for reinforcing stakeholder-centricity through compensation:
– Emphasize the long-term: It’s impossible to attend to all stakeholders equally in the short term so companies need to make near-term trade-offs while optimizing outcomes for all over the long-run and says the company emphasized an ownership culture with greater equity compensation, broad participation and policies that promote longer holding periods. The company steered clear of overlapping three-year performance cycles as the overlaps effectively create a series of one-year cliffs that emphasize short-term thinking.
– Explicitly tie pay to outcomes for all stakeholders: balance investor-focused metrics for the bonus with stakeholder-oriented goals such as employee engagement, customer retention and supplier satisfaction.
– Balance metrics with discretion: the board set specific priorities and definitions of success but allowed for discretion in actual assessments and payouts and allowed updates of priorities to ensure continued alignment with strategy.
– Stick to your guns: Let cash-based incentives awards follow stakeholder outcomes even when short-term financials are weak and pull back on pay when stakeholder priorities aren’t achieved. Boards need to build the credibility to diverge from “one-size-fits-all” status quo on pay, which will require them to be consistent and transparent in their compensation decisions.
The last point about sticking to your guns is probably the most difficult aspect of aligning compensation with stakeholder interests because, as the article points out, investors and proxy advisors may grow impatient as their guidelines tend to be more aligned with shareholder interests. Internal and external communication will likely be key to keeping focus on stakeholder interests.
-Lynn Jokela, CompensationStandards.com August 5, 2020
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