Korn Ferry (NYSE: KFY) and the Aspen Institute today released an in-depth report that provides insights into how Boards should evaluate executive pay practices as companies evolve to meet the demands of a highly complex and disruptive economy.
The “Modern Principles for Sensible and Effective Executive Pay” report shows a move from an investor-centric approach to including other priorities, such as fairness, employee well-being and other commitments to ensure long-term business success. The report points to key areas that must be addressed to align pay and incentives with Board responsibility and the changing role of the CEO.
“CEOs are increasingly understanding that in these incredibly uncertain times, they are not just leading a business,” said Don Lowman, global leader of Korn Ferry’s Rewards and Benefits Practice. “They are leading a more integrated community of employees, partners, investors and those acting on behalf of significant and growing environmental and community needs.”
One key principle in the report suggests that many executive pay programs are actually misaligned with the company’s purpose and drivers of long-term success.
Today, most executive pay programs are firmly aligned with total shareholder return (TSR) as the center of their performance measurement universe. However, a recent Korn Ferry analysis of proxy statements of 150 large U.S.-based companies found that approximately 20 percent now have some form of purpose-driven strategic objectives, including ESG measures (environmental, social, corporate governance) as key performance metrics for executive pay.
“While much more needs to be done to align purpose with pay, we are absolutely seeing a trend toward a more holistic view of what defines executive – and corporate – success,” said Lowman. “When Boards consider what is needed for organizations to flourish over the long term, non-financial drivers of performance become more apparent.”
Another key principle in the report points to fairness.
“Companies need to temper their sharp focus on external benchmarking and allowing it to dictate executive pay outcomes,” said Lowman. “We need a more holistic view of compensation, one that considers internal pay relationships and ensures that rewards and economics are shared appropriately across an organization.”
Final principles recommend using credible goals in incentive plans with difficult-to-manipulate outcomes; creating clear, jargon-free language to describe executive pay programs; and making sure the Board bears ultimate accountability for making executive pay decisions and aligning pay with the long-term health of the enterprise.
“Design and oversight of executive pay programs today is all about elevating the need for clarity, alignment with key goals, integrity, simplicity and fairness,” said Lowman. “This report serves as a guide for those who are responsible for creating successful, future-looking pay programs.”
About the Report:
The Modern Principles for Sensible and Effective Executive Pay have emerged from more than two years of research and outreach to directors, executives, investors and asset managers, and in consultation with experts in corporate governance, executive compensation, labor relations and the behavioral sciences.
About Korn Ferry
Korn Ferry is a global organizational consulting firm. We work with clients to design their organizational structures, roles and responsibilities. We help them hire the right people and advise them on how to reward, develop and motivate their workforce. And, we help professionals navigate and advance their careers.