FORUM: Executive compensation and the pay-for-performance challenge


Financier Worldwide Magazine

May 2013 Issue

May 2013 Issue

FW moderates a discussion on executive compensation between Pamela Baker at Dentons US, Carl Sjostrom at Hay Group, James E. Gregory at Proskauer, and Jens Massmann at Ernst & Young.

FW: How would you describe media and public perceptions of executive pay in the current economic climate? What progress has been made on the issue since the onset of the global financial crisis:

Baker: The man-on-the-street public, incited and urged by the popular media, perceives executive compensation as too high, full stop. Eye-popping bonuses appear excessive with unemployment remaining high. Most of the clients I work with, however, genuinely seek to satisfy both shareholder interests, limiting the equity plan ‘burn rate’, and public interests – that is, the ratio of CEO pay to median pay. In recent years perks and tax gross-ups have largely been eliminated, as have many automatic payouts on a change in control. In addition, cash severance amounts for top executives have been reduced. Companies are careful to call performance-based annual incentive pay just that, not a ‘bonus’. Performance criteria are heavily weighted to financial results. This is a very long way from the status quo a decade or more ago.

Massmann: The media and public continue to perceive executive pay as high and often disconnected from company performance. However, we believe that shareholders are gaining greater confidence in company approaches to executive pay given the changes that are occurring globally regarding shareholders’ ability to influence, and in some cases control, executive pay decisions. In general, transparency has increased due to changes in regulations regarding executive pay around the globe. These changes are in large part a result of the global financial crisis and continue to evolve as the global economy continues to recover. The media continues to scrutinise executive pay and occasionally creates issues without underlying shareholder concerns. Say on pay approval rates remain very high despite media coverage. To many companies’ credit, they are seeking a closer alignment with their executive pay to the company’s financial and total shareholder return performance. Much of the recent activity in the executive compensation area is a result of increased shareholder engagement earlier in the process. This has led to newer concepts like pay at grant, realisable pay, and take home pay. As a result, compensation committees must manage media relations in addition to investor relations.

Sjostrom: Public perceptions continue to be fuelled by the media, which politicians across the spectrum encourage by keeping the debate very emotional. In spite of many commentators trying to separate the technical from the emotional arguments to provide a greater understanding, it remains the case that in a difficult economic climate you will never gain broad support for high levels of remuneration, no matter how well deserved, linked to performance or market aligned. The worry is hence less public perception than it is that countries’ leaders are unwilling to engage in discussions around how improvements can be made to executive pay to support economic recovery.

Gregory: Both the general media and the public tend to focus on proxy disclosure, which is governed by specific accounting and securities rules. In fact, ‘actual value’ to executives can vary widely up or down. Also, there is an accounting expense or disclosure required for equity awards, even if those awards may never vest. Clearly there are many examples of misalignment between company performance and executive pay, and media reports tend to focus on these outliers. Readers should be sceptical when they see reports about pension and deferred compensation benefits – in many cases, these amounts have been earned or accrued for many years, yet they are treated as though the company decided at the time of termination to make giant multi-million dollar payouts – this often just isn't the case. Since the financial crisis, progress arguably has been made with new rules that enhance compensation committee independence and require further transparency, although there is widespread disagreement about the overall effectiveness of these rules.

FW: Are companies finding it tougher to retain top talent in the current market?

Massmann: We don’t necessarily see it being more difficult currently, as compared to prior years, to retain top talent; however, the focus on retaining top talent continues to be a priority for all high performing companies around the world. As the economy continues to improve, especially in high growth markets, companies have to be more creative and aggressive in designing compensation programs that will both motivate and retain top talent. The perceived value of executive remuneration has declined given mandatory deferrals, long-term orientation of pay and increased base pay – particularly outside the US. As it has been in the past, top talent is always more difficult to retain in dynamic situations beyond the steady state, for example in restructurings, and so on.

Sjostrom: In difficult times mobility slows down, but that means that it is to some extent bottled up. More of an issue though is that retention of top talent is critical for capitalising on recovery. A lot of recent European regulations are not encouraging retention and our expectation is that the consequence is less an immediate exodus but more likely slower growth. Take the financial services sector, for example. We expect that some people will react to reduced pay levels and leave the industry but, most of all, firms will be reluctant to make investments in regions that introduce erratic regulations that micromanage their operations and perhaps restrict their ability to recruit the required quality of talent.

Gregory: I get the sense from my CEO and executive clients that they are much, much more willing to walk away now than they were for the last three to five years during the recession. So yes, given this trend there seems to be a bigger push to retain top talent. Many top executives at public companies just feel like it is not as much fun and less rewarding than it used to be and of course the scrutiny is much greater. Also, in the financial services sector, many more clients seem to be considering moving to privately-held hedge funds or private equity funds, and getting out of the public company and regulated banking sector altogether. However, much of what I and others hear is anecdotal and it remains to be seen whether this represents something more systemic.

Baker: Rumours of executives moving to private equity concerns to avoid pay disclosures are exaggerated. Financial institutions under compensation strictures may have had trouble retaining top talent, but generally companies are able to find appropriate talent. Companies will fare better or worse, depending on the trends in their financials and stock price. A company perceived as tightening its belt more than its competitors in the financial crisis may lose some high and mid-level talent. Although companies have reduced the number of personnel eligible for stock options, these cutbacks have had little effect on the ability to retain talent. At levels where equity compensation is critical to retention, options have been replaced by restricted stock or restricted stock units, which retain value even if the stock price falls, unlike options. As the US stock market continues to climb out of the depths, equity is becoming a popular retention tool again.

FW: In your opinion, can executive performance be accurately quantified? Do current models of executive pay motivate executives toward higher levels of performance?

Sjostrom: Of course, executive performance can be accurately quantified – much of it has very tangible outcomes. However, all executive performance cannot be measured at the same time, nor can every aspect of it. Performance is in the eye of the beholder, which is why it is so important to be clear about what it is we are talking about when discussing the design of executive reward. This is also why there is such conflict when companies are accused of not paying for performance. They are always paying for performance, it just may not be the level and type of performance that you want to see. Pay and motivation is very tricky and there is an intense debate with contradictory research being thrown behind all sides of the argument. As far as I am concerned everybody is motivated by pay, the problem is that the extent is very individual. Some people will do vile things for a small banknote whilst others will refuse to compromise for a fortune – hence we cannot rely on the motivational effect when it comes to reward but we can rely on it for signalling. Pay is one of the loudest forms of communication an organisation, and its shareholders, can use to signal what behaviours and what outcome are important.

Gregory: It really depends on the company and the industry. I don’t think anyone seriously disputes that pay models can motivate performance. In any event, how do you measure ‘higher levels of performance’? Short term profits? Long term growth? Market share? That is the problem nowadays – what are we rewarding and at who's expense? If the goals are aligned with awards, motivation works. If the goal is clearly set – whether to sell the company or increase stock price, for instance – then that's what the executive is going to focus on doing. Executive performance is judged by the market and activist investors who seek change if the company’s market performance is down. If a company’s market performance is at the 99th percentile, it would be hard to complain if the CEO’s compensation is at the 90th percentile.

Baker: Executive performance can only be quantified relative to prior performance, whether of the company in question or of its peers. It is not like footraces in controlled physical environments. Each company is different and has its own challenges. ‘Performance’ is also not a uniform criterion, unlike a footrace where speed is the only measurement. I have seen, with my clients, that a change in performance criteria for earning incentive compensation does change behaviour. Does the company need greater market share? A reduction in expenses? Increased cash flow? A well-structured incentive program will lead to improved performance in those areas, which is to the benefit of shareholders. Equity compensation, the ultimate link to shareholder value, also drives performance, but only the highest level executives have the discretion to make strategic decisions that can affect stock price.

Massmann: It depends on the level of executive. For example, we believe a CEO’s performance can be judged, in large part, based on the overall performance of the company. Similarly, the performance of executives who are direct reports to the CEO can, in many cases, be judged based on their job responsibilities – for example CFO, Business Unit Leader, and so on – by referencing the performance of the function or unit they are leading. Evaluation of an executive’s performance depends on performance against other key performance indicators as well. It is important to evaluate performance over both the short- and long-term to ensure long-term results don’t suffer for short-term gain. Financial performance is more easily quantified than non-financial performance. We believe models that tie executive pay closely to the short-term financial performance of the company generally produce higher levels of performance. Models that are more discretionary in nature often times do not, because the line of sight between executive performance and executive reward may not be as clear. From a long-term perspective it is less clear, particularly with respect to stock-based incentives, because of the number of factors impacting stock value that are outside the control of the executive team – for example, market fluctuations. Even though it may be more difficult to closely link executive performance to long-term incentive results, we believe long-term incentives are critical to focus executive behaviours on the creation of long-term shareholder value.

FW: To what extent has shareholder influence grown since the global financial crisis? In what ways are shareholders exercising new rights and powers that affect executive compensation?

Gregory: I would say shareholder influence has grown quite a bit – the clearest example is Dodd-Frank’s ‘say on pay’ voting rules.Even though these votes are non-binding, proxy advisory firms like Institutional Shareholder Services (ISS) will frequently base recommendations for Compensation Committee directors – and other directors – on say on pay results, and so most companies pay close attention to the outcomes of such advisory votes. Remember, these votes didn't even exist a few years ago and ISS et al are becoming not only more well known in the investor community but also more aggressive in their positions. Among other things, these shareholder ‘advocates’ are pushing companies to adopt long-term share ownership guidelines and claw back short-term gains.

Baker: In the US the most visible shareholder voice is the annual say-on-pay (SOP) vote. It’s a non-binding referendum on the reported pay of the top few executives in a public company, now in its third year of existence. While most companies pass SOP with a 90 percent-plus approval rating from shareholders, some prominent companies have failed spectacularly, and all companies pay more attention to the optics of their compensation programs and disclosures than previously. SOP has also led to very substantial influence of shareholder advisory services which issue reports to institutional shareholders analysing reported executive pay and recommend a ‘yes’ or ‘no’ vote on SOP. Unfortunately, the shareholder advisory services have taken such a prominent role that companies tend to design their compensation programs to align with whatever the advisory services require as a condition of giving a ‘yes’ recommendation.

Massmann: Shareholder influence has increased significantly over the past few years. In most major regions, shareholders now have at least a non-binding vote on executive remuneration; while some countries such as Switzerland have adopted or are considering a binding vote. Even where the vote is non-binding, remuneration committees will likely not ignore shareholder views in making decisions regarding executive remuneration. Therefore the significance of shareholder influence is high. Shareholders continue to follow closely the views of shareholder advocacy groups such as ISS which in turn impacts the compensation programs of many companies. All of this activity has resulted in increased communication between companies and their shareholders regarding potential planned changes in executive pay packages. This increased level of communication and consultation should prove to further strengthen overall shareholder confidence.

Sjostrom: Influence has formally grown in many jurisdictions where ‘say-on-pay’ legislation has been introduced, or similar shareholder rights reinforcements. In most places this has had a very positive impact on the quality of corporate governance. However, shareholder rights is not all that it takes – there are important aspects to the exercise of those rights too. In most countries we have seen an ever increasing institutionalisation of capital as ownership disperses and large institutional investors emerge. The consequence of this is a dilution of interest and engagement that has led to formulaic voting behaviours – many institutions thus welcome the right to influence but bemoan the need to exercise such rights.

FW: What regulatory developments on executive pay have you seen in recent months?

Baker: There have been few US regulatory developments on executive pay in recent months, though more are expected in 2013. There has been a plethora of shareholder derivative suits claiming breach of fiduciary duty by boards and compensation committees for various actions, including: granting pay that is not deductible; failing to disclose in elaborate enough detail the possible effects of a new equity compensation plan; and foot-faults in the documentation procedure for equity grants. These suits get the company’s attention by being filed a few weeks prior to the annual shareholder meeting and seeking to enjoin the meeting. Most have been dismissed and very few shareholder meetings have had to be rescheduled. Companies, by and large, view the suits as meritless – a play for attorney fees by the firms that bring them. Nevertheless, they have caused companies to give even greater scrutiny to their procedures and ever more fulsome disclosures.

Massmann: In the US we have not seen regulations related specifically to the amount or form of executive in recent months. However, there has been activity around compensation committee and advisor independence and disclosures. The SEC continues to issue rules around how compensation committees are structured and the use of outside advisors. These rules stem from the provisions under the Dodd-Frank Act. In January 2013, the SEC approved the NYSE and NASDAQ listing standards related to director independence, as well as assessing the independence of the compensation committee advisor. In addition, compensation committees must now have a formal written charter including a provision related to the compensation advisor’s role and duties. Outside the US however, there have been much stronger regulations adopted including a proposal to limit bonus payouts to no more than one times base salary.

Sjostrom: The most notable developments have been the EU intervention in how pay is delivered in the Financial Services sector and the re-invigoration of ‘say-on-pay’ in Europe following the Swiss ‘Minder’ referendum. The regulation of bankers’ and fund managers’ pay is very unfortunate and will have an impact far beyond the Financial Services sector. The way we see it, high pay levels are part of a deeper, systemic problem with the way firms in the sector work and behave. And capping bonuses isn’t going to fix that. Capping could stop firms from making a positive contribution to the economy in the future. The most likely way they’ll respond to the regulation is by shifting from bonuses to unsustainably high fixed salaries – a cost they’ll have to bear year-on-year, irrespective of how they perform. The risk shifts back from employee to employer at a time when we desperately need stability in the sector and support for growth. But increased salaries are in themselves a minor worry. Compared to that it will also cement the way banks and fund managers reward their people, rather than encouraging them to explore approaches that fit the new realities of the sector. As capital has got scarcer, the fundamentals of how the sector works and pays its people have begun to shift. And they need to carry on shifting. We think that, rather than offering a way out of a difficult situation, regulation will reinforce the bad old ways of working, and – ironically – make it harder for regulators to curb risk-taking behaviour through things like bonus clawbacks.The Swiss vote is yet another example of politics forcing changes to compensation. Whilst some frustration at corporate governance standards may be justified, this has led to a very serious situation where responsibility for how companies are run has shifted first from boards to investors, and is now shifting to political control. Regulators and investors should instead be seeking a much more meaningful debate as to what the business case is for both composition and levels of executive pay.

Gregory: Dodd-Frank includes provisions to enhance the role played by shareholders in determining compensation philosophy and practice; strengthen the independence of compensation committees; provide additional disclosure of the relationship between pay and company performance; provide disclosure of median employee and CEO pay ratios; and mandate the adoption and implementation of claw back policies. Also, there are new rules that increase proxy disclosure rules for compensation and change in control benefits. The exchanges have adopted compensation committee independence rules that basically mirror the SEC rule-making under Dodd-Frank.

FW: Are you seeing more companies adopt clawback provisions? How straightforward is the drafting of clawbacks – and are they easily enforced?

Massmann: The prevalence of clawback provisions continues to increase. Many regulatory bodies actually require clawback provisions, although they may not provide specific guidance on the design of the provisions. Due to the lack of regulatory guidance, the design of clawbacks is varied and more difficult, particularly as it relates to long-term incentives. The enforceability of clawbacks and the issues related thereto remains to be seen.

Sjostrom:We do see an increase in formal clawback provisions across the world, combined with an increase in deferred compensation – and we have seen a few public cases where they have been enforced. However, it is questionable how much this has actually mattered much. Deferrals and clawbacks have been around for a long time and the impact on behaviour is not sufficient on their own. Companies that are truly concerned with not rewarding the wrong performance and behaviour tend to instead concentrate their efforts on the purpose, formulation and measurement of performance that drives incentive outcomes.

Gregory: Dodd-Frank requires that the SEC issue rules requiring companies to recover, or ‘claw back’ excessive incentive-based compensation –including stock options – paid to executive officers where the company is required to restate its accounting statements because of material noncompliance with financial reporting requirements, regardless of an executive’s fault. Dodd-Frank also requires the SEC to promulgate rules regarding the disclosure of clawback policies. Although the SEC has not yet issued rules to implement these rules, Dodd-Frank requires that a company’s clawback policy provide that if the company is required to prepare a restatement as a result of its material noncompliance with financial reporting requirements under securities laws, the company must claw back incentive compensation that is in excess of what the executive officer would have been paid under the accounting restatement. The clawback would apply to all incentive compensation paid during the three-year period preceding the date on which the company is required to prepare the restatement. Additionally, this clawback requirement applies to both current and former executive officers, so the incentive compensation of any such officer will be at risk if it was paid during that three-year period, regardless of whether the officer was an executive officer at the time of the restatement or whether the compensation was accrued prior to the three-year period, so long as it is actually paid during such period. Since Dodd-Frank rules haven't come out yet, many companies are waiting to see what the laws will provide. Drafting will depend – if the provisions are required by law or accounting restatement, this is usually fairly straightforward – especially given that this is supported by SOX and Dodd-Frank. If the clawback is based on poor performance or ‘bad acts’, drafting can be tricky and may be difficult to enforce. This is especially true where the clawback relates to breach of restrictive covenants.

Baker: Clawbacks have been used by companies for decades to provide an enforcement mechanism for post-employment restrictive covenants. Limited clawbacks became required after financial restatements under 2004 legislation. Broader 2010 clawback legislation is expected to take effect when the SEC adopts implementing regulations. Many companies have adopted policies designed to comply with the new requirements; many others are taking a wait-and-see approach. Of course, clawbacks are easier to enforce if the funds subject to clawback have a deferred payment date; some companies use that approach. If the funds have already been paid, the tax effects of the clawback are very complicated and not completely resolved, which adds to the drafting challenges. Other drafting issues currently include state wage law concerns, the general impossibility of changing the timing of payment of deferred compensation without serious tax penalties, the difficulty of defining what gets clawed back, from whom, and under what circumstances.

FW: To what extent have the legal obligations and potential liabilities of the compensation committee changed in recent years? How can committee members ensure they discharge their responsibilities appropriately?

Sjostrom: The strongest critique we hear from investors of corporate governance is how many boards and committees fall short in their ability to discharge their responsibilities. The key to ensuring that this is not the case for the compensation committee, or any other committee, is in the composition, education and processes of the committee. The composition must be linked to experience and understanding, so continuous education is essential to keep up with specialist subjects such as reward and auditing. The processes are equally important. If the committee is not fed with the right information, assistance of independent advisors and the right governance structure – and thus able to make informed decisions – then you can’t expect them to do their job.

Gregory: Independence is now required for public company compensation committees and their counsel and advisors. Committee members need to attend meetings, be actively involved, review documents, ask questions, and so forth. That hasn't changed, but the consequence of ‘bad governance’ is to be voted out at the recommendation of the institutional investors and proxy advisory firms.

Baker: When shareholders are not satisfied with a company’s response to a less-than-overwhelmingly favourable SOP vote, the next step is to vote out compensation committee members. There is a bigger risk now of being voted out than a decade ago. Compensation is very complicated, especially as companies struggle to find the right metrics to drive performance. It requires a compensation committee member’s full attention to understand any one company’s schemes. ‘Engagement’ is the name of the game. A committee member whose attention is spread too thin will not be able to focus on complicated strategic decisions required. Many compensation committees now engage independent compensation consultants to filter management recommendations with an eye for board members’ – and shareholders’ – interests. In my view, compensation committees also need the advice of counsel who specialises in executive compensation. I’m always amazed at how often a lawyer diverts a mistake before it happens.

FW: How do leading organisations combine individual performance of executives with company/financial performance measures?

Sjostrom: Leading companies recognise that financial performance is the outcome of critical inputs and operational outcomes, which can also be measured and incentivised, and are as important to incentivise and reward. At a high level, some organisations do this on a discretionary basis, recognising that it is a multivariate situation that will struggle to provide a fair assessment through a formula. Others are anxious to protect the objectivity and independence of decisions and reward individual performance through a predefined evaluation. Either way may be suitable and both carry clear flaws. What truly matters is whether incentives and other reward support what the company wants to do, where it wants to go and how it creates sustainable wealth. Sometimes that needs to be explicit, other times implicit – unfortunately reward design is therefore best tailored to the individual situation.

Gregory: Most companies recognise the need to tailor long-term performance goals with long-term strategic plans and retention needs and many companies are adopting factors including: risk adjusting payments; deferring payment to adjust payments based on actual outcomes; lengthening performance periods; and reducing sensitivity to short-term performance. Also, equity and cash long-term incentive programs are being tied to company-driven financial metrics and total shareholder return (TSR) metrics tied to peer performance. This is really more of an art than a science, although Dodd-Frank and other recent laws and regulations are imposing more objective criteria.

Baker: Several structures are used. Where deductibility of the bonus is not a factor – for example, because the inventive program is structured to permit discretionary adjustments while preserving deductibility – the committee, usually following the recommendation of the CEO has discretion to adjust the incentive award earned on financial performance upward or downward to reflect a subjective assessment of individual performance. In another common structure, a set percentage of the incentive – typically 25 percent or less – is earned by satisfying management objectives, which are specified individually for each position. At the end of the performance period the compensation committee, again usually following the recommendation of the CEO, determines the extent to which the objectives were met. The management objectives are often a mix of objectively determinable measures – for instance, ‘divest X business unit’ – and subjective measures, such as ‘be a leader’. Relative metrics usually only apply to financial measures.

Massmann: Company or financial performance is used to determine whether a short-term incentive is warranted each year. Companies that also include individual performance as part of determining the appropriate payout will typically use individual performance to influence the allocation of the incentive created based on company or financial performance. The optimal balance is determined by the business itself, and has to be adjusted slightly and carefully to take into consideration the personalities of the executives and the culture of the company. Seldom is the amount of incentive payout determined based solely on individual performance.

FW: What do you believe are leading practices regarding the number of performance measures in short-term and long-term incentive plans?

Baker: There is a range of practices. Short term and long-term incentives should have a different mix of company and business unit measures, and may also include personal and broad relative measures. With short-term incentives, if there are more than two or three measures, the so-called ‘line of sight’ gets blurred. With long-term incentives, the key measure is usually stock price, because long-term incentives are typically equity-based. If a financial measure is also added – for example, as a prerequisite to vesting – it is usually a single measure and may be relative to peer company performance on the same measure. For a company with a cash long-term incentive, there are usually only one to three financial metrics, and the financial metrics are different than the ones chosen for short-term incentives.

Massmann: Short-term incentive plans are very often based on more than one performance measure. The most prevalent practice is the use of two performance measures and frequently you see the use of three measures. When multiple measures are used, they are aligned with the business strategy of the company. For example, high growth companies usually focus on revenue or revenue growth and cash flow, while more mature companies may focus on revenue or revenue growth and earnings. Based on a recent review of companies in the technology sector, the most prevalent measure used was operating income or operating margin with the second most prevalent measure used being revenue. When companies use multiple measures the measures are generally weighted differently depending on the business outcomes desired. For long-term incentive plans that use performance measures to determine the amount of incentive earned, companies in the US typically use only one measure. Companies outside the US more frequently use either one or two. Common measures used relate to total shareholder return, relative total shareholder return, or return measures – for example, return on equity, or return on capital or invested capital.

Sjostrom: The conflict is that fewer is better from a clarity point of view; whilst the more measures you use the closer you get to perfectly describing performance. However, since reward is about signalling what is most critical, clarity wins in every case. Saying that, oversimplification is a loss of signalling opportunity, just one long-term incentive plan measure is unlikely to tell you enough about the long-term ambitions you should pursue. The worst practice of all are combination measures where one tries to hide multiple measures through complex Gordian knots of metrics in a single target.

FW: What general advice would you give to companies on designing effective compensation strategies? How important are risk and sustainability considerations in today’s compensation arrangements?

Gregory: The financial metrics really have to make sense and not end up being unobtainable which would discourage management. Also, TSR metrics have to be balanced against company metrics – the stock of a company going through a difficult cycle will lag behind its peers on a TSR basis, but management may be working hard and succeeding in ‘turning the ship’, and may deserve compensation recognition for doing so.

Baker: Firms should stick to the basics. Be deliberative and be guided by the compensation philosophy. This usually means a significant portion of pay should be performance-based, with short-and long-term elements, using both absolute and relative performance measures and metrics. Though it’s a cliché, equity compensation aligns executives’ interest with shareholders’. An appropriate measure is one where the executive can see the effect of his or her behaviour on the results, but cannot – or has a disincentive to – skew the results in a way that poses a material risk to the company. An appropriate metric is one that is achievable but not easily reached. It’s almost impossible to gauge right every time. Non-financial goals, such as grooming successors or improving the company’s image, can be equally important. Over time, keep an eye on whether a given compensation program is achieving the desired results, and don’t be afraid to change if need be.

Massmann: Step one is to link the compensation strategy and programs to the company’s overall business strategy. This link should be apparent to both the executives and the shareholders. Companies should actively engage their largest shareholders early in the process. They should understand how heavily those investors rely on shareholder advisory groups such as ISS and develop compensation strategies and programs that would be viewed favourably when compared to the advisory group’s leading practices. Risk management continues to be an important consideration in compensation programs. Management and shareholders do not want the compensation programs to encourage excessive risk taking and therefore, continue to monitor the performance objectives and associated payouts. Sustainability is gaining in importance as shareholders and the general public become more active in promoting social and environmental efforts. 

Sjostrom: Risk and sustainability considerations are key, not because they are the current buzzwords but because all compensation strategies should align with the corporate strategy, culture and organisation – which in turn means ensuring a matching risk profile and that performance is sustainable over time. Building on that, executive compensation signals to your executives what you want them to do and how you want them to behave. Equally, it signals to your shareholders how you manage your business, how committed management are to the strategy, and how clear you are with regard to what needs to be done to execute the strategy. Hence, important advice in my book is that compensation is not over complicated, it fulfils its purpose and it makes good business sense. Most important is to come to terms with the purpose – it is where most companies go wrong and what most stakeholders react to when it is evidently lacking.


Pamela Baker is chair emerita and vice chair of Dentons’ US Pension, Benefits and Executive Compensation practice. She represents boards, compensation committees, public, private, and not-for-profit companies in executive compensation matters, including non-qualified deferred compensation, equity incentives, change in control plans, and C-suite employment and severance arrangements. Ms Baker is listed as a “star individual” in Illinois Employee Benefits, Chambers USA.

Dr Jens Massman heads Ernst & Young’s Performance & Reward practice for Germany, Austria and Switzerland. He has over 17 years of experience in Performance & Reward projects. Dr Massman joined Ernst & Young’s Human Capital Practice in 2000 and was promoted to Partner in 2003. Before joining Ernst & Young he worked as an independent consultant. He is one of the leading remuneration committee advisors in Europe.

Dr Carl Sjostrom advises companies on the compensation of senior executives and associated corporate governance issues. He has been working with compensation advice for over 18 years, based in the UK, Hong Kong and the US. His career includes partnerships at two ‘Big Four’ advisory firms in London and, before joining Hay Group in 2011, he was global head of Compensation & Benefits at Ericsson, based in his native Sweden.

James E. Gregory is a partner in Proskauer’s Employee Benefits & Executive Compensation Group. He has broad experience in all employee benefits and executive compensation matters with a special emphasis on the financial services sector. His clients include a range of businesses and employers seeking advice on a variety of executive compensation, tax and related legal matters. 

© Financier Worldwide



Pamela Baker

Dentons US


Carl Sjostrom

Hay Group


James E. Gregory



Jens Massmann

Ernst & Young

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