Now more than ever, executive compensation plans are under the microscope. As a result, organizations must be careful when it comes to their executive compensation strategies.
In the past, many executives have been compensated purely on financial metrics. However, such practices do not recognize that successful financial performance is a result of successful operational strategies.
Moreover, with the current heightened level of scrutiny on executive compensation, many firms are actively benchmarking their compensation packages against those of their peers.
“Compensation packages require careful deliberation and should be tailored specifically to each organization,” says Harry Cendrowski, CPA, ABV, CFF, CFE, CVA, CFD, CFFA, the managing director of Cendrowski Corporate Advisors LLC.
Smart Business spoke with Cendrowski about the issues surrounding executive compensation packages and the strategies you can use to make sure your package is effective, fair and legal.
What current issues do you see with respect to executive compensation?
Many public corporations compensate executives based on earnings, revenue and market share growth — in other words, they look largely at financial metrics in assessing an executive’s performance. However, financial metrics are the output of successful operations, product quality and a significant focus on the customer. Success in these areas often foreshadows successful financial performance, not vice versa.
For instance, Toyota was long revered for its customer-first focus. This intense focus produced successful financial results: The company was building products consumers were willing to buy, and many became repeat buyers of Toyota products.
More recently, however, a former high-level Toyota executive stated that ‘anti-family, financially oriented pirates hijacked’ the company, implying that some recent Toyota executives became too focused on finances instead of Toyota’s customers.
The actions of these individuals, arguably, caused Toyota to perhaps grow too fast, too soon.
Do some executive compensation packages overcompensate executives for excessive risk taking?
I’m not sure I’d phrase it that way. We’d first have to define what it means for risk taking to be ‘excessive.’ For instance, is it fair to state that banks were taking ‘excessive’ risks when many other financial institutions were taking similar risks? Weren’t their policies simply competitive?
Of course, hindsight is 20/20. Congress and many in America would like to point the finger at banks for taking excessive risks, but the financial policies of banks allowed them to deliver stellar returns to investors for many years. In fact, rather than discussing ‘excessive’ risk taking in the financial sector, I’d argue that we should really be investigating why so many institutions took similar risks. Such actions only serve to increase the correlation between portfolios of differing banks, exacerbating the effect of any shocks to the economy. This, in my mind, is really a fundamental causal factor of the credit crisis.