The debate over pay-for-performance, which has never come close to being settled, is now intensifying. There may no longer be picketers in front of AIG’s headquarters, but the furor continues to reverberate 200 miles away, in Washington, D.C. Even as we were going to press, news reports began to surface that the Obama Administration is considering a number of limits on executive compensation throughout the financial-services industry; such limits would pertain even to companies that received no bailout money.
Will such efforts trickle down from Wall Street to Main Street, the way that every other recent bit of bad financial news has? Almost certainly. While sweeping legislation that caps the pay of executives at Midwest insurance companies or Silicon Valley chipmakers is unlikely, the push to more-properly align compensation with corporate results will galvanize compensation committees to rethink, once again, how and why they structure pay packages as they do.
The specter of the government involving itself in compensation policy pleases no one, of course — not even the government. Free-market ideology aside, past experience shows that legislation at this micro level can and does produce a host of unintended consequences, and may bear some responsibility for delivering us to our current state.
But if compensation committees and, at smaller companies, CFOs themselves take a harder look at who makes what, and why, wiser policies may very well emerge. Companies have grown comfortable with pegging pay to some sort of measurable outcome, but not necessarily the right one. Just as banks must rethink the practice of rewarding loan officers for the quantity rather than the quality of the loans they make, so too should many other companies take a harder look at the metrics that underlie their compensation packages. Contributing editor Russ Banham explores these and many related issues in this month’s cover story, “Fray on Pay.”