October 8, 2020 Executive Compensation Executive & Director Pay Design Articles

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Executive & Director Pay Design

Is Your Executive Compensation Plan Undermining Your Mission? Instead of Undermining It

New technologies have been disrupting business for decades, especially since the internet became widespread in the late 1990s. But a new wave of innovation, centered on artificial intelligence, big data analytics, and the internet of things, is now intensifying the pace and magnitude of disruption.

AI-powered advances by themselves, according to a 2019 McKinsey study, could boost annual global GDP by $13 trillion, or an additional percentage point.

The coronavirus pandemic has now accelerated technological change and innovation across industries, especially in e-commerce and remote work. Adding to the turbulence, social forces and business dynamics have undercut shareholder primacy while strengthening other stakeholder interests. With business changing in fundamental ways, strategic stability has fallen from its pedestal in favor of strategic agility.

Executive compensation, however, has not changed accordingly. Even as industries are restructuring, most executives operate within standardized pay plan parameters that can hinder creativity. Metrics that promote innovation and transformation are still relatively weak. Many companies rely on three-year performance periods that are too long or too short to capture the strategies they are implementing — and may thereby be contributing to the steady decline in corporate investment over the past decade. Also, boards frown on using discretion and qualitative measures in pay packages, even as they want their companies to be more agile and adjust strategies frequently. A clash is inevitable.

Not every company, however, should overhaul its executive pay immediately. Boards need to calibrate compensation to the state of their business. In this article, Blair Jones and Seymour Burchman identify three kinds of companies — stable innovators, intermittent disruptors, and ongoing disruptors — and identify incentive structures for each.

View the full article as it was originally published.

Seymour Burchman

Blair Jones

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