Thursday, April 26, 2012

Rising revolts on executive compensation: What’s Strategy got to do with it?


There’s hope for Strategy. In the matter of a few days, there comes news of a pattern of revolts against executive compensation at places like Citigroup, Barclays, Deutsche Bank, and yes, even GE. Why should this be so interesting to strategists?

Because there’s more to this revolt against egregious executive compensation than meets the eye.

Executive compensation questions are at the heart of strategy issues raised during the global financial crisis. The disconnect between compensation and long-term firm performance has become almost routine at large banks and companies. Most troubling is the lack of strategic thinking in deciding such compensation, which, even when linked to some notion of performance typically focuses only on short-term blips.

And Citigroup investors have raised an important point, as far as the underlying strategic aspect is concerned. An argument touched upon by them, but one that should receive even wider attention is about the time horizon that Vikram Pandit and his top folks had in mind when planning to reward themselves. While investors continue to suffer declines when seen in terms of longer time-horizons, executives are busy rewarding themselves by setting low targets for the next year.

But is any of this surprising? Perhaps not. As research by my colleagues and me suggests, there is little recognition amongst those entrenched at the top of existing systems that a substantial cultural-cognitive change is needed. They are simply creeping back towards established practices.

Strategic thinking on these issues shouldn’t just remain limited to a re-evaluation of specific business practices such as compensation, but should go deeper and discuss the overall relationship between business and society in the aftermath of the global financial crisis.

And in that vein, the surprise in terms of shareholder reactions should not be that this is happening, but the fact that it took so long.

Shareholder activism on this aspect is good to see, but let’s not forget that there are other stakeholders in the picture. What about the negative externalities caused by banking and other business practices in the wider society. As just one example, how do these compensation practices lead to increasing economic inequality in the wider society, which ultimately has other negative repercussions (www.beif.net)?

While shareholders are demanding their right to debate existing business practices, shouldn’t wider society debate these issues as well? Perhaps colleges and universities should be good places to start, as I've tried to argue here: "Does occupy offer teachable moments?" (.pdf). 

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