Interesting findings from Mercer Human Resource Consulting which reveals that the number of CEOs receiving option grants is slipping and there has been a decrease in those receiving restricted stock grants. However, the number of CEOs performance shares, including performance-contingent restricted stock, was up sharply. So there is a bigger focus by shareholders on performance pay.
But is it delivering results?
As the Mercer report says, investors continue to be unhappy with what they see as snail-pace progress of reining in CEO pay and institutional investors are now aiming for a greater influence on compensation.
Harvard Business School professor Jim Heskett raises some very good questions in his discussion piece How Should Pay Be Linked to Performance?
"There are a number of reasons why pay may not reflect performance. First, many of the larger pay packages are negotiated by those being hired from outside the organization. Most often, an outside hire is prompted by poor performance by insiders. So in a sense, the bargaining power of the outsider is increased, regardless of the performance that may be delivered later … Further, many pay packages are determined on the basis of what others in comparable jobs, regardless of performance, are being paid. This creates a natural disconnect between pay and performance. Third, current pay often reflects past performance, not current or expected performance."
Frankly, pay for performance is one of the big management myths. It can produce the wrong results and it only really works when it's the result of individual effort rather than the product of interdependent activity. Also, it mixes up outputs (where people are paid on what they produce) and outcomes (where managers are paid on the basis of such indicators as a share price, which might be affected by a variety of external factors such as industry conditions and global capital flows).
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