The May issue of Harvard Magazine carries a long article on executive compensation by two Harvard Business School professors, Jay Lorsch and Rakesh Khurana. They say that the idea that pay incentives for executives overlooks that "very often executives have little or no control over the results they are supposedly being rewarded for achieving." For example, a company's share price is determined not only by the executive and by the company's performance, which may itself by influenced by employees other than the executive, but by "the general stock market level and broader economic conditions."
They also criticize the "unexamined assumption" that "executives worked primarily for money." They say that "such rewards as future promotions, the intrinsic satisfaction of achieving results, and the pride taken in belonging to a successful company were overlooked and sometimes denigrated."
"A handful of consultants" with shared assumptions "advise the boards of all major American companies," the professors write.
They are skeptical about legislative or regulatory solutions:
The SEC can require greater disclosure about top management compensation in the CD&A—but the likely result is executives comparing their pay with each other to make sure they are being fairly treated. Or Congress can change the tax code (as it did in 1993), so salaries above $1 million would be taxed at an excess rate—but the dubious effect was to put more emphasis on incentive compensation, accompanied by all the problems just described. Congress can call for "say on pay" (a measure adopted in the United Kingdom), thus giving shareholders the right to hold a nonbinding vote on top executives' compensation—but shareholders are likely to be trapped in the same misleading assumptions as boards have been.
They conclude by calling for "a holistic re-examination not only of compensation but of the assumptions and values underlying the economic system we have created," which seems a bit of a reach.
