Governance In A World Of Misalignment

Why in all the heated discussions and media articles on corporate governance (or lack thereof) has the important relationship that exists between governance and executive compensation not been addressed?

If you want good governance then ignore executive and employee compensation arrangements at your peril!

The relationship between Executive pay and Governance is pretty straightforward and easy to understand, at least in theory. Pay structures need to align Executive goals (financial returns) with Shareholder/Organisational goals (financial returns). So when Shareholder returns are great/poor, the performance based benefits paid to senior executives and employees should follow suit.

The sad reality is that HIH, One.Tel, and Enron represent classic examples of what happens when the misalignment between executive and organisational/shareholder goals becomes acute.

	Getting compensation arrangements 'right' is an important pillar in the integrity of any good corporate governance system.
	Good corporate governance systems have compensation arrangements that apply across the entire organisation because people everywhere in the organisation have the capacity to make contributions, often small and imperceptible, that improve the organisation.
	To get compensation arrangements 'right' you need to create alignment, there must be something to align with. Glib executive statements on strategy and vision flicked out to employees buried in the occasional email or staff meeting are not explicit in conveying the goals of the organisation and have no direct meaning to employees.

This is where Scorecards and simple plain English Performance Agreements come into their own. They're useful tools that help to clarify in a meaningful way each individual's role in translating their company's strategy and in turn its performance from a bunch of words and numbers on a page into reality. Increasing the general commercial awareness of all employees also helps here.

For effective performance-based pay structures regular and meaningful feedback is vital. It is important to keep all employees regularly informed about how their (and their organisation's) performance is tracking against the plan – keeping everyone focussed, involved and informed.

To conclude, while it's clear that developing effective performance-based compensation schemes isn't easy (most organizations get it wrong), properly structured schemes can be a valuable tool in aligning organisational and executive / employee goals and outcomes. To deliver on these objectives, effective compensation schemes:

	reinforce an organisation's corporate governance system;
	cover everyone (down to the cleaners);
	are transparent, meaningful and relevant to everyone; and
	are the subject of regular communication and feedback.

What Next?

If you are interested in more information please give us a call on +61 2 8399 0011 and ask to speak to one of our consultants. 

Alternatively e-mail us at info@emdgroup.com.au or use the form on our Contact Us page.

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