8 Re-evaluation of the function and structure of executive compensation

Now that we have identified the first key problem in the current way that executives are remunerated, a re-evaluation of the function and structure of executive compensation seems the obvious next step. We need to let go of the idea that the primary function of remuneration is the advance guidance of executives. This does not mean that executives should not receive variable pay, but that the function, and therefore the design, of this variable pay should be different. The disruptive effect of variable pay is primarily due to the use of a variable pay system – rewards based on predetermined and objective performance measures – without paying attention to the influence this form of variable pay has on the social and economic context within which the executives operate. There appear to be fewer objections to variable pay using a merit-based rating system – variable pay that is determined in retrospect on the basis of the achieved success of the entire company.

If and when the advance guidance of executives is abandoned as the primary function of remuneration, this will result in a shift in the direction of the traditional position-related order. The recruitment and retention of executives then takes centre stage. In principle, the function of the variable part of the remuneration is cost efficiency. The motivational aspect of the variable pay would then be linked to a justified confidence on the part of executives that they will share in the actual success of the company. The concept of ‘motivating’ the executive thus acquires a different definition. Motivation would no longer be synonymous with the advance guidance of executives through rewards based on individual, influenceable, predetermined performance measures but on stimulating them to do their best for the resilient success of the entire company. Goal alignment would thus be chosen above controllability. This would also satisfy the feeling that it is reasonable for executives to share in the success. The variable pay would in this case be linked to the responsibility of executives for the entire company instead of to their individual performance: pay-for-responsibility. This would be the way to actually achieve an alignment of interests between the interests of the company and those of its executives.