The nature of change in business today differs from the past in both magnitude and pace: Technology is disrupting fundamental business models, forcing transformation across whole industries. According to a 2019 Accenture study, 71 percent of 10,000 companies in 18 industry sectors are “either in the throes of or on the brink of significant disruption.” Similarly, McKinsey concluded a major study of automotive, electronics, aerospace, and defense industries, saying, “The industrial sectors will see more disruption within the next five years than in the past 20 years combined.”
A New Framework for Executive Compensation
Leaders’ pay should be tied to corporate mission, not strategy.
February 26, 2020
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Summary.
Executive compensation plans typically are tied to corporate strategy, often rewarding executives for hitting financial targets over three-year cycles. But with technology disrupting traditional business models and societal forces undercutting shareholder primacy, executives find themselves tied to an incentive structure that supports incremental change when they really need to be fundamentally reshaping the business. It’s time to rethink the approach. The authors suggest a new framework for executive compensation, designed around six key approaches, focused on: (1) mission, rather than strategy; (2) stakeholders, rather than shareholders; (3) outcomes, rather than milestones; (4) financial and nonfinancial goals, rather than purely financial goals; (5) end-to-end cycles, rather than overlapping; and (6) goals that improve at a set amount over a prior cycle and relative to peer performance, rather than budgeted performance.