Published on: February 18, 2022
What is the Purpose of Incentive Compensation?
Center On Executive Compensation President and CEO Ani Huang interviews the Center’s Senior Advisor for Research and Practice, Dr. Charles G. Tharp, to get his views on the principles underlying the use of incentive compensation and the potential impact of the ever-expanding list of external themes and objectives that companies are pressured to include as incentive metrics.
Amid an increased focus on stakeholder capitalism, companies are balancing the needs of a multitude of stakeholders when it comes to designing executive pay. The introduction of Say-on-Pay, combined with increased pressure from investors and proxy advisory firms has led to a number of changes. Most large companies have adopted relative total shareholder return (rTSR) as a performance metric in their long-term incentives, decreased the prevalence of perquisites, eliminated gross-ups, adopted double-trigger change-in-control agreements and modified other executive compensation practices over recent years. The latest change advocated by external influencers is to include objectives measuring environmental and sustainability performance, diversity and inclusion, and other human resource metrics in incentive arrangements.
This continued pressure for expansion of performance objectives for senior management and metrics upon which executive incentive arrangements are based has prompted the Center to explore the potential implications of this trend on the purpose and effectiveness of incentives. We have termed this review Incentive Design: A More Purposeful Approach.