Reuters
U.S. Securities and Exchange Commission (SEC) Chair Mary Jo White testifies at a Senate hearing in this file photo taken in 2013.

Executive pay, company performance: Always a link?

A proposed federal rule would require companies to compare executive pay to their bottom line. While this transparency might help shareholders, would it track intrinsic motives of those running a company?

People who own stock, which includes nearly half of Americans, often want to know if a company’s executives are worth their salt. They may soon get some help. The Securities and Exchange Commission (SEC) proposed Wednesday that publicly traded firms reveal how incentive compensation for their executives stacks up against the company’s performance.

And not only that: Pay-and-performance charts would be compared with those of similar companies. The SEC hopes this kind of scorecard would enable investors to track the success of incentive schemes for top managers.

The SEC’s proposal was ordered by Congress after the 2008-09 financial crisis to make sure executive compensation does not produce perverse incentives for excessive risk-taking on Wall Street. It may also help ensure merit pay is actually well merited in high finance.

The federal regulator is merely proposing transparency, not dictating types of executive pay. This is a modest approach relying on market forces. Many companies still struggle to come up with ways to reward employees, often relying on competing theories about motivation.

External rewards, such as bonuses or job security, often are not enough to retain employees or compel them to excel. Variable-pay schemes are often too complex or changeable. And too often rewards for hitting a company target end up with negative consequences, such as people taking shortcuts or avoiding long-term investments.

Money does not always “talk” in job satisfaction. Companies need to think beyond the numbers of financial remuneration. The best companies are ones that best discern the intrinsic motives of employees, such as working in a creative environment, achieving excellence in a field, or helping meet social goals.

If the SEC’s proposed rule has a flaw, it is in not providing data on these other incentives for companies to use. They are difficult to measure, for sure, and yet they probably contribute more to the bottom line and help prevent problems, such as ethical lapses.

If shareholders really want to know what drives a company’s workers, they will need more than the SEC’s proposed rule. 

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