Aligning Long-Term Incentives to “Company Mission”
July 31, 2021
Pay for performance plans have increasingly come under fire for encouraging short-termism and discouraging long-term investments, with some stakeholders recommending performance shares be done away with altogether in favor of long holding periods. An alternative approach, outlined in a recent Semler Brossy piece for Directors & Boards, is simple but bold: redesign pay plans to support the company’s mission and purpose, rather than three-year strategy.
The mission-driven approach encourages long-term investment because executives are paid based on progress toward achieving the mission, rather than 3-5 year strategy (which is becoming difficult to quantify in an increasingly volatile political and economic environment). Rather than take the approach suggested by stakeholders such as CII, that compensation should focus on fixed base pay and 5-10 year vested restricted stock, the mission-driven approach emphasizes company purpose.
In the article, the authors note that annual plans should still involve setting goals aligned with strategies. But long-term plans could be redesigned so that each annual cycle builds on progress to the mission, requiring continuous improvement over at least three years. The mission is enduring and does not change with the winds of the environment, supporting long-term sustainability and transformation. For example, Tesla has a stated mission to “accelerate the world’s transition to sustainable energy.” In a mission-driven compensation model, long-term goals would be enduring and linked to the mission, such as measuring overall community acceptance of electric vehicles or share of electricity usage relative to fossil fuels in the company’s major markets.
Although it may seem unconventional, the possibility that pay for performance in its current form may undergo a significant change seems increasingly likely. With certain voices insisting that “pay for performance doesn’t work,” boards may appreciate a less conventional but no less effective approach to long-term pay.