Incentivizing the Workforce: Bringing the Company Together
For the past few years, people have been questioning the amount of money CEOs have been receiving for their services to their companies. At the heart of the issue is whether or not CEOs and other executive officers should be receiving payment packages that guarantee a certain amount of money regardless of how the company performs or if they should be paid in direct relation to how the company performs while they are at the helm. Though some CEOs currently have a mixture of the two forms of payment, a new idea of only incentive pay is coming about. Its logic is rooted in the fact that a CEO is more likely to care about the future of a company if his or her compensation is directly correlated with company performance. I believe that compensation for top executives should be paid through stock options and other incentive based payments. This system of payment, however, would also be effective in creating a feeling of equality and loyalty if it were expanded to all employees.
Before we can address the issue about whether or not an entire company’s employee staff should be paid on incentive, we must first answer the question of whether it is fair and just for this form of payment to be used at the highest level of a corporation. A.G. Lafely was the CEO and President of Proctor and Gamble. During his tenure, he opted for a salary of $1 and the rest of his compensation was from stock options and other incentivized payments. Lafely argues that this system is the fairest for the company and its stakeholders. His reasoning being that
It [incentivized compensation] should align him [the CEO] with the company not only when he is active but also in retirement, because the surest measure of his contribution is the quality of succession and the business’ performance in the year or two after he hands over the reins.
According to Lafely, a CEO who’s compensation is based on how the company does both during his tenure and after is a big incentive for that CEO to do well and work hard to make the company more successful. With this sort of compensation for CEOs, the company is looked after not only in the short term but also in the long term. There is no reason that a company should being paying multi-million dollar salaries to a CEO that is not bettering the company. To do so would mean that no matter what the CEO does he or she is going to make the same amount of money. Those against this idea argue that CEOs should receive a wage like everyone else. After all, CEOs are working and should be compensated for their time. The issues with this argument are two fold. First, CEOs are still being compensated for their time. Unless the CEO manages to crash the company, the stock options will be worth money. Second, CEOs are the leaders of their companies. If they don’t have a vested interest in the company’s future, then who will? Although most employees will never meet the CEO, he or she is the leader of the company. The actions of a CEO have repercussions both in the workplace and in the stock market. A CEO who willingly takes only incentivized pay is showing both the company and the market that he or she feels confident in his or her own abilities as a leader as well as the abilities of the company itself. For these reasons, CEOs should be only paid with incentivized compensation.
As we have seen with both Enron and AIG, short-termism can seriously hurt a company. Employees were being paid on the short-term profits they made for the company and so were not concerned with what impact their decisions had in the long term for the company. This type of short-term thinking led to the downfall of both corporations, which had severe impacts on the economy. A way in which we could help fix the problem of short-termism in the corporate sector as well as create a more fair payment system is to allow for part of all employees’ salaries to come from incentive based compensation. I would also argue that employees should not be able to leave the company and cash out on their stock options until a certain amount of years has gone by. This will create a more secure and stable corporation because the employees, who are also stakeholders, will be incentivized to take long-term approaches to their investment in the company. The Aspen Institute believes:
a healthy society requires healthy and responsible companies that effectively pursue long-term goals. Yet in recent years, boards, managers, shareholders with varying agendas, and regulators, all, to one degree or another, have allowed short-term considerations to overwhelm the desirable long-term growth and sustainable profit objectives of the corporation.
Stakeholders that are in it for the long run and not for short-term gains will be better for the company and create a more stable financial situation. With stock options that can’t be sold until a few years after the employee leaves or retires, there is a financial incentive to plan for the continued success of the company. In this way, employees will feel a closer bond to the company if for no other reason than that part of their salary is attached the success of the company in the long run. I would argue that the normal employee should not receive just incentive based compensation because the average employee has financial needs that need attending to on a regular basis. CEOs, on the other hand, already have enough financial capital that they aren’t worried about receiving monthly checks. If everyone has a financial stake in the company then everyone is receiving compensation based on the performance of the company, which is far fairer than making arbitrary salary numbers that have no bearing on performance. It also means that all employees are now stakeholders of the company.
The idea of what is fair and just comes up in Rawls’ A Theory of Justice. In it he brings up the idea that the fairest way to come up with a set of rules and a system is to decide in what he calls the “veil of ignorance”. In this state, people are unaware about who they are or what their position in life is. In other words people will make decisions that are the most fair for everyone because they don’t know if an unfair rule will benefit them or not. I would extrapolate this to the system of a company. If all the employees in a company were to consider for a moment what type of compensation would be fair if they were to consider it through the “veil of ignorance” I think that they would believe that incentive based compensation for all employees would be both fair and just. According to Rawls, through the “veil of ignorance” people will come up with two principles. The first is “each person is to have an equal right to the most extensive basic liberty compatible with similar liberty to others” Although my incentive based compensation doesn’t have much to do with the basic rights of employees, it does allow for equality in compensation. If everyone in the company had a financial stake in the corporation’s success then that would mean that all the employees would equally benefit from the company’s achievements.
The second and more significant principle is “social and economic inequalities are to be arranged so that they are both (a) reasonably expected to be to everyone’s advantage, and (b) attached to positions and offices open to all.” This fits with the incentive based compensation plan for a few reasons. First, it justifies that people in higher positions should make more money. This is justified by the fact that people in higher positions have more responsibility and have more of an individual impact on the corporation. This means that if they do their job well then the company will benefit which means everyone will benefit due to stock options and other incentive based compensations. This differs from justifying the current discrepancy in compensation because as of right now Your boss being incentivized to work harder to help the company has no bearing on the wealth you are going to receive. The chart below shows just how unfair this has become.
This chart shows the huge gap in compensation between the top 80th percentile and the lower 50th percentile. If incentive based compensation in the form of stock options were introduced into this equation then all level of employees would be gaining wealth as the company did better. Secondly, incentive based compensation is to everyone’s benefit because it makes all the employees of all levels have the same goal in mind: making the company successful. Without incentive based compensation employees might only care how their department does or how their personal numbers look. By tying at least part of everyone’s salary to the future of the entire company that means that everyone has a common goal to make sure the company does well. So by using Rawls’ two principles of equality we have proven that using incentive based compensation for at least part of every employee’s salary is both just and fair to all the employees in the corporation.
The idea of incentivizing CEO compensation is still fairly new. Extrapolating that idea out to a large corporation is, at the moment, unheard of. However, there is plenty of evidence that points to the fact that if all employees had a stake in the company’s welfare and continued success that it would be better for the company overall. This type of compensation would combat short-termism which can lead to dangerous business decisions. On the ethical side, tying part of everyone’s salary to the company would be both fair and just according Rawls. The inequality in distribution of wealth would only lead to hiring better executives who would in turn help make the company better which would allow for more wealth to be distributed to all employees. It is much more fair to have everyone’s compensation tied to the same fate because it makes all employees look out for each other and the company. Overall, incentive based compensation would create a stronger and more sustainable company than merely normal, flat compensation.