How can organizations set up executive compensation structures that reward the right values?

Listen to Episode 64 on Apple Podcasts

Guest: Frederic Barge, Founder of Reward Value Hosts: Dottie Schindlinger, Executive Director of the Diligent Institute, and Meghan Day, Senior Director of Board Member Experience for Diligent Corporation

In this episode:

  1. Rewarding Value: Barge takes us inside the founding of his organization, Reward Value.
  2. Rethinking Executive Compensation: Barge discusses recent and upcoming research on the future of executive compensation.
  3. Focusing on the Long-Term: Barge discusses the importance of long-term sustainable value creation and tying that to executive compensation.

Summary:

In this episode of The Corporate Director Podcast, Frederic Barge, Founder of Reward Value, takes us inside his organization's mission to reimagine executive compensation and how executive compensation can be used to drive more sustainable, stakeholder-centric outcomes for our society.

Rewarding Value

Barge begins with his professional background: 'I've been active in executive remuneration for most of my career, and I've spend about 25 years working for international companies in the Netherlands. International companies in the Netherlands. Over that period, I reflected on the role of exec comp and to what extent its purpose fit for the future. We want long term value creation for all stakeholders. Is executive compensation currently fulfilling that role?' The answer to Barge's question is no: 'I believe executive compensation is currently too focused on financial performance and the short-term.' So, at the end of 2018, Barge founded Reward Value, a a nonprofit research organization based in the Netherland seeking to modernize executive remuneration policies in a rapidly changing world. He expands upon this organizational purpose: 'We want to redesign executive compensation taking all stakeholders into account. Most companies understand that they need to pivot to a more sustainable and inclusive economy, and so many of them put out these purpose statements indicating that. But, their executive compensation structures are often misaligned from such statements. Societal stakeholders expect change, and responsible remuneration should be the catalyst for that change. Executives who are paid for short-term financial performance will ultimately harm long-term value creation. The alignment of purpose, performance, and change will work to our advantage.'
'Over the course of my career, I reflected on the role of executive compensation. It is currently fulfilling its intended role?' -Frederic Barge, Founder of Reward Value

Rethinking Executive Compensation

Reward Value produces effect-based research and dialogue with stakeholders. They work to design principles of responsible remuneration policies and models that allow companies to move toward sustainable long-term value creation. Barge gives a breakdown of some recent research: 'We originally looked at 4000 companies from 1992-2017. To summarize, we came away with the good, the bad, and the ugly. The 'good' is that executives are responsible and motivated by incentives. So, we know we can use compensation to drive outcomes. The 'bad' is that defining optimal behavior and incentives is subjective, and who gets to decide what optimal behavior is difficult. The 'ugly' is that even well-intended incentives can have bad side effects, breaking the link between pay and performance.' For Barge, this research culminated in a big action item for companies moving forward: 'You need to address the bad and the ugly to get those good societal outcomes. The goal of the green paper was to address these issues. Executive pay is too high, and there is too much focus on the short-term. Executives are able to manipulate their performance and 'game' their pay.' He goes on, 'We felt we needed to create a new model around true performance: what success looks like, how we tie that performance measure to remuneration to stimulate a long term focus, stressing that pay is linked to better performance, and looking at governance and reporting. This allows all stakeholders to get transparency. In the green paper we outline some possibilities: combined financial and nonfinancial metrics, and we are linking that to remuneration. As we speak, we're diving into subsequent research to create models for organizations to use.'
'Societal stakeholders expect change, and responsible remuneration should be the catalyst for that change.' -Frederic Barge, Founder of Reward Value

Focusing on the Long-Term

Barge then touches on a current research collaboration between Reward Value and the Diligent Institute: 'In subsequent studies, we hope to look at what long-term really means. This is where financial and nonfinancial impact measures converge with share valuation. If you really want to influence executive behavior, you have to use the incentives. Nowadays, so many companies have purpose statements saying they're focusing on shifting to the long-term and to sustainability, but their pay structures haven't changed in 20 years.' He dives further into the importance of looking to the long-term: 'Only looking at short-term has not been indicative of long-term success. It all goes back to willing and openness to pivot their businesses. The world changes quickly, and it's hard for companies to respond, which is likely part of the reason why the lifespan of listed companies has decreased in the last few decades. Companies that are not acting sustainably over the long term will likely lose customers, suppliers and employees, resulting in their ultimate demise. Change will happen, and lifespan of company is determined by ability to adapt, be open and reap the benefits.'
'Sustainability is a risk element but also an opportunity. If you address it as an opportunity, your company can transform, survive, and flourish.' -Frederic Barge, Founder of Reward Value

Also in this episode...

Barge gives his prediction for the future of governance: 'I think we'll see a more stakeholder-oriented governance model in the future. Are we going to develop a concept of serving leadership? This really reflects elements of different stakeholder groups. Right now, we're seeing the first steps with the growth of B-corps and other organizations where the inclusion of stakeholders is better organized than it is currently. How fast that trend will progress is difficult to say.'

Resources from this episode:

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The Future of Compensation

Listen

Listen to Episode 64 on Apple Podcasts

Guest: Frederic Barge, Founder of Reward Value

Hosts: Dottie Schindlinger, Executive Director of the Diligent Institute, and Meghan Day, Senior Director of Board Member Experience for Diligent Corporation

In this episode:

  1. Rewarding Value: Barge takes us inside the founding of his organization, Reward Value.
  2. Rethinking Executive Compensation: Barge discusses recent and upcoming research on the future of executive compensation.
  3. Focusing on the Long-Term: Barge discusses the importance of long-term sustainable value creation and tying that to executive compensation.

Summary:

In this episode of The Corporate Director Podcast, Frederic Barge, Founder of Reward Value, takes us inside his organization’s mission to reimagine executive compensation and how executive compensation can be used to drive more sustainable, stakeholder-centric outcomes for our society.

Rewarding Value

Barge begins with his professional background: “I’ve been active in executive remuneration for most of my career, and I’ve spend about 25 years working for international companies in the Netherlands. International companies in the Netherlands. Over that period, I reflected on the role of exec comp and to what extent its purpose fit for the future. We want long term value creation for all stakeholders. Is executive compensation currently fulfilling that role?”

The answer to Barge’s question is no: “I believe executive compensation is currently too focused on financial performance and the short-term.” So, at the end of 2018, Barge founded Reward Value, a a nonprofit research organization based in the Netherland seeking to modernize executive remuneration policies in a rapidly changing world.

He expands upon this organizational purpose: “We want to redesign executive compensation taking all stakeholders into account. Most companies understand that they need to pivot to a more sustainable and inclusive economy, and so many of them put out these purpose statements indicating that. But, their executive compensation structures are often misaligned from such statements. Societal stakeholders expect change, and responsible remuneration should be the catalyst for that change. Executives who are paid for short-term financial performance will ultimately harm long-term value creation. The alignment of purpose, performance, and change will work to our advantage.”

“Over the course of my career, I reflected on the role of executive compensation. It is currently fulfilling its intended role?”

–Frederic Barge, Founder of Reward Value

Rethinking Executive Compensation

Reward Value produces effect-based research and dialogue with stakeholders. They work to design principles of responsible remuneration policies and models that allow companies to move toward sustainable long-term value creation.

Barge gives a breakdown of some recent research: “We originally looked at 4000 companies from 1992-2017. To summarize, we came away with the good, the bad, and the ugly. The ‘good’ is that executives are responsible and motivated by incentives. So, we know we can use compensation to drive outcomes. The ‘bad’ is that defining optimal behavior and incentives is subjective, and who gets to decide what optimal behavior is difficult. The ‘ugly’ is that even well-intended incentives can have bad side effects, breaking the link between pay and performance.”

For Barge, this research culminated in a big action item for companies moving forward: “You need to address the bad and the ugly to get those good societal outcomes. The goal of the green paper was to address these issues. Executive pay is too high, and there is too much focus on the short-term. Executives are able to manipulate their performance and ‘game’ their pay.”

He goes on, “We felt we needed to create a new model around true performance: what success looks like, how we tie that performance measure to remuneration to stimulate a long term focus, stressing that pay is linked to better performance, and looking at governance and reporting. This allows all stakeholders to get transparency. In the green paper we outline some possibilities: combined financial and nonfinancial metrics, and we are linking that to remuneration. As we speak, we’re diving into subsequent research to create models for organizations to use.”

“Societal stakeholders expect change, and responsible remuneration should be the catalyst for that change.”

-Frederic Barge, Founder of Reward Value

Focusing on the Long-Term

Barge then touches on a current research collaboration between Reward Value and the Diligent Institute: “In subsequent studies, we hope to look at what long-term really means. This is where financial and nonfinancial impact measures converge with share valuation. If you really want to influence executive behavior, you have to use the incentives. Nowadays, so many companies have purpose statements saying they’re focusing on shifting to the long-term and to sustainability, but their pay structures haven’t changed in 20 years.”

He dives further into the importance of looking to the long-term: “Only looking at short-term has not been indicative of long-term success. It all goes back to willing and openness to pivot their businesses. The world changes quickly, and it’s hard for companies to respond, which is likely part of the reason why the lifespan of listed companies has decreased in the last few decades. Companies that are not acting sustainably over the long term will likely lose customers, suppliers and employees, resulting in their ultimate demise. Change will happen, and lifespan of company is determined by ability to adapt, be open and reap the benefits.”

“Sustainability is a risk element but also an opportunity. If you address it as an opportunity, your company can transform, survive, and flourish.”

-Frederic Barge, Founder of Reward Value

Also in this episode…

Barge gives his prediction for the future of governance: “I think we’ll see a more stakeholder-oriented governance model in the future. Are we going to develop a concept of serving leadership? This really reflects elements of different stakeholder groups. Right now, we’re seeing the first steps with the growth of B-corps and other organizations where the inclusion of stakeholders is better organized than it is currently. How fast that trend will progress is difficult to say.”

Resources from this episode: