Dysfunctional compensation schemes

Executive pay has been on the agenda for investors for more than two decades, with calls to align compensation with the interests of long-term investors. But the reverse has happened!

  • Pay levels have soared, driving social inequality.
  • Pay schemes have become so complex that even CEOs are unclear about their total compensation.
  • Disconnects between CEO pay and performance is well documented.
  • Misaligned incentives have exacerbated risks tied to climate change and the future value of the company.

Underperforming CEOs are rewarded handsomely whilst contributing to risks that harm employees, society, and ecosystems. Utility company CEOs are actively incentivised to ignore the risk of climate change. Pesticide company CEOs are incentivised to ignore the risk of bee colony collapse. And so on.

While institutional investors could be expected to pay attention to this misallocation of resources, their executives are also excessively paid, creating a conflict of interest. We believe the dysfunction within compensation schemes could lead to another preventable disaster in financial markets. That’s why Preventable Surprises supports the call by Daniel Godfrey, former CEO of the Investment Forum, to do away with bonuses all together, with CEOs getting a salary only (including shares).