Incentives, Executive Compensation and Governance are three important topics that are linked to one another. The corporations that are such a big part of the productivity and prosperity equation require governance that ensures that they are using their financial, human and physical assets constructively. A key facet of the governance of modern corporations is the compensation of executives, especially of the CEO, for which the board of directors has sole authority. Executive compensation, in turn is a function of how we think about incentives that can be used to shape and encourage executive behavior and action.
I am devoted to influencing fundamental change in how we think about incentives, executive compensation and governance. Practice in each of the three areas is influenced by weak and/or flawed theories – theories that are deeply ingrained in modern corporate life. As a result governance systems underperform and executive compensation systems don’t result in the behaviors we would want. The dominant response to the failures is to blame the “implementation” of the system in question. And what inevitably ensues is tweaking of the existing system – with a vain hope that something good will happen.
I hope, with research and writing, to help those involved in governance and executive compensation to be able to constructively question their assumptions about incentives and accept fundamental changes to compensation and governance practices.
Capital versus Talent
I believe there as a modern and very important battle being waged between capital – i.e. shareholders – and talent – i.e. senior and specialized executives – for the spoils of their joint activity. Before 1980, talent worked placidly for management without making huge demands of compensation. But then talent woke up and ever since has been working assiduously to take an ever-bigger piece of the economic pie, frustrating and angering capital.
I believe that the practice of executive compensation is deeply flawed and see that fundamental fixes have to take place in order to have executive compensation that produces outcomes that we would actually want. Much of my advocacy relates to the flawed practices around stock-based compensation.
Sadly, I believe that our governance systems are not clearly thought through and we expect directors to perform in ways they are unlikely to have the incentives or capabilities to do. My work in this area attempts to go back to first principles to unravel the shortcomings of governance systems and suggest fundamental improvements.
Incentives and Smart Regulation
I write from time to time on government regulatory strategy. In particular, I am a critic of input regulation, where instead of focusing the regulation on the output we want, we focus on regulating some input, which inadvertently creates incentives that result in us getting the opposite of what we want. For example, Canadian broadcast regulators would like a particular output – more watching of Canadian-made television programs by Canadians. But instead of focusing on regulation that promotes that output, they regulate input – percentage of prime time shows that must be Canadian – and create an incentive to produce lots of crummy Canadian shows that Canadians don’t watch.
Human Nature and Incentive Systems
I also right about human nature and how we often fail to understand fundamental aspects of human nature when we design compensation systems. In particular, we over-estimate the power of monetary incentives and under-estimate the power of fear.