and risks

Executive SummaryStern Stewart Research // Volume 40

There have been very few topics lately that have stirred up as many emotions as managers’ compensation – not entirely without reason, as causal research of the current economic crisis has exposed.

However, the understandable anger has not led to meaningful solutions. Capping salaries means that management cannot participate fully in the upside of their company’s success. It cannot be the goal of compensation systems to reduce management’s incentive to make entrepreneurial decisions in this way, especially in times of crisis.

There is no doubt that the “standard compensation model” that was predominant – not only in banking, but also in many other industries – does not meet the requirements of today’s reality.

Truly entrepreneurial compensation systems need to fulfill four essential criteria:

  • Create clarity about the definition and measurement of success
  • Reward sustainable and long-term value creation
  • Ensure participation in entrepreneurial opportunities and risks
  • Include all employees in the scheme to ensure congruity of purpose between management and other employees

The sheer enormity of today’s crisis allows companies the opportunity to bid farewell to traditional and outdated compensation schemes and implement real and sustainable management participation in the opportunities and risks they face.