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Perhaps all the people currently trying to redesign executive compensation should consult just that: Design. Well-known design thinker and University of Toronto’s Rotman School of Management dean Roger Martin wrote recently over at the Harvard Business Review about restructuring executive compensation.
His fundamental idea: scrap stock-based compensation. Just like utilities can’t control the weather (even though hotter summers and colder winters would equal more profits), CEOs can’t really control their stock price, Martin argues. Far too much compensation, he says, is built around options and share prices. Martin’s solution: pay CEOs based on “real measures,” such as earnings per share, return on invested capital, and market share.
While these and similar factors are sometimes considered in determining executive compensation, it’s often just portion of the formula, with stock options they must keep above water making up a big chunk, too. Technically, tying pay to share prices may be performance based pay. But is it really performance executives can control?
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