Page 184 - Accelerating out of the Great Recession

A NEW MANAGERIAL MIND-SET

employees, and taking account of stakeholders as well as share-
holders—they will also need to address their own compensa-
tion, as well as that of their colleagues. In a politically com-
bustible climate, in which there is rising unemployment and
slow growth, coming up with a solution to retain and reward the
best will not be easy.
Politicians, economists, and a dissatisfied public have roundly
condemned bonus systems for their role in encouraging extreme
risk taking—something often seen as a major cause of the
financial crisis. Such a view is simplistic: the core problem of
high debt levels cannot be fairly attributed to bonus schemes.
Nevertheless, the level and the basis for bonus payments are
likely to come under far more scrutiny in the years to come.
Given that a slow-growth environment most probably will lead
to lower equity returns, stock options might lose some of their
appeal as well. It will be necessary to redesign compensation
systems in a way that will attract and retain talent and, at the
same time, reward sustained (real) strong performance. Criteria
for such a redesign should include the following:

1. An emphasis on the long term. Investors (and politicians)
want managers to focus on creating sustainable long-
term value, not just beating this year’s plan—especially in
today’s recessionary environment. Therefore, incentive
compensation plans should have a bias toward the long
term in the form of longer vesting periods, clawbacks,
and multiyear performance targets.
2. The reward of relative performance. Equity-based incen-
tive compensation such as stock options or restricted
stock grants should reward executives when the company
outperforms its peers, not just when it enjoys a windfall

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