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Read the second of four summaries from the 2020 annual meeting of the Salzburg Global Corporate Governance Forum - Putting Directors to the Test: How Does Leadership Measure Up in a Time of Crisis?

The 2020 annual meeting of the Salzburg Global Corporate Governance Forum took place virtually this year due to the pandemic. At "Putting Directors to the Test: How Does Leadership Measure Up in a Time of Crisis?" from 9-10 October 2020, 58 participants spread across 18 time zones, mainly directors and principals of corporations on four continents supplemented by additional stakeholder voices, explored crisis response and leadership, addressing what it takes for a business to survive an existential threat, and how companies should tackle both the distinct issues and converging risks around income inequality, COVID-19, climate change, and broader issues of systemic inequality.  

This online program – sponsored by BNY Mellon, CLP Group, the Diligent Institute, and Elliott Management Corporation, with university partner Simon Fraser University Beedie School of Business, Centre for Corporate Governance and Sustainability – consisted of four highly-interactive modules that facilitated participants engaging in candid, in-depth, and practical discussions in a conversational non-webinar format over two days. The first discussion asked, "Shared prosperity: What is the role of the compensation committee in addressing income inequality?"

Salzburg Global Seminar would like to thank the Forum's Advisory Committee members for their programmatic advice, insight, and support in leading these conversations. Members include Melissa Obegi (Chair), Stephanie Bertels, Walt Burkley, John J. Cannon III, Bharat N. Doshi, Christopher F. Lee, Simon M. Lorne, and Robert H. Mundheim.

Shared Prosperity: What Is The Role Of The Compensation Committee In Addressing Income Inequality?

One of the board’s crucial functions is determining and setting competitive pay packages to attract and retain key executives. There have been calls for compensation committees to broaden their focus to tie executive compensation to longer-term outcomes and environmental, social, and governance performance; and address compensation across the organization - even in their supply chain.

Income inequality, particularly workforce compensation, has become a flashpoint in the current crisis. In response, there has even been the suggestion that the board compensation committee might play a role in ensuring fair compensation for all employees. Together, Fellows participating in the program asked whether compensation committees should provide oversight across all workforce compensation levels. Participants were asked: Should compensation committees ensure that all workers are fairly compensated for their contributions to value creation? What role should compensation committees play in the case of outsourced or supplier workers?

In many jurisdictions, economic insecurity and inequality have risen in lockstep with the pay awarded by compensation committees to senior management. As a result, there are criticisms that employees do not enjoy an equitable share in the corporate sector's increasing profitability. It may be time to revisit the mandate and work of the corporate compensation committee.

Key Questions for Compensation Committees

What is the appropriate mandate for the compensation committee?

1. Should the mandate of the compensation committee extend beyond determining the remuneration of top executives?
2. Should the compensation committee instead oversee a root-and-branch, firm-wide compensation strategy commensurate with the company’s ambitions?
3. Would doing so enrich decisions that have long been premised mostly on the competition for executive talent?
4. Is the issue pay disparity, or is it more about income insecurity and living wage?  

To what extent does income inequality represent a business risk?

1. What role should the compensation committee play in risk management?
2. To what extent does (and will) the institutional investor focus on ESG (environmental, social, and governance factors) extend to the underpayment of workers?
3. Does worker compensation pose a reputational risk?  (For example, during the COVID-19 crisis, some companies have been criticized for furloughing lower-paid workers without requiring top management also to take pay cuts.)
4. Jurisdictions like the United States and the United Kingdom require firms to disclose or explain pay ratio.  Will that also drive the compensation committee to look at pay across the company?
5. Proxy firms have said they will start voting against compensation committee chairs. Will this drive compensation committee action?  

What would it take to expand the mandate of the compensation committee?

1. What do the different employee-management engagement models globally have to teach one another about how compensation can serve private and public interests?  For instance, while some countries require co-determination (i.e., worker representation on the supervisory board), those companies may invest outside their own countries for cheaper labor. Is there a way to find regionally appropriate ways to put upward pressure on working conditions worldwide?
2. Does reconceiving the compensation committee require global cooperation to avoid a race to the bottom, and if so, what are the prospects for convincing political leadership that labor compensation is not zero-sum?
3. To what extent would a broadening of the compensation committee's mandate, if desired, require exogenous intervention, whether from the public or private sector?

How could compensation committees go about understanding and tracking progress against systemic inequality?

1. Why do recent decades suggest executive compensation is both a one-way ratchet and also uncorrelated with performance?
2. What is the appropriate allocation between fixed and variable compensation models?  Is it the same for every worker?  In every division?  At every level of seniority?
3. Are quantitative measurements adequate to indicate that the committee’s goal(s) have been achieved?  CEO to median salary ratios?  Demographic statistics?  Longitudinal tracking of the stasis or growth of salaries?
4. How might alternative, perhaps even non-quantitative understandings of compensation be incorporated into the committee’s analysis?

Have an opinion? 

We encourage readers to share your comments by joining in the discussion on LinkedIn

The Salzburg Questions for Corporate Governance is an online discussion series introduced and led by Fellows of the Salzburg Global Corporate Governance Forum. The articles and comments represent opinions of the authors and commenters, and do not necessarily represent the views of their corporations or institutions, nor of Salzburg Global Seminar. Readers are welcome to address any questions about this series to Forum Director, Charles E. Ehrlich: cehrlich@salzburgglobal.org To receive a notification of when the next article is published, follow Salzburg Global Seminar on LinkedIn or sign up for email notifications here: www.salzburgglobal.org/go/corpgov/newsletter