Balancing Purposeful Complexity & Greater Simplicity in Pay Design
“Where We Are, How We Got Here”

Written by

Ani Huang
President and CEO
Center on Executive Compensation
&
Dr. Charles G. Tharp
Senior Advisor, Research and Practice
Center on Executive Compensation

Over the past few decades, there has been an explosion of criticism of CEO compensation, particularly in the wake of the 2008 financial crisis. The so-called “quantum” level of executive compensation, the apparent lack of a strong correlation between executive pay and performance (often expressed as returns to shareholders), and the correlation between rising pay and wealth disparity have been the main targets of criticism. Many legislative and regulatory measures put forth by critics (see Appendix for a thorough analysis) have significantly increased the complexity of pay and transparency.

To date, these initiatives do not appear to have lowered executive pay or altered the opinions of those who argue that pay and performance are too loosely linked. A new strategy dubbed “simplification” is emerging in response to the perceived inability to restrain executive pay. On the one hand, proponents of the current structure make a strong case that, given all the goals that businesses are required to accomplish, any complexity that does exist is needed and intentional. On the other hand, this may be an opportunity to challenge ourselves and explore alternative ways to structure executive pay.

In other words, the time may be ripe for new thinking and experimentation in the design of executive incentives.

There are three prevailing viewpoints when it comes to simplification: 1. “If it ain’t broke, don’t fix it.” 2. “Radical simplification.” 3. “Executive compensation isn’t broken, but aspects of it should change.”

First, let’s delve quickly into the evolution of pay design: how we got here and why pay plans are so complicated. Then we will review the major voices calling for simplification, a company example of simplification in practice, and the questions management and the Compensation Committee should be asking to assess if simplification is right for their company.