Bonuses to executives for financial results, a socially irresponsible practice?
Traditionally, creating shareholder economic value has been the crucial factor in setting executive salaries. However, some suggest that compensation schemes should also include non-financial social responsibility objectives.
Executive pay is a delicate issue because it constitutes a key point of corporate governance , the discipline that aims to minimize the divergence of interests between the owners of the company and its managers. Salary is a way to align executive behavior with the interests of the organization. It is assumed that the more prepared and experienced an executive has, the more he or she should opt for higher incomes. But this assumption does not measure ethical, social and responsibility parameters.
Typically, compensation systems have been dominated by “agency theory,” which proposes a positive relationship between the manager’s income and the company’s results.
According to this theory, to encourage executives to defend the interests of shareholders, it is necessary to impose a high variable remuneration scheme based on the financial results and stock market value of the company.
However, although agency theory is the dominant compensation paradigm, there is no conclusive evidence regarding its ability to promote organizational success. In fact, experience indicates that sometimes the opposite occurs, that is, the executive takes a position and acts influenced by his final goal, which may be to achieve – whatever – good financial indicators to influence the valuation of the company. company that stock market analysts are doing.
In fact, some researchers attribute corporate scandals to excessive zeal in maximizing shareholder value without taking into account their effects on other interest groups.
In scandals such as Enron in the USA and La Polar in Chile, highly paid executives in schemes based on agency theory greatly harmed employees and shareholders, in some cases going so far as to hide information, have double accounting and provide inaccurate information. to suppliers, clients and auditing companies.
Thus, business ethics and corporate social responsibility entered the debate on executive compensation.
Following the corporate scandals, many of the flaws in traditional compensation schemes came to light.
Indeed, compensation based exclusively on financial performance indicators usually generates short-term incentives that can harm the sustainability of the organization through neglect of relationships with stakeholders .
Thus, in recent times, proposals have emerged to link executive remuneration to the value created for the organization’s different interest groups.
Socially responsible companies enjoy a greater reputation in the market and are more likely to grow sustainably.
In this way, adding social responsibility objectives to strictly financial indicators can be a good way to align the actions of executives with the sustainability of the company.