Recent economic turmoil has raised noteworthy trends among executive compensation. After two modest years (2008-2009), executive pay in the U. S. skyrocketed and reached an all time high in 2010. The Hay and Equilar executive pay surveys show that in 2010 the average pay package for the head of a large U.S. company was over eight million dollars -- an increase of about 25 percent from the previous year.
Last year, executives were showered with pay of all types -- salaries, bonuses, stock options and stock grants -- but the biggest gain came in cash bonuses. Needless to say, most employees of large organizations did not experience the sizable pay gains that executives did in 2010. All the while, layoffs continued and most corporations tightened their budgets across the board.
There is another trend worth noting. The pay difference between the top and the bottom in large corporations has expanded tremendously since the early 1980s (roughly speaking, it has gone from 100 to 1 to 500 to 1). Some steps have been taken by the government to limit executive pay, most notably mandated shareholder advisory votes on pay programs. However, so far there is no evidence they have made an impact. The new normal with respect to executive compensation appears to be very similar to the pre-recession normal. And it's just not sustainable.
Numerous critics of executive compensation have raised concerns with respect to sustainable organizations and societies when there is a large difference between the best and least well-paid members. The drop in executive pay that occurred in 2008 and 2009 offered the opportunity for corporations to reduce the pay difference between the top and the bottom. 2010 was a window of opportunity to show some restraint in the amount executives are rewarded for improved corporate performance. By giving smaller bonuses and less stock, organizations could have reduced the pay distance between the top and the bottom.
The 2010 rise in executive compensation was largely due to new incentive plans that were designed to reward them, as were their old ones almost exclusively based on the financial performance of their firms. Thus, organizations missed an opportunity to make important changes in the basis for executive incentive payments.
Instead of basing incentive payments strictly on financial performance corporations could have based them on environmental and social performance as well as financial performance. This would have had two very positive effects: focusing executives toward a more balanced set of performance results and in the end ultimately improving the sustainable performance of organizations, and likely reducing the amount of pay that individual executives got -- a win/win.
Although financial performance increased dramatically in 2010, there is little evidence that the social and environmental performance of organizations improved at the same rate or at all. If these criteria were considered to be a part of executive performance, bonuses would have been much lower and less extravagant in 2010, and total compensation for executives would not have made such a dramatic upward movement. In addition, it would have brought home to executives the need for social and environmental performance as it relates to the sustainable effectiveness.
What about the future? It looks as though 2011 is going to be another good year, if you are an executive. Maybe not quite as good as last year, but executive compensation is likely to rise significantly given the positive performance of the stock market so far and the continued improvement of corporate earnings.
Looking ahead to 2012, we will likely be assessing the executive pay levels of 2011 and finding that the pay distance between executives and the rest of their organizations has gotten even greater. We will once again see that executive performance was solely focused on financial performance and that social and environmental performance received little attention. It will not be a positive picture for those who believe sustainable organizations require high levels of financial, social and environmental performance. After all, it's the sustainable organizations that will win in the long run and serve society best.
Cross-posted from Forbes