By Dr. Gijs van Bussel and Jasmine De Clerck

In the wake of the financial crisis, we’ve reached an inflection point: Companies are expected to prioritize the management of People, Planet, and Profit. But are actions supporting this expectation? Are corporate leaders being held accountable for successfully achieving the balance?

To answer these questions, a research team at Borderless—the Brussels-based leadership consultancy and executive search firm—surveyed international senior executives in roles at the top three levels of their organizations. Borderless researchers, led by Consultant Jasmine De Clerck, worked in collaboration with Dr. Gijs van Bussel, Professor at Nyenrode Business University and partner at PwC’s Human Resource Services practice in the Netherlands.

“If it’s true that compensation drives behavior, then we wanted to know to what extent organizations are transforming financial packages and benefits to support today’s expectations of corporate leaders,” said Ms. De Clerck. “Our research showed that despite years of talk about corporate social responsibility based on the ‘planet, people, and profit’ ideal, there is still a clear mismatch in aligning management compensation structures.”

Three key conclusions were drawn:

  1. Short-termism Trumps Corporate Social Responsibility
    The prevailing view in terms of awarding variable compensation seems to be short-termism.

    “When asked about their variable compensation—cash bonus, stock options, shares, etc.—participants responded that it is most often linked to their short-term impact on the business—that is, financial results and reaching strategic milestones within three months to a year,” explained Ms. De Clerck. “To a much lesser extent it relates to people and planet issues such as employee engagement and motivation, environmental footprint, reputation, brand, innovation, and other corporate social responsibility (CSR) measures.”

    Interestingly, close to 28 percent of respondents felt that their variable compensation is at least partially a pure retention bonus. And almost half stated that they don’t have a long-term (5–10 year) incentive.

  2. Words Aren’t Necessarily Backed by Actions
    Opinions are clearly divided as to whether the CEO is rewarded for the long-term viability of the company from a profit, planet, and people perspective: one-quarter of executives answered positively, one-quarter negatively, one-quarter replied “to an extent,” and one-quarter simply did not know.

    “Moreover, only a minority of the surveyed companies reported having CSR objectives tightly linked with compensation,” said Ms. De Clerck. “Even if C-level executives were ‘walking the talk’ on these issues, actions are not clearly disclosed and rigorously demanded. Although each annual report today talks about the effect of the company’s activities on the environment and its key stakeholders, there is no clear link to the CEO’s remuneration in these domains.”

  3. Transparency to Relevancy: Not There Yet
    “We were surprised to find that the international movement promoting the shift from ‘transparency to relevancy’ in disclosures within compensation reporting does not seem to have taken off in the companies who responded,” said Ms. De Clerck.

    As Dr. Gijs van Bussel pointed out: “It is not good enough to simply list all of the data in the report. Companies should ask: What is the relevancy of this data for our stakeholders? Can our stakeholders easily discern whether or not we pay for performance or retention from the data presented in the report?”

    There was a clear difference in responses from privately- and publicly-owned companies. Sixty-seven percent of respondents in public companies said that the compensation packages of board members and the executive committee are clearly communicated in the annual report, whereas only 22 percent of private company respondents agreed.

    “For private companies in particular, what message do you send when you don’t go beyond the minimum legal requirements of reporting? What if you want to promote pay-for-performance as a value in your company? How credible is your message if you are not seen to be setting the example from the top? There is no reason for privately-owned companies not to consider implementing best practices in transparent communication when it comes to pay and performance,” added Ms. De Clerck.

The Evolving Landscape of Executive Compensation
As more emphasis is placed on how executives perform and how that performance is rewarded, it is clear that we are not yet where we aspire to be. The International Integrated Reporting Council (IIRC), set up in 2010, aims to define standards for a new format of annual reports that shows the short-, medium-, and long-term effects of strategy, governance and performance on value creation in terms of both financial and nonfinancial capital, such as talent, natural resources, and intellectual property.

“We believe, in the same way that several internal control scandals provoked new codes for corporate governance, the financial crisis will lead to the adoption of more robust reporting standards like that being created by the IIRC,” said Els De Cremer, Managing Director, Borderless. “This transparency would allow investors and prospective employees to understand how companies are investing their (leadership) capital and how they are setting the stage for their business to succeed responsibly, today and tomorrow.

“Transparency, relevancy of what is communicated, and congruence in corporate values lead to sustainable results in more ways than one.”

Borderless has a unique approach to international executive search. The firm finds and attracts talented senior-level executives for multinational companies in the process and converting, life sciences, environmental technologies and food processing sectors. For more than a decade, Borderless has been identifying leaders to assume roles on boards and in senior management, finance, human resources, administration, marketing and sales, operations, logistics, and R&D,
as well as a range of specialist positions.
http://borderless.net.