This article is a translation of the original that appeared in the Norwegian financial daily Dagens Næringsliv.
C-level salaries are once again a topic for debate. This time around, option-based remuneration for senior leaders of the country's largest companies is at issue (Dagens Næringsliv 3 July 2007).
Twenty years ago, few companies had performance-based remuneration schemes. Today, most businesses have implemented such schemes; which have given us an understanding of what does work, and what does not work. During this period, a number of new methods and solutions have been developed within this area.
Now we have several studies documenting that performance-based remuneration works. These studies not only address the effect on the leader's own performance (which is the one often discussed in the media), but also on the company's ability to attract and retain highly skilled employees. The most crucial point may be the 'tournament effect', ie that attractive c-level salaries encourage employees at lower levels to improve their performance to achieve a future promotion.
On the other hand, it is not difficult to understand why some remuneration schemes attract negative publicity. This is an understandable reaction when there is no obvious link between achievements and remuneration, or when the gap in salaries between leaders and other groups of employees is unreasonably large.
For the same reason, we rarely recommend our clients to introduce option schemes. The strength of option remuneration is that it ties leaders' and shareholders' incentives to one another. However, the obvious disadvantage is that option remuneration does not function as a good mechanism for remuneration when shareholder value decreases in a falling market, or when the increase in shareholder value is independent of the choices made by the management of the company. Today, there are alternative remuneration schemes. The best solution being long-term bonus programmes that connect the leader's - and the employees' - remuneration to the real value they add to the company, so called 'value-based remuneration.
The debate here in Norway will be enhanced if instead of focusing on the remuneration packages of specific individuals, we discuss how remuneration schemes should be designed to reward those who really enhance the shareholder return of their organisations.
