Does your board compensation reflect board value? V2

Does your board compensation reflect board value? V2

What is the purpose of this article?

Enable investors, the board directors, and management to discuss the board’s impact on value creation and related compensation.

This article is focused on for-profit company boards, not: charities, government entities, or not-for-profit organizations.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

What are the critical learnings in this article?

Let’s assume your company has the principle that value creation is reflected in compensation.

CEO compensation can range up to $100 of millions per year.
At the June 13, 2024 Tesla Annual General Meeting, shareholders were voting on Elon Musk’s $56 billion compensation package (yes – $56 billion).
Many C-Suite and senior executives make millions of dollars a year.

What does board compensation look like in one of Canada’s largest public companies?

This is a typical situation. I won’t mention the company name, which could distract the conversation.

The CEO compensation is more than $10 million per year.
The CEO compensation is about three times the total compensation of the board.
The average director compensation in this company is what a successful MBA graduate would make in their third year in a tier 1 strategy firm.

What is the relationship between board compensation and value creation?

Do the differences between board compensation and management compensation reflect:

The board having little impact on value creation?
The board has decided to allocate the bulk of its value creation impact to others in the company’s ecosystem e.g. executives?
The boards of large companies view their contribution as charitable or giving back to society?
Or something else?

The ability of talent to create value in a specific company is impacted by several factors, including:

Let’s not forget luck.

Why should you focus on value creation?

I’ve seen countless companies that that talk about strategic objectives, strategic initiatives, strategic etc. I’ve seen these achieved, while value creation is poor, and in some cases the company fails and goes out of business.
This is one of the reasons I talk about value creation plans and not strategies. A discussion about “successfully achieving a strategy” is very different from a discussion about “successfully achieving value creation”

What are your next steps?

Define the words/concepts you’re using, in a glossary. I’ve seen major confusion when the same words mean different things to different people.

Discuss and agree upon:

Does the board of directors have ultimate authority? If not, who does?
Does the board of directors have ultimate accountability for your company’s performance and value creation? If not, who does?
If your company has controlling shareholders (e.g. private equity, voting trust, unanimous shareholders agreement) do they have ultimate authority and accountability for company performance and value creation? If not, who does?
What does accountability mean? If the people with accountability have poor personal performance, what are the implications for those people?
What are the principles used to determine the value creation of each person in the company, including board directors?
What are the principles used to determine how much of each person’s value creation should be in their personal compensation vs allocated to others?
What is your company’s overall value creation plan, metrics/KPIs (Key Performance Indicators), process for setting value creation targets, and process for tracking results.
What % of your company’s pre-tax profits are allocated to: the board of directors, each director role, and each role in the C-Suite?
Based upon the above, discuss the compensation of the board relative to their value creation. And do a benchmark comparison with other companies.
Based on the above, discuss the potential for value creation in director roles, and the implications for the director capabilities.

What further reading should you do?

Professor Dieder Cossin and Estrelle Metayer “Does your board really add value to strategy?”, IMD Global Board Center

First sentence in the article is “Boards are ultimately responsible for the long-term success of their organisations.”

Jeff Bezos 2020 letter to shareholders – his final one. He quantities value creation in financial terms for some members of Amazon’s ecosystem.

“Traditional corporate governance dooms your company to failure”, Koor and Associates

“Is your company planning to fail?”, Koor and Associates

Koor and Associates