The Modern Risk Review
Executive compensation can be a sensitive issue at the best of times, but particularly when governance failures allow executives to realize substantial rewards in cases of gross misconduct or shortsighted decision-making. From headlines of Enron executives siphoning away millions of dollars ahead of the company’s collapse to outcry over major financial institutions paying massive bonuses […]
Deborah Beckmann is a Managing Director, Phillip Pennell is a Principal, and Mia Schiel is a Senior Associate Consultant at Semler Brossy LLC. This post is based on their Semler Brossy memorandum.
Executive compensation can be a sensitive issue at the best of times, but particularly when governance failures allow executives to realize substantial rewards in cases of gross misconduct or shortsighted decision-making.
From headlines of Enron executives siphoning away millions of dollars ahead of the company’s collapse to outcry over major financial institutions paying massive bonuses for behavior that was seen as the cause of the 2007-2008 financial crisis, the consequences (and media coverage) can be extensive, often attracting the attention of regulators. In response to public outcry after 2007-2008, the SEC introduced a new rule in 2010 requiring companies to review their incentive policies for material adverse risks.
Today, the “risk review” is standard practice across all major public companies in the United States. Still, we continue to see disruptive corporate scandals that are perceived to be, at least in part, due to behavior incentivized or enabled by pay program design. These events highlight that not all risk review processes are effective and underscore the importance of having a risk process that is effective. We reviewed 10 recent high-profile scandals to understand the role compensation programs played in creating or exacerbating them. We identified lapses in at least one of the following three areas across all our case studies.
