Alignment in exec pay

There's a lot of commentary from a lot of sources these days arguing against a shareholder-centric corporate governance model. So far, the commentary is far ahead of any policy, and certainly in the US there is scepticism about the motives of those - like the Business Roundtable - who have almost overnight become advocates of a more stakeholder-orieted model.

One thing that, as far as I am aware, hasn't been discussed in detail is what all this means for executive pay. I raise this because the dominant ideas relating to executive pay in markets like the US and UK are derived from agency theory, and the version of agency theory that is applied envisages the boards of companies as agents of shareholders. Leading on from this, pay is structured in a way that aligns directors' interests with those of shareholders. Hence there is a lot of emphasis on both variable pay and equity.

But if we are looking at a future in which other stakeholders are also part of the governance of companies, and in which directors' duties are no longer conceived as being solely owed to shareholders (and thus directors are not agents of shareholders) this seems open to challenge.

If pay was aligned with the interests of the workforce, for example, it would surely have a much lower variable element and more emphasis on fixed, though perhaps also expanded short-term profit-based awards (provided these are shared across the workforce).

In addition, questions about how executive pay is decided and approved might also be contestable once more. After all, if directors are not solely accountable to shareholders the fact that only shareholders vote on who they are remunerated might seem a little outdated.

So I could imagine quite a shift in various aspects of pay - provided that the nature of corporate governance itself changes.