The goal of almost every organization is to cultivate a work environment that inspires employees, impresses shareholders and drives consistent growth. However, if a company’s corporate governance and executive compensation program are misaligned, attaining workplace harmony can be difficult.

When governance and compensation programs aren’t in unison, low employee morale, poor stakeholder confidence and underwhelming revenues can emerge. The results of which can be devastating. One recent study found that in 2022, the overall cost of voluntary employee turnover amounted to over $1 trillion in the US.

Aligning a corporation’s governance and their type of compensation strategies helps prevent employee trust from eroding and encourages your team to propel corporate goals forward. 

In this article we’ll explore the basics of corporate governance and executive compensation, the benefits of keeping the two in alignment, and share tips on how to connect them.

What is Corporate Governance?

Corporate governance includes the set of rules and practices that a company uses to guide its decision-making processes. The purpose of corporate governance policies are to ensure the company has the right framework to act in the best interests of all stakeholders and for promoting the core values and mission of the organization. 

Corporate governance policies are used for establishing a clear hierarchy of decision-making, to define roles and responsibilities of their people as well as define the policies and procedures to promote core values and ethical behavior.

A business’s corporate governance documents typically include how an organization approaches:

• corporate strategy
• ethical behaviors
• environmental awareness
• compensation packages
• risk management

Who Should Develop a Corporate Governance Policy?

The senior executives, chief financial officers, or board of directors are typically the people responsible for establishing the corporate governance documents and policies for an organization. However, to ensure unbiased and fair guidelines are created, companies often enlist help from external human resource consultants for assistance with the development and implementation of corporate governance policies.

What is Executive Compensation?

Executive compensation are the policies, practices and procedures a company uses to determine how much to pay its top executives, such as the CEO and other senior leaders. These policies outline the structure of executive pay, including the types of compensation offered, such as salaries, bonuses, stock options, and other incentives.

Ideally, executive compensation packages should be developed in accordance with the company’s corporate governance documents. However, oftentimes the two become misaligned due to internal pressures, influence from compensation packages at other companies, or budgetary constraints.

What is the Relationship Between Corporate Governance and Executive Compensation?

Corporate governance and executive compensation are closely linked. 

This is because executive compensation policies are a key component of a company’s governance framework. Executive compensation policies, on the other hand, determine how much a company pays its top executives and how that compensation is structured.

The benefit of having  governance and compensation policies in alignment is they will work in tandem to promote transparency, accountability, and fairness within the organization. 

Alignment Creates Long-Term Value

For example, a company with strong corporate governance policies will have clear guidelines for executive compensation that promote long-term value for shareholders and are tied to the employee’s overall performance. This is a great way to ensure that executive pay is based on merit and is not excessive or unjustified.

Misalignment Erodes Trust

On the other hand, if a company’s executive compensation policies are misaligned with its corporate governance framework, it can create feelings of mistrust and lead to poor accountability and conflicts of interest. 

This can erode employee morale and stakeholder confidence, ultimately harming the company’s financial performance and reputation.

4 Benefits of Aligning Executive Compensation Structure with Corporate Governance

When corporate practices are balanced in accordance with corporate governance policies, your company is better able to leverage the following seven benefits:

Attract Top Talent

Attracting executive talent that can further a company’s aims and achievements can be less challenging for businesses with well-balanced compensation structures and governing practices.

When potential employees see that a company has a strong governance framework and a clear approach to executive compensation, it can help to build trust and confidence in the organization. 

Increase Employee Retention

Transparent compensation policies can help increase employee retention. This is because when an employee can predict and manage compensation expectations, it helps drive pride and confidence in their employer, causing them to stay longer with an organization.  

This can be particularly appealing to candidates who are looking for a company with a strong ethical foundation and a commitment to long-term sustainability.

Develop Trust

Building trust with your team takes time, consistency and a clear understanding of where accountability lies as well as honest communication. Aligning executive directives with established pay structures helps employees trust their employer as it’s clear that compensation is fair, performance-based and other defined protocols.

Increase Corporate Accountability & Public Perceptions

Corporates are accountable to their employees, shareholders, customers and even the public. When a company’s compensation practices mimic its core values and established governance documents, they’re better able to demonstrate corporate responsibility and accountability.

7 Tips to Align Executive Compensation and Corporate Governance

Here are some tips to align corporate governance and executive compensation policies:

• Establish clear governance policies that promote transparency, accountability, and ethical behavior.
• Develop a comprehensive executive compensation policy that is tied to the company’s overall performance and aligns with the governance policies. Enlist the help of trusted compensation consultants.
• Ensure that executive pay is reasonable and fair, based on industry norms, IRS regulations, and the company’s financial health.
• Provide regular updates and reports on executive compensation to employees, shareholders, and other stakeholders.
• Create a culture of transparency and fairness by involving employees in decision-making processes and soliciting feedback on governance and compensation policies.
• Ensure that the board of directors is independent and has the necessary skills and expertise to oversee the company’s governance and compensation policies.
• Review and update governance and compensation policies regularly to ensure that they remain aligned with the company’s goals and values.

Foster Corporate Governance with Executive Compensation Alignment with JER HR

Nurturing work environments that fulfill corporate objectives and employee expectations can seem like an uphill battle at times. However, by aligning corporate governance policies with executive compensation practices, your company will easily get ahead of the game.

At JER HR, we help companies of all sizes and industries to cultivate healthy workplace cultures by providing expert consulting on corporate governance policies, executive compensation packages, and more.