Relating Economic Value to Executive Compensation

The last financial crisis revealed a mismatch between performance compensation and the creation of short- as opposed to long-term economic value, with no well-defined criteria for the connection between the two. The chapter looks at the current state of the art with particular reference to total shareholder value (TSV), and systems for employee participation in the ownership of companies. Are stock options the best way for doing this or not? Also discussed are the measures for relating compensation to value, such as the Chartered Financial Analysts’ Institute (CFA) call for simpler cash measures, like free cash flow. Finally, the ethical implications for compensation related to economic value are discussed, and the need for better annual reporting of value related compensation.