If the reward system is thoughtfully designed and carefully implemented, it harnesses the behavior and performance of everyone in the organization. A badly structured executive reward system negatively affects executives and non-executives. It has serious behavioral and psychological consequences on the executives’ performance and the whole organization. There is no doubt that the executive reward system shapes the overall reward system. The challenge is how to design reward systems that make people cooperative not competitive.
Executive pay should not be associated with the financial performance of the organization, but with the overall value generated by the organization.
Most CEOs receive their reward packages based on the financial returns they deliver to shareholders. How much value has been created to employees, customers, vendors, society and shareholders? The focus should not be only on enriching the shareholders, but on creating value for all stakeholders. Have the executives created value for all stakeholders? The answer must determine the overall executive compensation.