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Vince Molinaro is managing director of the leadership practice at Toronto-based Knightsbridge Human Capital Solutions and the author of The Leadership Contract.
Vince Molinaro is managing director of the leadership practice at Toronto-based Knightsbridge Human Capital Solutions and the author of The Leadership Contract.

LEADERSHIP LAB

The warped math of executive compensation Add to ...

This column is part of Globe Careers’ new Leadership Lab series, where executives and leadership experts share their views and advice about the leadership and management issues of today. There will be a new column every weekday. Follow us at @Globe_Careers. Find all Leadership Lab stories at tgam.ca/leadershiplab.

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When Tim Cook took over as chief executive officer of Apple Inc. in 2011 – just a month after the company’s co-founder Steve Jobs died – he was provided with lucrative stock options that, once fully vested, would be worth more than half a billion dollars.

Hardly anyone blinked at the generosity of the Apple board of directors. Apple is one of the world’s most successful companies, and Mr. Cook certainly had some big shoes to fill.

Even so, with Apple’s stock still languishing well below peak levels, Mr. Cook this past year asked his board to rewrite the vesting schedule for those options so that they were tied to performance.

When all is said and done, Mr. Cook will lose $4-million (U.S.) in stock awards. In its filing with the U.S. Securities and Exchange Commission, Apple said Mr. Cook’s decision was designed to “set a leadership example in the area of CEO compensation and governance.”

We need not weep for Mr. Cook; he will still collect $4.25-million in salary and bonuses this year. And previously realized stock options have increased his wealth by hundreds of millions of dollars. However, his decision to forgo a significant portion of his total compensation this year certainly makes a statement.

Mr. Cook’s gesture raises the question: Why aren’t more executives demonstrating real leadership by connecting their pay with their company’s performance?

The basic math of executive compensation is getting more and more attention these days. From the “golden hellos” – the lucrative incentives used to recruit top executives – to guaranteed annual bonuses and exorbitant severance or retirement packages, the gaze of the business world is firmly fixed on the size and structure of executive pay.

Advocates for exorbitant salary-and-bonus packages claim, with some justification, that the highest-paid executives often produce the best financial results. Critics respond that too many bonuses are paid out automatically, without any connection to actual performance. There are also concerns about ostentatious, predetermined severance packages, especially those paid to executives who have been considered abject failures.

Despite the lack of consensus, you can see evidence that more executives, and more boards, are making the connection and taking action.

Barrick Gold Corp., for example, is considering new compensation rules that would force executives to hold stock options until retirement. The heads of Barclays Bank PLC and UBS AG have both in the past year refused bonuses based on scandals and poor performance. Microsoft Corp. CEO Steve Ballmer has been docked bonus pay for two years based on the company’s sluggish performance. And the board of Nokia Corp. has been locked in a nasty, very public dispute with outgoing CEO Stephen Elop, having asked him to return his guaranteed $25-million golden parachute.

It seems likely that senior executives are going to be asked to show some courage on the issue of compensation. In particular, they are going to be asked to make sure they are taking only what they deserve based on performance.

Why would a top executive consider refusing bonuses or severance payouts? There are a number of potential benefits.

For your employees. Showing leadership on compensation can send a strong message to your employees that you stand with them during tough times. There is nothing more demoralizing for a work force than to see gaudy executive bonuses paid out despite poor overall performance. Refusing bonuses shows that executives are devoted to long-term success, not short-term plundering.

For the markets. Investors have become more outspoken on the issue of executive compensation, correctly viewing it as an issue of corporate governance. The insistence of some companies to offer outrageous guaranteed bonuses that are not tied to performance is quickly becoming a warning sign that has and will continue to affect investor appetite.

For your organization’s brand. In the wake of the 2008 global financial market meltdown, there is a heightened sensitivity around executive compensation. This is forcing some companies to change tack purely in response to general opinion. That’s not a bad thing. Your organization’s reputation is one of its most important assets. Having executives who are poster boys or girls for avarice can never be good for business.

No one can say with any real certainty how much a top executive should be paid. Leading an organization is not an easy job, and very few executives are up to the task. And over the past five years, it’s become an even tougher job thanks to the continuing uncertainty about when, or if, we’ll see a real recovery.

However, everyone from investors to rank-and-file workers has grown weary of the image of business leaders taking more and producing less. Yes, top executive talent comes with a hefty price tag. However, along with that hefty price should come hefty expectations.

Real leaders know that there is nothing wrong with negotiating a generous salary and bonus package. As long as you go out and earn it.

Vince Molinaro (@VinceMolinaro) is managing director of the leadership practice at Toronto-based Knightsbridge Human Capital Solutions and the author of The Leadership Contract.

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