The Trouble With Stock Compensation

Paying outside board members with equity grants is becoming increasingly popular. Unfortunately, new research suggests that it leads to companies with less socially responsible behavior. This investigation comes at a time of public outcry over business actions that have had a negative impact on societal and environmental interests, including BP's oil spill in the Gulf of Mexico in 2010 and the 2008 financial crisis.

Research into social performance ratings and director compensation data for more than 1,100 U.S. public companies between 1998 and 2006 showed that while companies with high levels of outside director stock compensation in a given year exhibited higher financial performance in later years, “they also showed lower levels of responsibility to communities as measured by their charitable giving, relations with indigenous peoples, community employment and economic development, and support for basic public services,” write Yuval Deutsch and Mike Valente (both of Schulich School of Business, York University). A similar effect was evident with environmental performance and with human rights measures.

The findings suggest that paying outside directors with stock incentivizes them to ignore other stakeholders.

“Our findings suggest that there is a need to investigate more creative compensation arrangements that better reflect the complexity associated with addressing multiple and oftentimes contradictory interests simultaneously,” write Deutsch and Valente. They suggest greater board diversity coupled with compensation schemes that motivate directors to protect the interests of a broader range of stakeholders.