On compensating directors...

Should directors receive performance-based pay for their contributions?

This is an interesting question. Performance-based pay has become commonplace amongst senior executives and sales staff in the last decade or so. The model is straightforward: perform well (by achieving agreed objectives) and get paid a commission, be awarded stock or receive recognition via some sort of bonus. Performance standards are generally set by a more senior manager. The system seems to work reasonably well. However, an increasing trends in recent years is the implementation of similar performance based reward systems in the boardroom. But is this smart? Do performance-based pay systems motivate the "right" behaviours amongst directors?

Whereas management and staff are directly responsible for implementing strategy and achieving performance goals that are determined by a more senior party, the Board is not. In addition to their role being quite different (to determine strategy, monitor performance and manage risk), the link between what Boards do and company performance is tenuous, at best. Simply, we do not understand how Boards contribute to performance. Further, Boards are endogenous—they largely set their own agenda and determine the company's objectives. In establishing performance-based pay systems for themselves, Boards are immediately conflicted. One way of ensuring performance-based payments are made is to set artificially low targets (for example). I'm not sure this is a good way of maximising company performance, or motivating healthy behaviours, but it is a way of being paid(!)

My preference is towards rewarding directors through fixed fee payments for their contribution. If they are contributing, they receive their fee. This would be the default. However, if they are not contributing effectively, this should become known through a formal Board review process. Shareholders should have access to review documentation, and only re-appoint directors that are contributing. 

This sounds remarkably easy on paper, however the topic of today's muse is hotly contested amongst practitioners and academics alike. What's your view?