Sit in on a compensation committee meeting some time, and watch how the room treats time.
When the subject is the chief executive's long-term incentive plan, the conversation is remarkable. How long should the performance period be? Three years, or does three years encourage the wrong decisions in year two? Should vesting cliff or ratchet? Should there be a holding requirement after vesting, and for how long, and does that requirement survive retirement? What happens to unvested awards on a change of control? Should deferral be elective, and if it is, what does the tax treatment do to the incentive at each election point?
This can absorb an afternoon. It absorbs the afternoon because everybody in the room understands, without needing it explained, that when value is delivered and how long it is held are not administrative details. They change what the award actually is. Two grants of identical face value with different time architecture are different instruments.
Later in the same meeting, the salary structure for the other five thousand employees is approved. The conversation is about a percentage.
What the contrast proves
I want to be careful here, because there is an easy version of this observation that is about executive pay levels, and that is not the point I am making. The point has nothing to do with how much anyone is paid.
The point is that the profession has already demonstrated it knows how to think about compensation across time. Rigorously. At length. With real analytical machinery behind it. We do not need to be convinced that time is a design variable, because we act like it is one every year, for five people.
The Executive Exception. The field's demonstrated rigour about pay's temporal architecture for the top five employees, and its silence about it for the other five thousand.
This is useful because of the objection it removes. When you suggest that compensation should be evaluated by what arrives rather than only by what is paid, the first response is usually that this is impractical, or academic, or somebody else's discipline. The Executive Exception makes that answer unavailable. It is not impractical. There is a whole consulting industry doing it. It is simply not being done for most people.
Why it happened
The uncomfortable part is that there is a coherent reason, and the reason is not indifference.
Executive compensation became temporal because of pressure. Say-on-pay votes, proxy advisers, disclosure rules, institutional shareholders, and a long public argument about short-termism after 2008. External parties with actual leverage demanded that awards be structured across time, and so awards were structured across time. The rigour is real, and it exists because somebody was asking.
For everybody else, nobody was asking. There is no proxy adviser for the salary structure. No one votes on whether the savings plan survives a job change. The employee who would most benefit from the question being asked is not in the room and does not know the question exists.
So the temporal machinery got built exactly where it was demanded and nowhere else. That is not a conspiracy. It is what happens to any profession when its incentives to think hard about something are concentrated in one narrow place.
The version for everyone else
What would it look like to extend the same thinking downward? Not the instruments, which are wrong for the purpose, but the questions.
Executive design asks: over what period is this meant to work? What has to be true for it to pay out? What happens to it if the person leaves? How long must it be held before it converts? Those questions transfer almost unchanged.
- What horizon is this element for? Salary funds the life being lived now. A savings match funds a life forty years away. Recording those two as members of the same category is how the difference disappears.
- What survives departure? An executive award has a precisely specified answer to this, negotiated in advance. For most employees the answer is unwritten and, in practice, often unfavourable.
- What is it denominated in? Executive awards are frequently denominated in something other than cash, and everybody understands the denomination is part of the design. Below that level, everything is cash, and nobody treats that as a choice.
- What arrives? The one question the executive process asks most seriously, and the one almost nothing else asks at all.
None of that requires giving anyone equity. It requires asking, about the compensation of ordinary employees, the questions the field already knows how to ask about the compensation of five of them.
The line that should be uncomfortable
I have started using a version of this in talks, and it lands differently in a room of practitioners than almost anything else in the argument, because it is not a criticism from outside. It is a description of a Tuesday.
Rigorous about time for five. Silent for five thousand.
The reason it stings is not that anyone chose it. It is that nobody did.