1. The performance yardstickÂ
Financial performance measures play a key role in determining executive pay. We think companies should broaden those performance targets to include the long-term value generated for all stakeholders, not just short-term operational goals. Â
On the financial performance side, one yardstick is the Long-Term Investor Value Appropriation (LIVA) framework, which uses share price data to calculate long-term value creation, or destruction, for shareholders.  Â
LIVA reflects actual cash returns over time from share price appreciation, share buybacks and dividend payouts from holding shares in a company, minus the opportunity cost of investing in that company. For example, if you bought $10,000 worth of Apple shares in 1984 when it launched its first Mac computer, you would be $3.8 million richer today. Therefore, Apple’s LIVA over this period is $3.8 million.  Â
 While it’s possible to measure non-financial performance, the lack of reliable data makes it harder. One option is to use the Impact Weighted Accounts (IWA) framework, which puts a monetary value on a company’s societal impact, such as its carbon emissions. This allows for a more direct comparison between financial and non-financial performance. Taken together, the IWA and LIVA frameworks can be used to gauge long-term stakeholder value creation.Â
2. Linking performance to payÂ
When it comes to embedding such performance data into executive pay plans, it can help to set KPIs that are specific to the organization – such as the environmental footprint of an airline, or worker health-and-safety for a mining company. This ensures the C-suite has a financial incentive to protect its stakeholders.Â
But it’s important that the compensation model includes both fixed annual pay and a longer-term incentive. Most compensation packages come with “absolute goals”, meaning the executives need to hit a specific number to get their bonus. But these targets usually have a one-year horizon. Even when bonuses are paid based on relative performance, say compared to peer companies, the average time horizon is just three years.  Â
All too often, the prevalence of short-term bonus plans leads to manipulation by executives who try to “game” their remuneration, often to the detriment of shareholders. For example, executives may delay certain payments or investments in research and development (R&D) to keep cash flow targets alive until after they get their bonus.Â