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Pay for Performance: It’s About Strong Corporate Governance

As an Old National Bancorp Board member, and Chair of the company’s Compensation and Management Development Committee, I’m pleased to say that Old National passes the corporate governance and ethics test, as evidenced by five straight years on the Ethisphere World’s Most Ethical® companies list and seven consecutive years of earning the Ethisphere Certification®. But national recognition and awards aside, one of the clearest signals that any organization is ethical, transparent and trustworthy is how it chooses to structure and manage its executive compensation.

screen-shot-2016-12-13-at-11-02-07-amAt the risk of being obvious, informed investors value an executive compensation structure that is fair, transparent and decidedly performance-driven. And investors aren’t the only ones paying attention. When a company’s employees recognize that their senior-most leaders are focused on performance and being compensated accordingly, they are more apt to be mindful of their own performance, which then helps fuel organizational success.

It wasn’t always this way. An article in the March/ April 1990 edition of the Harvard Business Review stated the following: “In most publicly held companies, the compensation of top executives is virtually independent of performance.” Today, however, many publicly-traded companies have a performance-based compensation structure. There is also a greater understanding of how performance-based compensation, when structured and managed properly, correlates positively with long-term value for shareholders.

While Total Shareholder Value (TSV) is the ultimate measure of a publicly held company’s worth, modern investors are also highly concerned about corporate governance, transparency and business ethics.

As a publicly held company, Old National (ONB: NASDAQ) is squarely in the performance-based compensation camp. Equity grants for CEO Bob Jones are 100% performance-driven, and about 70% of his total compensation is performance-based. Compensation for other senior executives is also heavily tied to performance, specifically to TSV relative to Old National’s peer group. And operating results and measurable company results help drive incentives at virtually every level of management.

There is admittedly risk associated with a performance based compensation structure. An executive in a position of control might be tempted to manipulate results and/or make decisions that are not in the best long-term interest of a company or its owners. So how does Old National address and mitigate these risks? In a number of important and interconnected ways.

Full article available here.

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