Harvard Case - Executive Incentive Pay Disclosures at Etsy, Inc.
"Executive Incentive Pay Disclosures at Etsy, Inc." Harvard business case study is written by Mark E. Haskins, Luann J. Lynch. It deals with the challenges in the field of Accounting. The case study is 22 page(s) long and it was first published on : Dec 6, 2019
At Fern Fort University, we recommend that Etsy, Inc. enhance its executive incentive pay disclosures to provide greater transparency and alignment with its long-term growth strategy. This will involve a multi-pronged approach focusing on:
- Expanding the scope of performance metrics: Including metrics beyond traditional financial measures like revenue and earnings per share to encompass key strategic goals like user growth, seller satisfaction, and platform innovation.
- Improving clarity and granularity of disclosure: Providing more detailed information about the specific performance targets, weighting of different metrics, and the methodology used for calculating incentive payouts.
- Strengthening the link between executive compensation and long-term value creation: Emphasizing the connection between executive incentives and Etsy's sustainability, social responsibility, and long-term growth objectives.
2. Background
This case study examines the executive incentive pay disclosures of Etsy, Inc., a leading online marketplace for handmade and vintage goods. The case highlights the complexities of aligning executive compensation with a company's strategic objectives and the importance of transparency in disclosing these arrangements to investors. The main protagonists are Etsy's CEO, Chad Dickerson, and the company's Board of Directors, who are responsible for setting executive compensation and ensuring its alignment with the company's strategic goals.
3. Analysis of the Case Study
The case study presents a compelling analysis of the challenges faced by Etsy in balancing shareholder expectations for short-term financial performance with the need to invest in long-term growth initiatives. The following frameworks can be used to analyze the case:
a) Agency Theory: This theory highlights the potential conflict of interest between shareholders and management. Shareholders want to maximize their return on investment, while management may prioritize their own compensation and job security. This tension can lead to a focus on short-term financial performance at the expense of long-term value creation.
b) Stakeholder Theory: This theory emphasizes the importance of considering the interests of all stakeholders, including employees, customers, suppliers, and the community, in addition to shareholders. This perspective suggests that executive compensation should be aligned with the company's overall social responsibility and sustainability goals.
c) Corporate Governance Framework: This framework highlights the importance of effective corporate governance mechanisms, such as independent board oversight, robust disclosure practices, and strong internal controls, to ensure that executive compensation is aligned with the company's strategic objectives and that shareholders are adequately informed.
4. Recommendations
Etsy should implement the following recommendations to improve its executive incentive pay disclosures:
1. Expand the Scope of Performance Metrics:
- Include non-financial metrics: Etsy should incorporate metrics that reflect its long-term growth strategy, such as user growth, seller satisfaction, platform innovation, and environmental sustainability.
- Align with strategic goals: These metrics should be directly linked to Etsy's strategic objectives, ensuring that executive incentives are aligned with the company's long-term vision.
- Consider a balanced scorecard approach: This approach can help Etsy track performance across multiple dimensions, providing a more comprehensive picture of the company's progress.
2. Improve Clarity and Granularity of Disclosure:
- Clearly define performance targets: Etsy should provide detailed information about the specific performance targets for each metric, ensuring that investors can understand how executive compensation is determined.
- Explain the weighting of different metrics: The company should disclose the relative importance of each metric in calculating incentive payouts, providing transparency about the factors that drive executive compensation.
- Describe the methodology used for calculating payouts: Etsy should clearly explain the methodology used for calculating incentive payouts, ensuring that investors can understand the process and its implications.
3. Strengthen the Link Between Executive Compensation and Long-Term Value Creation:
- Emphasize sustainability and social responsibility: Etsy should highlight the connection between executive incentives and its commitment to sustainability, social responsibility, and long-term growth.
- Consider a multi-year performance period: This can help align executive compensation with longer-term goals and reduce the temptation to focus solely on short-term performance.
- Implement a clawback provision: This provision allows the company to recoup incentive payouts if executives fail to meet performance targets or engage in unethical behavior.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The recommendations align with Etsy's mission to empower creative entrepreneurs and foster a thriving marketplace.
- External customers and internal clients: The recommendations aim to enhance transparency and build trust with investors, while also motivating executives to focus on long-term value creation.
- Competitors: Etsy's competitors, such as Amazon Handmade and eBay, are increasingly focusing on sustainability and social responsibility, making it imperative for Etsy to demonstrate its commitment to these values.
- Attractiveness - quantitative measures: While it is difficult to quantify the impact of improved disclosures on shareholder value, the recommendations are expected to enhance investor confidence and potentially lead to a higher valuation.
6. Conclusion
By implementing these recommendations, Etsy can enhance its executive incentive pay disclosures, improve transparency, and align executive compensation with its long-term growth strategy. This will help ensure that executive incentives are aligned with the interests of all stakeholders, including shareholders, employees, customers, and the community.
7. Discussion
Other alternatives not selected include:
- Adopting a fixed salary structure: While this would eliminate the potential for misaligned incentives, it could also reduce executive motivation and potentially lead to a less competitive compensation package.
- Focusing solely on financial metrics: This approach would be simpler to implement but could lead to a short-term focus and potentially undermine Etsy's long-term growth strategy.
Key assumptions of the recommendations include:
- Investors value transparency and alignment: This assumption is based on the increasing importance of ESG (environmental, social, and governance) factors in investment decisions.
- Executive compensation is a key factor in attracting and retaining talent: This assumption is based on the competitive nature of the tech industry and the importance of attracting and retaining top talent.
8. Next Steps
Etsy should implement the recommendations in a phased approach, starting with the expansion of performance metrics and the improvement of disclosure clarity. The company should then work to strengthen the link between executive compensation and long-term value creation by incorporating sustainability and social responsibility goals. This process should be overseen by the Board of Directors and communicated transparently to investors.
Timeline:
- Phase 1 (Year 1): Expand performance metrics and improve disclosure clarity.
- Phase 2 (Year 2): Strengthen the link between executive compensation and long-term value creation.
- Ongoing: Continuously monitor and evaluate the effectiveness of the new disclosure practices and make adjustments as needed.
By taking these steps, Etsy can ensure that its executive compensation practices are aligned with its long-term growth strategy and that investors are fully informed about the factors that drive executive incentives. This will help build trust and confidence among stakeholders and contribute to the company's long-term success.
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Case Description
The financially savvy (fictional) protagonist in this case is an independent artist, intrigued with the possibility of becoming a seller on the Etsy, Inc., marketplace. As such, she is seeking to learn about the company-that is, its culture, recent history, and incentive compensation philosophy and practices for top executives. The case provides pertinent, publicly sourced information for exploring and discussing such issues. This case is suitable for an undergraduate, graduate, or non-degree executive education course where the focal topic is, in general, performance management, and more specifically, the use and design of executive incentive compensation plans. A valuable secondary objective is to introduce students to some of the company information disclosed in a publicly available corporate proxy statement. That document, filed with the SEC as Form DEF 14A, is filed in preparation for a public company's annual shareholder meeting.
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