In designing pay-for-performance programs, companies continue to be pressured by outside observers to measure everyone on the basis of standard one- and three-year periods – even if those time frames are irrelevant to their actual business cycles.
A relatively short-term performance window might be appropriate for a fashion manufacturer, but not for a steel manufacturer where the recovery for a major capital investment could be 10, 20 or even 30 years out. If performance-based payouts aren’t directly aligned with the company’s actual business and investment cycle, you’re likely over time to end up rewarding executives for the wrong results.
It’s equally important to calibrate the timing of performance plans to the arc of your company’s talent needs, and these should be broken down by function. In a rapidly-changing discipline like IT, a company may need certain skills over only a short-term period and long-term retention of key managers is not necessarily a good thing. In other areas, long-term seasoning is critical to effective leadership.
Most industries need to be concerned with developing and retaining general management talent for long periods, which calls for structuring pay programs to pay out reasonably steadily over the course of people’s careers. Today’s clamor for more pay-for-performance “alignment” is very short-term focused relative to the job that we expect most managers to do. Even if you intend your pay programs to be career-focused, if executives’ incentive payouts are focused on achieving relatively short-term goals, at the end of the day you’ll get short-sighted behaviors.
A third timing consideration is philosophical: grounding pay programs around how much current performance risk you want to impose on your executives in a given year. If you habitually end up fluctuating between big pay days and empty wallet days, you’ll get a lot of short-term thinking from executives who are simply trying to make their compensation more predictable.
It comes down to a decision whether the company opts to conform to outside pressure from advisory firms and short-term investors for short-term results as they define them, or to consider its own needs and manage both pay and performance for the long-term.
