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The role that compensation and incentives play in developing and nurturing a successful corporate culture is an emerging topic on compensation committee and board agendas. Yet in many boardrooms, that conversation is incomplete: directors must step back and think about the broader context first, before diving into the specifics of pay-plan design. While the board’s primary focus is on the management team, it’s important to have a strong sense of the forms of recognition—monetary and otherwise—that matter to and motivate employees, and how those factors influence culture across the entire organization.
Creating a culture of performance begins with the people—hiring, retaining, developing, and rewarding the right talent. It requires empowering that workforce with the opportunities and resources that create strong engagement, as well as the formal and informal recognition programs that help satisfy the needs for achievement and affiliation. It also requires performance management systems or processes that help define and track progress against business goals and career development plans. Under that umbrella, boards can then examine the total reward systems, including compensation programs and other levers that motivate ongoing success.
Directors and members of management want to attract the right talent to the organization to achieve their business goals—talent that is motived by the desire to develop and grow, become more skillful, and earn greater responsibility over time. Given that premise, there are two key questions boards should ask related to the talent development, career progression, and reward systems that can help define a company’s culture. The first is how do people get ahead in the organization? The second, and perhaps more important, is what stalls or derails careers? Are these “rules” (whether written or unwritten) well-known, well-understood, and applied consistently?
The fact is a company can have a carefully designed compensation program, and employees may be able to recite all of the right mantras about corporate values, but if the way one gets ahead is not by their achievements but by political maneuvering, brute force, or excessive risk-taking then that is what will define the true culture. And that climate will be much more powerful than any pay program.
For that reason, boards and compensation committees need a complete picture of the relationship between compensation as it relates to corporate culture: one that includes both financial and non-financial rewards, and that goes beyond the board’s statutorily-defined responsibility for oversight and compensation of CEO and NEO talent. To support a performance-based culture that drives value, the board must have a clear understanding of how talent below the C-suite is developed and rewarded. It must evaluate and determine if this culture supports the company’s long-term business and leadership strategies and if so, must then ensure there is alignment between compensation programs and other forms of recognition and accolades (see sidebar, Rewards and Recognition), not only in the C-suite, but throughout the organization.
With this level of knowledge and oversight of how the company’s talent management is practiced, the board will then be in the best position to determine supporting compensation philosophies and programs. We believe at that point, in order to support culture, the focus should be on the foundational goals of compensation: attract, retain, and motivate—and then reward.
Boards must ask the right questions to understand what an organization is doing to identify the top performers, develop them as future leaders and to ensure that the employees themselves understand what it takes to be successful and how the organization supports their career progress. On a growing number of boards, compensation committees are taking the lead on these important responsibilities for talent strategy oversight.
In the “2016-2017 Director Compensation Report,” a comprehensive research study conducted by the NACD and Pearl Meyer, it was found that among more than 1400 public companies 17 percent have expanded the name and scope of the compensation committee. These names include: Compensation and Leadership Resources Committee, Compensation and Talent Management Committee, Compensation and Leadership Development Committee, and even the Culture and Compensation Committee. Changes to committee names and charters can send a powerful top-down message about the board’s focus on talent development across the organization.
Further, a recent global survey, “Are Boards Creating a Leadership Culture,” conducted by Pearl Meyer and the WomenCorporateDirectors Foundation asked if boards had delegated formal responsibility for leadership and/or talent development to the committee level. Among those who had, 57 percent had taken the additional step to modify the committee’s charter and 18 percent had modified the committee name to reflect this broader scope of oversight.
The 2017 NACD Blue Ribbon Commission has outlined four attributes of a healthy corporate culture: alignment, accountability, transparency, and resiliency. We believe a strong, unified talent development and compensation philosophy that serves a healthy culture also has those characteristics.
Here we align questions for the full board and the compensation committee to review with three of the major corporate elements identified in the graphic Culture as a Unifying Force on page 10 of the report: talent and leadership development, recognition and reward systems, and goals and targets. We believe these are the areas that can be most directly affected by compensation. If pursued, each of these questions can help the board achieve a clearer picture of how compensation can influence the organization’s culture. (See sidebar for examples of cultural “red flags” related to compensation, recognition, and rewards.)
Talent Strategy and Leadership Development
Performance Management, Rewards, and Recognition Systems
Goals & Targets
As boards think about nurturing a culture through compensation, it too can be helpful to bear in mind the importance of rewards and recognition, and the subtle but important difference between the two.
Consider this example of a strong link between a company’s culture and its compensation programs—its tangible rewards. An organization’s overarching mission is to deliver unparalleled manufacturing quality. The teams responsible for quality are stable in terms of turnover and consistently report high levels of employee engagement. HR understands the criticality of these roles and ensures high flyers and top recruits in the discipline are consistently paid above median. The teams regularly meet or exceed goals and achieve above target incentive payouts. Executive compensation programs clearly reflect the importance of quality to the business strategy.
While recognition can also include monetary rewards, it is more geared to honoring professional achievement and/or milestones and helps build affiliation within an organization. An example of cultural and total rewards alignment based on recognition is an electronics design firm where innovative technology is central to the organization’s value proposition. Engineers are critical to the success of the company. There is consistent and widespread recognition in the engineering discipline and teams or individuals are routinely recognized internally at quarterly meetings with awards for new ideas, scientific breakthroughs, or filed patents and given due externally via a recurring feature on the corporate website.
As directors become more cognizant of the corporate culture and the board strives to more deeply understand the role of total rewards and executive compensation programs, they should likewise be aware of potential red flags—signals from the organization’s talent management approach and pay philosophy that could hint at a potentially negative cultural issue.
While not necessarily indicating a problem, the following circumstances are examples that do at least warrant further investigation by the board to ensure they are not indicators of a counter-productive culture.