How can compensation committees uncover performance metrics that align with strategy and give clear guidance to management teams on achieving success?
Q. Pearl Meyer has led us into this “Age of Alignment” and the practice of linking compensation and business strategy. What are some approaches boards can take for developing strategically-aligned pay programs?
A: Well first we know that boards today are asked to walk a fine line between oversight and management, and business strategy is one of those key areas where there is significant on-going discussion between the two groups. However, a strategy is only as good as management’s ability to execute. That’s where the board can effectively use compensation to guide outcomes. But this is key—the program has to be structured with metrics that have line-of-sight, in other words, clear visibility into those areas that the leadership team can and should affect, in order to drive behaviors.
Q. How can compensation committees uncover the right metrics with line-of-sight?
A: It’s about prioritizing objectives; outlining which of those will drive value this year, mid-term, and long-term; and uncovering the determinants of success. Those might involve look-back financial goals like profit, return on invested capital, or operating margin—or they might be tied to leading indicators of growth or innovation, such as new product introductions or a more efficient global distribution system. It really depends on the strategy. At this point, with the right mix of value-drivers identified, performance metrics can be clearly tied to actions taken by the executive team.
Selecting actionable metrics, with good line-of-sight and that align to the business strategy, will lead to long-term shareholder value creation.
