Transcript
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"Today I'd like to discuss a very pressing issue for a majority of the companies I work with: developing an appropriate compensation philosophy. What is the pay level that you want to reward your executives? What is the pay mix that you want to employ as part of your compensation program? And what level of alignment should your compensation have with performance? |
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If I can, I’ll go into a little bit more detail about those three buckets of pay philosophy. Pay level—I mean not just the amount of pay, but also the level of differentiation you want in your pay program. Pay mix—what is the mix of short-term pay, long-term pay? How much pay do you want in cash compensation versus how much pay you want in equity compensation? Then, finally, what is the level of alignment you want with performance? In today's environment, I think it's very important for companies to have a compensation philosophy that is aligned to the performance objectives that the company lays out for themselves. |
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Oftentimes what I find is when companies try to draft a compensation philosophy, they focus too much on hitting the appropriate market percentile numbers. Do we want to pay at the fiftieth percentile? Do we want to pay at the seventy-fifth percentile? What gets left behind is what I like to refer to as “the human element.” To do that, it becomes a very large challenge for the directors as well as the executive management team. What that basically means is to get to know the CEO and the CEO's direct reports—understand what makes them tick. Is the compensation philosophy and the compensation program that you're putting in place, is it going to motivate them? |
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The second thing that directors can do is really remove that governance hat and put on their manager hat. Unfortunately, understanding what makes the executives tick is a bit more nuanced and probably a little different than what most directors are used to in their role as a director. However, majority of directors we find have been very successful managers, and it's exactly those managerial traits that we think should be applied. |
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The third thing directors can do to ensure value creation for the organization is to not be afraid of making certain distinctions within the overall compensation program. Not that individuals who are covered by the program would have wholesale different programs akin to a cafeteria-style compensation plan, but rather that you're allowing for flexibility within the program for individuals. |
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Bringing back the human element to compensation allows us to be much more focused on what is an effective plan design and an effective compensation philosophy that will translate to value creation for your organization." |
