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General Electric chairman and CEO John Flannery is not wasting any time in his new role as he works on a complete portfolio assessment of the industrial giant’s business — including its executive compensation plan, which has drawn frustration from shareholders.
Pete Lupo, senior managing director and Atlantic region head at Pearl Meyer, says the first thing the compensation committee should do when reevaluating pay after an executive shuffle is confirm the new or revised long-term strategy at the company.
“Every company compensation program should be tied to long-term strategy,” Lupo says. “Even if the new CEO in place doesn’t trigger a new strategy, [the compensation committee] would want to look at the long-term metrics and goal setting to see if they are still appropriate going forward.”
Lupo says large companies with multiple business units also need to review the annual incentive plan and determine the extent to which the compensation committee is tying goals to a particular business unit versus the company as a whole. The review should extend down multiple levels of senior management in most companies’ cases, he adds.
“Other points to consider include if the company follows a traditional pattern of a combination of stock options, restricted stock and/or a performance-based vehicle,” Lupo says. “When going through a challenging time or a significant change in strategy, the committee needs to ask to what extent are strategic goals incorporated into the plan and under what time frame do they need to measure these goals.”
“If a company is going through a major change, [compensation committees need to] give themselves enough time to do a thorough review of the strategy and what changes [in the pay plan] may support that,” Lupo says. “The key areas are metric selection, goal calibration and back-testing the proposed design so it historically makes sense. This can be a four- to five-month process.”