Nowhere do you get what you pay for more than with executive compensation.
This blog is Part 3 of my series on the 5 Steps To Ensure Executive Success.
If you want to set a room on fire with passionate debate, mention executive pay. Many people got their first purview into the world of executive pay during this economic crisis and were horrified at what they saw. The number one culprit? The convoluted relationship, or lack thereof, between pay, performance and accountability.
The Macro Issues:
Todd Gershkowitz, senior vice president of Farient Advisors, an executive compensation consulting firm, did a nice job in an article on DailyFinance.com which summarized the key areas that need to be considered when creating effective executive compensation plans.
- Risk evaluation:
Evaluating the relationship between compensation and excessive risk taking
Taking steps to restore shareholder trust through transparency,
demonstrated reasonableness and adherence to good governance guidelines
- Alignment: Determining how to deliver demonstrable alignment between performance and pay, with a particular focus on the mix of pay, the choice of performance metrics and the goal-setting process around those metrics
Redesigning long-term incentive programs, given shifting perceptions of the
value of equity (stock options in particular)
- Communication: Engaging in more proactive, direct, open and two-way communication with shareholders about compensation philosophy and plan design
The Micro Issues As They Pertain To Executive Success and Blog #3:
I am not an executive compensation expert so this is not about the technical mechanics of all the factors that go into creating compensation plans. Rather, it is focused on how to ensure the alignment between the plan and the outcomes to drive executive accountability and success. It starts and ends with the basics.
- Have a written set of specific goals with deliverable dates and the metrics that will be used to assess them. This should include financial deliverables (revenue, expenses, cash etc…) as well as operational deliverables.
- Make sure LEADERSHIP, the “how things get done”, is included in the goals in addition to the specific “what needs to get done”. Executive performance failures result primarily from lack of emotional intelligence, not technical competence. If you want to have a highly engaged and innovative workforce and be able to compete for the best talent, make sure that your operational goals include leadership expectations and specific goals.
- Weight the goals in terms of priority for the time period defined. This should clearly communicate what is most important and where/how the executive should be focusing her/his time and resources. It may also change depending on the opportunities or challenges the organization is facing.
- Assign financial remuneration (cash, stock etc) by category. Whatever reward is being used, indicate the specific target and stretch opportunities within each category.
- Review the plan to make sure that you are focusing, incentivizing, aligning and rewarding the deliverables that will create business value and individual success.
- Cascade the goals, with the same respective weighting and financial remuneration, throughout the organization. This will insure alignment of all resources (talent, capital, equipment, R & D etc…) to the agreed upon deliverables.
Next blog: How Coaching Accelerates Executive Success
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