As children, we play Follow the Leader with the goal of fitting in. In this game, kids will do whatever the person in front of them does. I have actually seen kids fall down, just because the person in front of them tripped and fell. As adults, we learn that to be a leader, you must worry less about fitting in and more about doing what is right for a given situation. As compensation professionals, we are constantly asked to build a balance between two worlds: the world of homogenization and that of innovation. From one side, we are asked to build programs based on survey data and peer group analysis. On the other side, we are asked to create programs that mesh with our business goals and company culture. Far too often the survey data wins this battle, based not on “best fit”, but instead on a mythical “best practice.”
Often compensation survey data reports on a self-fulfilling prophecy. The data only reflects what people were told to do the prior year and that data reflected what the market data showed from the year before that. Imagine if you stood outside a hamburger shop at 2:00PM and asked people what they ate for lunch. Very few would say tacos, poppadum or chow mein. Most would reply with some form of hamburger, fries and soft drink. Compensation data can be quite similar to this.
As an example: When companies look at current survey data they see that nearly every company that is issuing RSUs offers them with a three-year vesting schedule. Some might believe that this is because three years has been shown to be the perfect timeframe for most companies. I would argue that this is simply because most prior plans have had a three-year vesting schedule and survey data works to perpetuate that trend. Of course, there is nothing inherently wrong with three years, but for many companies something shorter or much longer may make far more sense. Even if a compensation professional determines that a different vesting schedule would likely be more effective, they are likely to be faced with the incessant question of: “What does everyone else do?” As I mentioned, the survey data does not show what is best, it just shows what is being done.
This same problem is applied to nearly every compensation instrument or pay level. It leads to a lack of innovation and creativity in broad-based plans. It is also a main culprit behind the consistent growth in executive pay, regardless of outcry, proof of effectiveness or, in some cases, corporate or individual performance. On the bright side, Say on Pay has pushed new innovation in executive compensation. Perhaps this will lead to broad-based programs being allowed to break out of the “norms” and focus on best answers, instead of best practices.
We know that Follow the Leader often leads to us walking off a cliff, so why do we do it? The alternative is leading and innovating in a publicly reported world. Even with the current disclosure it is difficult for investors to sort out compensation. The recent growth of performance-based awards has only added to the complexity. If you innovate too much, you risk singling your company out for unwanted attention. Because of this, innovation can be dangerous. If you try something new and it doesn’t work, failure will likely be blamed on your unique approach. It doesn’t really matter if the old method may have also failed. A new method can provide job instability for compensation committee members, executives and compensation professionals. Better to be wrong in the middle of a herd than wrong and exposed.
I guess this post offers less in the way of solutions than questions on this issue. Have you really tried to innovate? Did you have to fight for a new solution? Ultimately, did it succeed or fail? Do you believe that innovation is limited because of market data or fear of failure? I would love to hear from other professionals on this topic.