Executive Compensation Contradiction: Differentiate…But Don’t Innovate?

stickman exec comp contradiction

stickman exec comp contradiction

A recent article in London’s, The Telegraph “Overhaul the role of pay advisers, urges Lord Myners”, pushes for more accountability on the part of the advice provided by executive compensation and remuneration consultations. At issue are recent pay packages that met with shareholder ire, including those at Barclays and Cookson Group. At both companies, CEOs had large compensation packages approved by their boards. In both cases, the companies used external consultants. At both companies, the packages for the CEOs were outside the norm. And, at both companies, the boards made it clear that they utilized the expertise and experience of their outside consultants to guide them through the process of creating better compensation programs.

The CEOs made more money than some thought was warranted. It seems obvious to them that the pay packages were incorrectly or intentionally structured to pay out higher than might otherwise be warranted. In both cases, the programmes (hey, it is the UK…) were not typical of the peers’ remuneration programs. There is an outcry for better link between pay and performance and these different plans did not make that link as expected.

Here’s the rub…

The critics have been complaining for years (decades) that legacy compensation practices have been consistently ratcheting pay upward. Simultaneously, they are screaming because these companies broke from the norm. At issue is the possible future of innovative and evolution of executive compensation practices.

Evolution is often met with failure. It is the nature of the process that some new things will work and others will succeed. Over time and many steps, we can build upon the successes to create something entirely new.

With thousands of public companies and hundreds of consultants, we can accelerate the process by closely monitoring the successes and failures. If we clearly communicate both the “what” and “why” of the successes, we will move swiftly to a new regime of remuneration (it’s still the UK…) Of course, we also need to recognize the failures, but we need to correct, and not overreact, when these occur. Our investors, compensation committees and organizations like ABI, ISS and Glass-Lewis must be better at pointing out the flaws while recognizing the attempt at something better.  We then need to move on to something better, not return to something “like everyone else has.”

If the old way is broken and new ways are punished, what are we to do?

As compensation professionals, (external consultants, internal leaders and subject matter experts), we need to be better about explaining the “what” and “why” of every innovation. We need to make sure that both upside and risks are fully understood. We need our boards to truly understand the flaws of the legacy program and how the new program has been designed to correct them. In short, we need to provide the ammunition for support just in case the risks come true. Compensation has become increasingly more strategic and visible. If we are going to evolve to meet everyone’s needs we must also be given the room to occasionally fail.

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