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3 Things To Look for in Executive Pay

Executive compensation is always in the spotlight. With all of that attention, mostly focused on supposed failures, you’d think that we would have seen some fairly dramatic changes over the past decade. The truth is, even with lots of new regulations, some fairly visible failures in governance and annual increases that surpass the rank and file every year, executive pay has stayed fairly consistent.

Over the next two or three years, we will see at least two of the following significant changes in the world of executive compensation. The rumblings are now coming from CEOs themselves. A quiet buzz is starting to build amongst consultants. It is starting to feel like change may actually happen.

1)     Focusing on how you get there, not where you ended up.

Executive compensation performance has been focused on results for a long time. Those results are generally based on three-year cycles. The combination was touted to better link pay to performance, but the methods often delivered pay that was tied more to market movements than to individual or company achievement.

It is becoming clear that how a company achieves its goals should be as much a consideration as the fact that the goals are achieved. Having great total shareholder return over three years, while setting the company up for future years of strife or struggle is being recognized as a poor practice. Stumbling to success based on the poor performance of peers is no longer enough.

We are going to see more executive LTI programs that utilize shorter-term metrics to determine final payouts. I also think that these metrics will often be focused almost entirely on internal objectives related to financial and operational performance, rather than stock price and shareholder returns. Well run companies deliver value to shareholders, customer. and employees. Companies managed to meet shareholder returns often deliver no long-term value to anyone involved.

2)     Learning new ways to communicate pay in light of CEO pay ratios

Margaret O’Hanlon has recently written some excellent posts on CEO Pay Ratio and communication. (here’s a good example). I am confident that reporting CEO Pay Ratio, although it serves no business purpose, will seldom be reasonably comparable from company to company and will create tons of “make work”, will be a motivating factor in helping employees better understand the risk and reward of executive pay. Obfuscation will no longer be enough. CEOs don’t love angry mobs. CEO pay ratios have the potential of turning even the most satisfied employees into sign holding protestors. Communications will improve.

3)     A move to stock options if the market retreats

Ha! I tricked you. Just a couple of paragraphs ago I talked about better linkage of performance goals to LTI. Then I talked about how communications would improve. But, if the market falls away and stock prices drop precipitously, we won’t get either of those. We will see companies leap back into stock options. All of the “in things” like Performance Units and alignment will disappear as fast as the strong stock prices. When prices go low, stock option numbers will go high. Count on it.

The first two of these changes will happen gradually. I expect two or three years, at best. The change will be so slow that you may not even notice it (don’t worry I’ll remind you.) The third change, if it happens, will happen so quickly that all of us will forget about the other two for a very long time. If you had to add a fourth “big change” what would it be?

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