Creating Powerful Management
"Synergy" Via Executive Compensation
"Synergy" is one of those 90's words that vaulted into business jargon as a describer of unlimited potential and dynamic possibilities. But as the 90's passed, such words came to symbolize a kind of hackneyed business lexicon that offered much but seemed to deliver little.
But "synergy," in the very best sense of the word, is a vital component in the makeup of every management team. To grow the top and bottom lines of any business competing in today's churning marketplace, a well-coordinated, complementary management team is a must. Executive synergy can't be nurtured unless an organization is able to attract and hold onto intellectually powerful and experienced management talent. And let there be no question, a chief recruiting and retention consideration for the best and brightest will always be your executive compensation program.
Granted, executive compensation has become snarled in public outcries over the compensation excesses that continue to plague the world of business. But talented executives still demand and receive compensation packages that reward them for their skills, talent, and experience in making businesses work.
With legislative changes like Sarbanes-Oxley, new FASB accounting requirements, and more aggressive government intervention, executive responsibilities have seemingly taken on new and greater risks, demanding new and greater reward. At the same time, investors have become increasingly fond of executive compensation programs that are more and more tightly linked to business performance results.
Crafting an effective executive compensation program is complex - part art, part science. It requires a careful and thoughtful understanding of the business, of the executives running the business, and of the goals the two have together. Here are four keys to building and retaining an effective management team through a well functioning and competitive executive compensation program.
1. Focus on Salaries
It may sound trite - but a good compensation package these days begins with an appropriately-set salary. In these more conservative times, cash is once again king.
Fixed salaries provide organizations with the ability to stabilize their compensation programs while still providing executives with competitive financial rewards. Since the salary focus trend is certain to grow, it makes good sense to begin shifting your executive compensation program in this direction. Indications are that more and more executives are encouraged by a more secure reward for their commitment and hard work.
Keep in mind, however, that an increased or renewed focus on salary will also bring its own pressures. On the one hand, investors will take increased notice of your salary structure, for better or for worse. At the same time, your salary picture will need to measure up in the competitive marketplace in general. That's because today's executives often change industries when they change jobs.
2. Tie Annual Bonuses More Tightly to Performance
In the recent past, some organizations have given the often repeated phrase, "pay for performance" high-profile lip service, but not much else. Bonuses must now more than ever be an honest recognition and reward for above average performance. When stock prices sky rocket and earnings improve significantly every year owners can, and frequently do, overlook a lot of below average executive performances. However, with earnings taking a dive as they have for many firms, executives need to be held accountable for the downward spirals. And with that more critical scrutiny must also come a more intense concern for tying pay to performance. Of course, your best and brightest are also going to demand fair compensation when profits are headed upward and strong growth once again begins to drive the company's momentum forward.
Companies must make the link between pay and performance uncompromisingly strong. A key to maintaining that strength comes from the system used to measure performance. To be credible around the issue of pay for performance you must develop more comprehensive and accurate systems for setting goals and for measuring management's performance. That part of the equation must become a primary component of your executive compensation program.
In developing your measurement criteria, adopt less of a "follow the leader" mentality. Consider the uniqueness and workplace environment of your company and develop a measurement system that works for you.
3. De-emphasize Stock Options
In the days of the raging bull market, the name of the compensation game was stock options. Salary and bonuses were passive incentives; the real compensation action was in stock options. Not only did stock options soar in value, but they basically served as free tender for companies, since they generally resulted in no charge to earnings.
The bear market and startling corporate abuses increased public scrutiny. Pressure mounted and the requirement that stock options be treated as a compensation expense took hold. If your executive compensation model still relies heavily on stock options, it's time to rethink your strategy. Surveys show that more than two-thirds of the country's organizations have made changes, or are planning to make changes, in their long-term stock option plans.
Stop treating the granting of stock options as if your executive management team has access to a broken ATM machine that just keeps spitting out options. If stock options are part of your compensation program, tie them to achieving financial and strategic goals. And make certain that your stock option program conforms to both the letter and spirit of the regulatory laws governing such plans.
In addition, think about making long-term incentives a more prominent part of your program. More and more companies are shifting their emphasis to accomplishing longer term goals in lieu of superficial short term accomplishments.
4. Make "Compensation Coordination" the Name of Your Game
Don't allow your executive compensation packages to be driven by a single, dominant element. Salary, annual bonus, long-term incentives, special benefits and perks should all be part of your scheme, tailored to reflect both the needs of the individual executive and the overall attitude and goals of the company. Avoid the tendency to treat and negotiate each compensation element as a separate reward. In negotiating, if the salary goes up to meet short term security goals, the long term incentives should be reduced accordingly.
Keep in mind that there are many ways to be competitive in the compensation arena. Some organizations strive to position each compensation element so that it matches the average of the marketplace for similar talent. Other organizations have chosen to provide below average salaries and above average annual bonus or long-term incentive opportunities in order to get to a competitive compensation package.
Some organizations provide more valuable executive benefits and perquisites, and therefore, can provide lower bonus opportunities and long-term incentives in order to reach the right competitive mix. The key to success in these organizations is typically a stable executive team.
On the other hand, organizations that benefit from a frequent influx of new executive talent are more likely to reach the right competitive position by providing lower levels of the "fixed" elements (salary, benefits and perks) and higher levels of the variable elements (annual and long-term incentives.)
There is no right or wrong answer. Organizations must structure compensation packages to reflect the unique environment in which each operates while striving to meet key strategic and financial goals.
There is little doubt that the nature of executive compensation is undergoing radical and sweeping change. Excess is out, fair and just is in. Compensation and performance must be linked in a way that rewards current and future attainment of goals, not past successes. Organizations are also discovering that there is an extremely positive synergy that can be achieved if executive compensation programs succeed in building and retaining a coordinated management team, with mutual goals and aligned incentives.
But all this means that companies will be called upon to develop more accurate and all-inclusive measurement criteria for judging the level of an executive's performance. And while it is still a highly competitive environment for attracting strong executive talent, change in the way that talent is compensated is being demanded by both the investor community and the government agencies that regulate corporate activities.
A. Lee Westervelt is a principal with BakerER, a strategic growth and workplace management consulting firm. Whether in the marketplace or workplace, our promise is simple: we help organizations that compete on the basis or their relationships to be the “best choice” for their customers and employees. The end result: sustainable, profitable growth for the organization.
Contact Lee Westervelt by e-mail: firstname.lastname@example.org
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