Driving Performance with Executive Compensation Plans

Yes, the business landscape is undergoing quite the upheaval, mostly borne of the pandemic. But stick your head in the sand at your peril since there’s no getting around it. The good news is that you can view the disruption as an opportunity to reflect on and reshape your executive compensation strategy to help with recruitment, motivation, and retention, and to become more agile. We don’t know where the tumult is leading, so it’s best to be as nimble as possible so that you can pivot. 

One thing you want to focus on is linking goals to financial rewards with the aim of nudging leaders to be all they can. Your bottom line will thank you. Here’s what you need to know about driving performance with executive compensation plans.

What is Executive Compensation?

Also known as executive pay, executive compensation refers to the remuneration packages crafted exclusively for an organization’s senior management, executive-level employees, and senior management. Such packages include salaries, perks, insurances, incentives, etc.

Why are Decisions About Executive Compensation Important?

How you handle executive pay can have an enduring and far-reaching effect on an enterprise. When it’s done right, exec pay is aligned with execs’ behavior, as it relates to the company’s strategy, and improves performance. When it’s mishandled, however, a lot of damage can ensue, including the loss of key talent, a demoralized workforce, disjunctive goals, and lackluster shareholder returns.

Now do you see why it’s crucial that executive compensation plans are gotten right? Get a consultant to help to make sure you’re on point.

What are the Elements of Compensation Design?

• Variable or fixed. We’re talking base salary — set in advance — versus short-term and long-term incentives.
• Short-term or long-term. Variable compensation can be paid in the year it was awarded, or it can be deferred and paid later.
• Cash or equity. According to the Harvard Business Review, some 41% of execs are paid in cash, while 59% get equity. If the cash coffers are a bit low, start-ups tend to depend on equity to lure and keep key talent.
• Individual or group. Data show that, on average, 29% of compensation is linked to individual performance, while 71% is based on enterprise or division performance.

Can’t I Just Stick with Executive Compensation Best Practices?

That’s a good idea, ordinarily. The problem is that just a handful of best practices apply to all organizations and all scenarios. That means that enterprises must begin with definite strategies that are based on their circumstances. It also means that leaders must “get” the fundamental components of compensation and how to tie them to positive outcomes. Yes, 83% of the 250 biggest S&P 500 companies utilize a formulaic annual incentive plan, but that figure is expected to fall as the landscape continues to shift and executives have more options, in terms of where they wish to work and why.

Is it Best to Link Compensation Design and Outcomes?

Yes. An effective comp system starts with a company’s strategic objectives. You get in trouble when that’s not the case. Then ask yourself how your business strategy is reflected in your rewards program, and whether it’s time to make changes to your current program design.

At the end of the day, to drive performance with executive compensation plans, you must take deliberate, data-based steps that are in line with your organization’s business objectives. Doing so will help you attract, retain, and motivate key exec talent while, if you enlist assistance from a consultant such as Mercer, remaining compliant with shareholder, governance, regulatory and legislative requirements.

It’s time to step up to the challenges of the day.