Articles About Business Compensation and Management Solutions
MAKING STRATEGY WORK
Are you paying for performance or paying for results?
Pay-for-performance is assumed to be the objective of most pay plans, particularly longterm incentives. A quick read of most proxy statements will likely find the phrase prominently used; the Dodd-Frank act expressly requires the SEC to require companies to describe their pay-forperformance program. However, we find many of these programs simply pay for results.
Let me explain. Pay for performance infers that the reward is somehow linked to actual contribution, whether as individuals or as a team. It infers some level of cause and effect.
In the context of a long-term incentive arrangement (LTI), this might be achieved by linking the number of shares vesting to management based on achievement of a key strategic objective, like successful diversification into an adjacent business, or introducing sufficient new products to sustain a higher gross margin.
How “Competitive Pay” Undermines Pay for Performance (and What Companies Can Do to Avoid That)
The mantra of all compensation committees is “pay for performance.”
Read any Compensation Discussion and Analysis (CD&A) in the company’s proxy and you will find numerous references to pay for performance as a major objective in setting and implementing pay programs.
Yet a closer reading of the CD&A will reveal that the method often used to set compensation levels is an approach called “competitive pay.”
The competitive pay method sets a target amount of total compensation—salary, bonus, and equity—within a specified range of the amount paid to the executive’s peers, typically companies that are similar based on industry sector and size.
Unfortunately, as used in current practice, competitive pay targets undermine pay for performance. In the pages that follow, we will explain why that’s so and how companies can tie their competitive pay targets to performance so that they actually achieve pay for performance.