Financier Worldwide
September 2008
Developing an effective executive compensation strategy
"Boards have become more sensitive to the investor and public relations ramifications of their pay decisions," says David Swinford, president and chief executive of Pearl Meyer & Partners.
A sound reward structure should balance labour market competitiveness, short term business objectives and long term shareholder gains, according to Mr. Swinford. "Everyone, including executives and shareholders, should expect to make less money in difficult economic times and more money in good times. It is as inappropriate for executives to expect to be completely protected from the impact of a recession as it is for shareholders to grouse about how much money executives make in an up-market," he says. He adds that executives will be fairly rewarded if the company offers a competitive base salary, pays an executive for accomplishing key objectives in the short term and ties the long term portion of the package to shareholder returns. Even when there are some short term anomalies, such as unusual market situations, the pay will remain fair. This helps a company to hold on to key personnel in difficult times, when job security may be at its lowest and head hunters are trying to tempt talented individuals away.
Equity compensation is taking up a larger portion of total pay packages so that executive benefits are tied to shareholder gains and losses. "The critical issue here is over what time frame executive compensation must be shown to positively impact shareholder returns," observes Mr. Swinford. "One year is clearly too short a timeframe. The right period is more likely five to 10 years, depending upon the industry's business and investment cycles. Many, in fact most, shareholders do not stay invested in one particular company that long," he adds.
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