Beyond One-Size-Fits-All Executive Pay Practices - Pearl Meyer & Partners Provides Practical Recommendations
Whitepaper from compensation consultancy Pearl Meyer on transforming compensation from a cost of doing business into a powerful competitive advantage
NEW YORK—June 3, 2014—Linking a company’s executive pay program to business strategy can transform compensation—typically one of a company’s largest line-item expenses—from another cost of doing business into a powerful competitive advantage that drives business results and creates long-term value, according to a new whitepaper from compensation consultancy Pearl Meyer & Partners, titled The 2014 Compensation Committee Agenda: Raising the Bar.
Today, positive say-on-pay votes—and even the percentage level of shareholder approval—are often viewed as an exclusive measure of good pay programs and, by extension, good governance. The publication contends that this is a flawed standard of good compensation governance.
“We continue to strongly believe that the most effective way to accurately motivate executives and fuel long-term business growth and success is to put the company's business and leadership strategy ahead of generic approaches to pay programs,” said David N. Swinford, President and CEO of Pearl Meyer & Partners. “A well-tailored pay program, supported by a robust governance process, is the best way to drive exceptional performance.”
The firm argues against a default to generic pay program design that mimics the marketplace, such as the proliferation of relative Total Shareholder Return (“TSR”) plans, and safely meets proxy advisory firm standards. Providing practical recommendations and diagnostic tools for Compensation Committees to use, the whitepaper emphasizes the importance of communicating with internal and external audiences about why a particular pay program was designed as it was.
“Understanding where your program differs from prevailing practices or proscribed program designs, and crafting messages about how your business challenges and opportunities drive the design of your programs, is critical. It allows a company to make a compelling case for why it makes sense to do something different,” Swinford notes.
The paper outlines five key questions that Compensation Committees should be asking themselves in order to create customized pay programs that will influence executive behaviors and support the unique business strategy of a particular company. It also offers practical recommendations on how to go beyond best practices and “check the box” compliance:
1. Business Strategy—Does your pay program align with your business value drivers?
Leverage the power of incentives to signal the importance of key strategic imperatives.
2. People Strategy—Does your pay program support your talent management strategy?
Integrate talent management and compensation strategy to communicate internally and externally what kind of people the company values.
3. Performance Measurement—Does your pay program reward the right performance?
Use financial performance measures in addition to total shareholder return to reward performance.
4. Good Governance—Is your pay program informed or dictated by external pressures?
Develop a pay program that aligns with and is based on the company’s business strategy and objectives, regardless of external views about what is “acceptable.”
5. Clear Communication—Does your pay program resonate with executives and shareholders?
Establish a year-round communication plan that discusses the reasoning behind the compensation strategy at the company.
Pearl Meyer & Partners produces an annual white paper covering the leading approaches to executive compensation issues. To download this year’s complete white paper The 2014 Compensation Committee Agenda: Raising the Bar.