With Management Say on Pay (MSOP) rising on the horizon, we are
all faced with properly implementing a new performance paradigm.
Academic research in countries that have had MSOP for a while shows that
its true impact is not changes to compensation levels or frequency.
Its single biggest impact is the broad and increasingly deeper use of
performance metrics to determine pay. This is especially true for
long-term instruments such as equity awards and deferred compensation.
So, what is the perfect metric? The old adage of
"stock price equals performance" will no longer fly. There is a lot of
noise these days about Total Shareholder Return (TSR), both absolute and
relative. TSR is the change in stock price factoring in dividends paid.
This is usually expressed as a percentage.
Proponents argue that this is the true performance that shareholders
seek and that comparing one company to a group of peers (a Relative TSR
plan) provides the best optic of performance in a given market.
Opponents and tepid supporters argue that there is little direct
line-of-sight for most individuals. In fact, compensation professionals
at many companies who use this metric will tell you that even most
senior managers are cloudy when asked how their daily or monthly work
directly impacts TSR.
In a June 2010 HBR article Dan Ariely reiterated the old standard: "You Are What You
Measure." He argues that measuring performance based on stock price
defines stock price as the purpose of the company. I tend to agree.
The science seems simple. People will do what they are told is
important. If we want them to change what they do, we need to redefine
what is important.
Sometimes I think we sell our staff an ourselves short by trying to
find a too-simple solution for a very complex issue. We aim for the
common denominator rather than the uncommon differentiator. We
communicate once instead of having an ongoing performance conversation.
Be prepared. As a compensation professional in this new decade you
will be required to understand your business; how it performs and the
risks and rewards of driving specific actions. Over the next 60 days
take the time to schedule meetings with senior managers of each critical
area at your company. Get the dialogue started. Drive the performance
your company needs and you really want instead of what the trends and
market data say you should pursue.
There is no silver bullet or perfect metric for all companies or all
people. Now's the time to start defining who your company is,
who it wants to be and how you can use compensation to help get it
there.
Dan
Walter is based in San Francisco, CA and is the President and CEO
of Performensation, a firm
focused on improving its clients performance and equity compensation
programs. He has worked with small start-ups through the Fortune 100 for
more than 15 years. In addition to being a frequent speaker in the US
and abroad, Dan is on the board of the
National Center for Employee Ownership, helps run ShareComp, a virtual conference
for the share plan industry and heads one of the largest free
networking groups for equity compensation professionals, Equity
Compensation Experts. Dan loves to share ideas and information.
Follow him on LinkedIn
or Twitter at @performensation.