"Pay for Performance OR Justification for Compensation? That is the Question..."

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Pay for Performance OR Justification for Compensation? That is the Question...


Pay for Performance OR Justification for
Compensation? That is the Question...




3336597052_e6b0e47990 I have recently
done several presentation covering the possibiel impact on U.S.companies
once Management Say in Pay (MSOP) becomes mandatory. Around the world
MSOP is usually defined as a shareholder vote on compensation or
remuneration practices.  The pending Dodd-Frank bill includes MSOP. The
current document calls for a vote on compensation every two or three
years.


In most countries with MSOP this vote is non-binding, but it gives
voice to a powerful statement on how shareholders view remuneration. 
Most of my source materials come from academic studies that reviewed the
influences of compensation votes in locations such as the United
Kingdom, where it was rolled out years ago.  In general, these studies
conclude that MSOP has had little impact on pay levels or pay
frequency.  (Links to some of these studies can be found at the end
of this posting.)
  In fact, the only consistently measurable impact
appears to be a movement from compensation based on service period
(time-based pay) to compensation based on achieving performance metrics.


Performance-based pay is almost universally touted as a positive
result of the MSOP revolution.  The odd thing is that the movement from
time-based pay to performance-based pay has not really impacted
compensation levels.  How can this be?  This would seem to indicate
that, in the past, compensation professionals and their companies have
perfectly matched time-based compensation to corporate performance.  If
this wasn't true, wouldn't pay levels have become much more variable as a
result of adding the riskier and more leveraged components of
performance metrics?  If we had perfect alignment all along, it is
unlikely there would be such an outcry for more transparency and
shareholder input.


Just as companies in the U.S. are starting to look at how to roll out
plans that will pass MSOP muster, many of our consultant are looking at
historical data from other countries to determine how to design
programs that will receive the vote of shareholders in the future.  What
is often missed is that in Europe these programs are often being
derisively referred to as "justification for compensation"
programs.  I don't believe it will take long for institutional
shareholders in the U.S. to jump on this bandwagon.


The real questions is whether shareholders in the U.S. will give
companies that same multi-year leniency as they did in the U.K and other
locations that have mandatory MSOP.  Will we be allowed to have only a
loose linkage between goals, payouts and corporate performance, or will
shareholders immediately hold us accountable for accurate alignment? My
vote is on the latter.


It is time to start discussing this with your shareholders and
management.  Preparing fully aligned performance metrics can take
several months at large companies (and it may be near impossible for
some small companies.) Over the next twelve months you need to ask
yourself if you will be driving toward true "Pay for Performance" or
simply trying to provide "Justification for Compensation".  The choice
may be yours today, but it is unlikely to be yours in the future.


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.


Resource Materials


Say
on Pay Votes and CEO Compensation: Evidence from the UK.
  F. Ferri,
D. Haber


Say
on Pay: Cautionary Notes from the UK Experience and the Case for
Shareholder Opt-in.
  J. Gordon


Shareholders'
Say on Pay: Does is Create Value? 
J. Cai, R. Walkling


Image: Creative Commons Photo "Stack of Money,
Scraped from the Net" by purpleslog




3 Replies

Hi everyone.  This is a recent blog posting I did for the CompensationCafe blog.  I wonder if the Justification aspect will win over the Performance components.  What are your thoughts?



I woul love to hear your comments here, or even better post them on the CompensationCafe blog...


Compensation Cafe: Pay for Performance OR Justification for Compensation? That is the Question... http://bit.ly/9vLk2r

Dan, This is a thoughtful, insightful essay/blog with useful examples from outside the US. We love the concept of "pay for performance" in the United States. Whether you are a parent, manager, or board member, we believe that if we get the incentives just right, every kid will get A's on their math test, every employee will work harder and smarter, and every CEO will make just the right decision.


I think your question is just right, although I word it differently: Is this performance-based compensation really changing behavior and decision making, or just a form of justification for the decisions/results that would happen even without it?

To me, what matters the most is that the performance compensation is really tied to long term results. At least when the large sums are paid out, it is for real success! You’re welcome to repeat my words in your blog with credit back. Thanks.

Bruce Brumberg, Editor, www.myStockOptions.com

Thanks Bruce,


I am doing a webinar for the NY-NJ NASPP, with Ed Hauder, on the real impact of Say on Pay.  We will cover some of the facts and figures behind these concepts.


Feel free to REGISTER.  It is free and open to anyone interested.


 

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