So often we see companies whose executives are paid handsomely only to
falter shortly after. How does this happen? Goals were apparently met.
Success seemed to have been achieved. But the final result of the goals
and success is a large payout followed by a sharp corporate collapse.
Are we doing something wrong when we incentivize our executives?
As the evolution of Dodd-Frank and mandatory Say-On-Pay quickly
impacts executive compensation, more companies are incorporating pay for
performance into their executive packages. I am a huge proponent of
performance-based pay. When the ‘Big 3” of compensation: design,
execution and communication are properly addressed in performance plans,
they represent a healthy future for compensation programs.
Unfortunately, when the Big 3 are not handled correctly, these programs
may fail even more spectacularly than some of our past compensation
debacles.
Designing your plan requires truly understanding where the
company wants to go and what compensation instruments are required to
get there.
The main goal of any compensation program is like a mountain on the
horizon. Like a mountain, your key goal must be visible from many
angles. It must be large enough to be seen from a great distance. It
must be a challenge to reach the top in order to ward off those who do
not have the strength, fortitude or passion to earn the summit. Your
final goal may be reached through the use of multiple or layered
compensation instruments provided over several years.
Performance compensation must be specific enough to keep
people focused and flexible enough to allow for modifications as the
environment changes.
Climbing a mountain is a monumental task. You start in the flatlands
on a basic trail. Like all trails it is never straight and often twists
and turns through trees and valleys. At each break in the trees, you
must reorient yourself on the mountain and redirect your efforts to
reach it. As you progress, you will undoubtedly summit smaller hills.
Some will be useful and lead to higher plateaus. Others will prove to be
obstacles that had to be passed in order to get the final mountain.
When you finally reach the base of your final mountain the summit can
often be obscured. Therefore, the path must be carefully mapped since
the final climb will be very hard.
At this point many of you are thinking, “Okay! Enough already, I get
the metaphor.” You already a performance compensation program in place.
It seems to be working. Results are coming in and your executives are on
board. You have progressed to a point where people feel close to their
goal. What’s the problem?
As you close in on your goals, perspective becomes more difficult and more important.
The fact is being near your goal at the base of the mountain is the
most dangerous place to be. This is not because of avalanches, although
they may occur. This isn’t because of a lack of the right equipment.
(You have planned for this climb and, undoubtedly, made sure you have
the right tools.) The base is dangerous because of the excitement of
reaching the top and the lack of perspective when you are so close to
reach your goal.
Regardless of the plan design and compensation instruments used, execution and constant communication are required for success.
Once you start climbing the mountain you need focus on the work
directly ahead of you. Each step is a challenge and you may not have a
view of the summit for long periods. You may be following a path that
was roughly defined long ago, but does not provide the specific details
required for your ascent. Without direction, you may create new paths
and trust that as long as you go up, you will succeed. This can result
in reaching the top of the mountain only to find yourself gazing across
the vista only to realize “your mountain”, the one you have been aiming
for all this time, is actually the next summit over. For all of your
passion and effort, you have actually climbed the wrong mountain.
Getting from the top of the wrong mountain to the top of the right
mountain is something few of us of have the time or passion to endure
and failure becomes a legitimate option. This lack of perspective,
especially at critical times, requires someone be watching from a safe
distance, where perspective can still be had.
Compensation pros must retain perspective as performance goals come within reach.
Compensation professionals must serve the role of guide and
navigator. Our programs must be clearly designed to get people to the
correct summit. We must ensure that each step is executed in a manner
that keeps our employees safe and moving upward. Our communications must
be clear and specific. We must be cognizant of potential missteps and
confident enough to redirect our team as needed, even when the euphoria
of an imminent summit is before them. We are not always part of the team
that plants the flag at the summit, but we are absolutely essential to
ensuring that the flag is planted on the correct summit.
Dan Walter is based in San Francisco, CA and is the President and CEO of Performensation
an independent compensation consulting firm focused on the needs of
companies not in the Fortune 1000. Dan’s unique perspective and
expertise includes equity compensation, executive programs,
performance-based pay and talent management issues, Dan is on the board
of the National Center for Employee Ownership, helps create ShareComp, a virtual conference addressing equity compensation and founded Equity Compensation Experts
a free networking group with more than 1,100 members. Dan is also in
high demand as dynamic and humorous speaker. Connect with him on LinkedIn or follow him on Twitter @performensation.