Friday, April 15, 2011
According to an April 12, 2011 report by Towers Watson, the human resource consulting firm, 2010 CEO compensation improved as the economy gathered steam. The primary growth factors were base pay and “discretionary” bonuses, a form of variable pay tied to the performance of the CEO’s organization. This uptick in pay is now under the eye of the say-on-pay provisions of the “Dodd-Frank Act” and the regulations of the Securities and Exchange Commission, which has oversight authority on executive compensation. While it may be hard for the average line worker to feel sympathy for their million-dollar bosses, the intent of the Dodd-Frank Act in to engage shareholders in having a “say” in determining the executive staff’s compensation.
Compensation, whether for the CEO or the forklift operator should be aligned with and tied to the long term health and well being of the organization. While that relationship may vary by several degrees, nevertheless, if neither the CEO nor the forklift operator are performing their roles, the overall performance of the organization will suffer. To be clear, the financial impact of these two roles is certainly different by several factors of magnitude. Failure to load a truck in a safe and timely manner may lead to a late delivery, or at worst, a lost customer. Failure to secure financing for a new plant, equipment, product line or supplies may result in bankruptcy.
In general, CEO compensation and that of other executive and C-Suite employees is set in a similar manner to that of any other position, beginning with an organizational compensation philosophy. What is the “peer” compensation of positions within a similar industry, in a similar organizational design, of similar size, similar responsibilities, and similar revenue? The actual compensation “menu” is made up of base pay in the form of salary and variable compensation made up of annual bonuses, stock, short and long-term incentives, and prerequisites, such as auto and travel allowances, club memberships, … etc. Information about executive compensation is available through human resource consulting firms in the form of annual or bi-annual survey results. The key to effective executive compensation setting is finding the right balance between base pay and variable compensation and aligning that balance with the organization’s business requirements. PricewaterhouseCoopers and its Center for Board Governance clearly states: “The focus is on how pay policies align with performance, risk, and a company’s long-term growth”.
Once the organization establishes executive compensation there has to be a way to measure how well the company has performed under the leadership of any executive memeber. The simple answer is, did the organization make a profit this year? Unfortunately, a onetime profit may not be an indicator that the organization will continue to prosper in the future. In the case of start-ups, it may be several years before the braekeven point or profitability is reached. Each organization will need to identify its own metrics for evaluating performance and these measures may change over time as the business and it environment changes.
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