Designing your executive pay plan can be daunting—you need to consider a whole host of factors, such as the company's goals and the competitive environment. Let's take a look at some design considerations for effective executive pay plans.
Design Considerations for Executive Pay Plans
"Your design considerations are important. What we like to see is almost a road map for what you're looking for when you're designing your exec comp program. It's not really a play-as-you-go type of initiative." Mary A. Rizzuti told us in a recent BLR webinar.
Here are 6 design considerations for executive pay plans. Ask yourself these questions before you begin:
- How successful have our executive compensation programs been in the past? "You don't want to continue to repeat the same mistakes, and you don't want to just continue to move forward on something that you've been doing in the past may not have been working, just for the sake of doing so." Rizzuti explained.
- What are the company's short-term and long-term goals? In other words, what is the company's strategic plan? Knowing where the business is going, in addition to knowing where it came from, is imperative in order to get an effective compensation program in place.
- What is the company's stage of business development? The answer to this question can affect how the plan is designed. For example, if the company is in the early stages of development, there could be cash-flow issues. This is where you could consider giving long-term incentives and stock ownership. If you're a more mature company, you can consider more cash-based annual incentives. You want to overlay your goals year-to-year as well provide some leverage to get better performance year-over-year.
- What is the condition of the competitive market? This question is actually two-fold. You need to assess the competitive market both from a business perspective and from a talent perspective. Many companies have two different peer groups—peer groups for talent, and peer groups where they compete for business. This is important because the compensation structure between the two groups may be very different. You may need to blend your comp program to address both.
- What behaviors would the company like to motivate? Do you want revenue growth? Client retention? Do you want to improve productivity efficiencies? Does the company need to focus on growing talent from within for succession planning? The answers here will determine what type of incentives might be appropriate.
- How will compensation drive performance? Take a look at the items under the previous question. All of these factors need be addressed so that you know what behaviors to incentivize. Remember, however, that the behaviors that you need to get from one group may differ significantly from what you need from another, even for the same overall goal. Be wary of a one-size-fits-all comp program.
For more information on the design considerations for an executive pay program, order the webinar recording of "Executive Compensation Strategies: How to Stay Current, Compliant, and Ahead of Your Competition." To register for a future webinar, visit http://store.blr.com/events/webinars.
Mary A. Rizzuti, CCP, PHR is a principal and senior consultant with Compensation Resources, Inc. (CRI) . With over 15 years of compensation experience, Rizzuti serves as project manager for consulting projects. She also leads CRI’s Training Institute, delivering customized compensation and human resources training for senior leadership and human resources professionals.