Benefits and Compensation

Why Compensation Can Be Both Psychological and Political (In Addition to Financial)

Yesterday, we shared some insights on executive compensation committees from Robin A. Ferracone, chief executive officer and founder of Farient Advisors. Today, her views on why compensation can be extremely emotional—and why this shouldn’t be overlooked when you’re managing executive compensation.

BLR: When is compensation more than just dollars and cents?

Ferracone: Compensation can be and is very emotional. A compensation committee chairperson who knows the subject matter and is skilled in understanding it can make a big difference.

A lot of executives who are quite aggressive and achievement-oriented look at money as their score card. If they’re not making as much as the next person over, they feel like they’re not being appreciated. The person who chairs the comp committee has to figure out how best to reach that CEO and not use money as a surrogate.

Too often, money can be used to smooth over the bad messages. They might be giving the CEO an increase even though he or she didn’t cut it, because the market’s up and they don’t want to lose the person. That’s a mixed message. Or, maybe they didn’t say anything to the CEO about his or her performance, but they give him or her a whopping increase because that is their way of showing that they really think the CEO is terrific.

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The board cannot get into those games. They have to make sure they’re connecting with that person emotionally, and a skilled compensation committee chair can help do that.

The compensation committee often gets into very political things. I have seen a lot more than one CEO come into the room and say, “I had to pay so-and-so a lot more because they’re getting calls all the time from recruiters.” Then the committee goes off into an executive session and now, because that person got a big increase, they feel they have to keep a financial separation between the CEO and everyone else, so they have to give that CEO an increase. It’s political, and you have to really watch out for those things.

BLR: What can a smaller company learn from all of this?

Ferracone: Smaller companies don’t have a big budget or a lot of depth in executive compensation, so they can benefit from creating a trusted relationship with their consultant. You’re not always going to agree with the consultant, but a good consultant is going to add value. So to the extent that the consultant is working for the compensation committee, a smaller company should take advantage of that resource.

The consultant can provide tremendous support because they’re going to be proactive and be a partner to the company. The internal people can take advantage of that, just as much as the committee can.

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