Designing Executive Compensation Plans
In human resources, your overall task is to edge out rivals with an executive compensation plan that can lure top-shelf talent to your organization – and keep it. In between is where it gets messy, since the package also must be aligned with corporate goals and pass muster with a public that generally lacks understanding of the intricacies and challenges of executive positions. In that light, here’s what you need to know about designing executive compensation plans.
What Makes for a Good Executive Compensation Plan?
In general, a solid plan hinges on proven compensation approaches, practices and polices that line up with the company’s overarching aims and objectives. The process of putting a plan together cuts across regulatory, tax, budget, and documentation considerations.
How is Human Resources Involved?
Human resources’ involvement in crafting and managing an exec compensation plan does vary, depending on the company involved. However, the fundamental job of human resources will be to apprise management of the advantages, costs and host of decisions involved in establishing or enhancing an executive compensation program.
Within that, HR will play an important role in establishing which tasks will be performed internally and which will require outside help. You can count on needing at least some outside expertise in the design and management of a sound executive compensation program. Perhaps you’ll require executive compensation consulting from an established firm such as Mercer.
The Communications Process
When it comes to the plan’s success, communication plays a central role, as does HR. We’re talking communicating with, say, the execs involved, the corporate board, other compensation experts, and perhaps governmental organizations and media outlets.
You also don’t want other employees ticked off by word of an executive’s pay. That hurts workforce morale. However, with an effective comms strategy, one in which the company’s pay strategy is clearly defined, that can be avoided.
If communication does break down, that can lead to issues including:
- Executive performance not being incentivized. Why? Because no one got employee input.
- No up-front definition of performance goals.
- No stated performance goals the exec can influence.
- Performance standards being modified late in the game.
- Assessment of employee performance according to standards not included in the written document.
- The listing of job descriptions that are at odds with the executive compensation plan.
Metrics are vital when establishing or improving an exec compensation program. Because such an effort is labor intensive, companies want to be certain they get enough bang for their buck. Therefore, metrics should be established that reveal where the company is now, and where it is after a given period, using the same methodology.
The human resources department is largely responsible for gauging the suitability of technology to be used in the incentive pay program. As such, there are software and services for automating processes such as variable pay, processes that can be effective behavior influence instruments in that they study, track, and set bonuses, commission and various kinds of variable pay. The technology can ultimately, and more efficiently, give management a holistic snapshot of pay as it relates to performance.
Exec Pay Plan Design
Usually, exec pay packages comprise salary, yearly and long-term incentives, benefits, severance packages, and perks such as employer provided vehicles or country club memberships.
And when it comes down to it, designing executive compensation plans necessitates balancing shareholder interests, performance-based outlays, recruitment and retention, and an examination of cost versus likely benefit. If you can establish a long-term pay program that has built-in performance-based incentives, that balance can be effectively struck.