Knowledge Infusion Center of Excellence: Consultant's Corner : Tags : pay-for-performance

Great article today on TheStreet.com today that discusses the House Oversight Committee's dissecting compensation packages of Chief Excutives at 3 major banks: Citigroup; Merrill Lynch; and Countrywide Financial. While the bulk of Nate Worden's article highlights how disconnected company performance and CEO pay at these 3 institutions over the past couple of years, he does include excerpts from the Committee's report that raise some important questions compensation specialists must answer when structuring pay-for-performance deals:

How do you protect shareholders from downside risk when attempting to attract the people you feek have the most potential to add value to the stock prices over the long term? "The companies defended the compensation awarded to Prince, O'Neal and Mozilo as fulfillment of contractual obligations that were put in place in an attempt by their employers to attract talent, years before the housing crisis struck, according to the report. "
Executive roles are undoubtedly critical to company success. But just how critical? "In 1980, CEOs in the U.S. were paid an average 40 times the average worker, according to the report. In 2006, the average Fortune 250 CEO was paid over 600 times the average worker. While CEO pay has soared, employees at the bottom of the pay scale have seen their real wages decline by more than 10% over the past decade."
Do you have any basis for comparison? Can you defend it? In 2006, a new compensation consultant, Exequity, raised new questions about Mozilo's compensation [at Countrywide. The firm said his contract was based on a flawed "peer group" of companies that inflated his pay and inappropriately placed him at the top of the peer group in terms of salary and bonus.
Who is your client? "Although the company retained Towers Perrin, internal emails show that the consultant appeared to serve as Mr. Mozilo's personal advisor with the goal of achieving 'maximum opportunity' for Mr. Mozilo. The final contract was significantly more generous to Mr. Mozilo than Exequity originally recommended, according to the report."

If you are currently attempting to structure such deals for your organization, you may want to put yourself in the hypothetical situation of having to answer these questions on Capitol Hill.

0 Comments 0 References Permalink Tags: compensation, pay-for-performance, pay_packages, critical_roles

During a recent client engagement focused on the project kick-off for the implementation of a compensation administration application, I found myself in a room with several HR Generalists having a good laugh about the 'Peanut Butter' approach to merit increases. As the conversation went on, those in the room even made funny hand motions simulating the 'spreading' of a 4% merit budget across a line of business. The concept of differentiation was a hot point that provoked sheer cackling laughter from the group.

This scene is likely not too uncommon for most companies as they approach the merit planning season. The 'Peanut Butter' approach seems to be the norm with few companies mastering differentiation and true pay-for-performance. This begs the question why planning managers find it so difficult to differentiate performance and reward based on that differentiation? Is HR failing in getting the concept across and building the necessary tools and means to make it a reality? Is this message falling on deaf ears?

As organizations work to build a pay-for-performance strategy and enable it with technology, they need to remember to take into account the critical component of manager development in their efforts. It's not enough to state a pay-for-performance philosophy and publish salary increase guidelines to support it. Managers need development opportunities on how to manage performance and how to have difficult conversations with under performing employees and how to take the necessary steps to correct that performance or work those individuals out of the organization. Merit can be and should be a means to incent and retain true contributors in the organization. True differentiation won't be possible until managers are enabled to do the critical work beyond filling out the spreadsheet.