Printer Friendly
The Free Library
22,728,043 articles and books

Compensation: Some guiding principles.



How to craft a sensibly designed and well-implemented executive pay program.

IN JUNE June: see month.  OF 1960, I joined the salary administration department of 3M Co. (it was then called Minnesota Minnesota, state, United States
Minnesota (mĭn'ĭsō`tə), upper midwestern state of the United States. It is bordered by Lake Superior and Wisconsin (E), Iowa (S), South Dakota and North Dakota (W), and the Canadian provinces
 Mining and Manufacturing). This was my first position in the corporate world. Salary administration was certainly new to me, and executive compensation was a deep mystery which was beyond my understanding. However, early on in my new position, it was obvious that executives were on a different compensation track than other salaried people.

Since those early career days, I have always believed that there were some guiding principles which could be set forth concerning sensibly designed and well-implemented executive compensation programs. The following principles have evolved from being on "both sides of the table" as a corporate practitioner and more recently as a compensation consultant. These principles certainly should not be viewed as absolutes. Instead, they are considerations which can be used in the development of an effective compensation program for a company's executives.

The executive compensation program must fit the culture and meet the specific needs of the individual organization. This principle, I believe, is paramount. It recognizes the "given" that there are no two organizations which have the same cultures and needs. Some companies have cultural similarities. Also, many organizations have like needs in the structuring of their executive compensation programs. However, individual variations exist and must be reckoned with if the program is to meet the organization's compensation objectives. Therefore, at the very start of the program's development, the designers, be they company executives or consultants, must have a clear understanding of the organization's culture and its specific needs. The process takes time. If this meaningful analysis is not made, the program is prone to failure.

With this overarching o·ver·arch·ing  
adj.
1. Forming an arch overhead or above: overarching branches.

2. Extending over or throughout: "I am not sure whether the missing ingredient . . .
 principle as our backdrop Backdrop may refer to:
  • Theatrical scenery
  • Filming location
  • A pro wrestling move that's also called a belly to back suplex.
  • The Back Drop Club, website with BDSM resources, including BDSM related .
, here are 10 additional principles, not prioritized in any particular order as they are all believed to be of equal importance.

* Determine how the three major components of the program -- base salary, annual incentives, and long-term Long-term

Three or more years. In the context of accounting, more than 1 year.


long-term

1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term.
 incentives (includes stock options) -- fit together and the emphasis that should be placed on each. Many call this evaluation the company's executive compensation strategy. It is an essential evaluation which must be made at the very beginning of the program's development. It is imperative imperative: see mood.

imperative - imperative language
 that management expresses its views as to how each component is expected to be used and the weighting for each.

* Beware be·ware  
v. be·wared, be·war·ing, be·wares

v.tr.
To be on guard against; be cautious of: "Beware the ides of March" Shakespeare.

v.
 of the external data trap. Many compensation practitioners have too much of a love affair with external data. They firmly believe that the data very much dictate TO DICTATE. To pronounce word for word what is destined to be at the same time written by another. Merlin Rep. mot Suggestion, p. 5 00; Toull. Dr. Civ. Fr. liv. 3, t. 2, c. 5, n. 410.  the program's design. Use the data as it should be used as part of the required analysis. Realize that it is only one part of the decision-making decision-making,
n the process of coming to a conclusion or making a judgment.

decision-making, evidence-based,
n a type of informal decision-making that combines clinical expertise, patient concerns, and evidence gathered from
 process. The program's design must be the right one for the organization and not necessarily right for the data sample.

* Get necessary input from the involved staff groups. Some executive compensation designers look at the structuring of a program as a very private exercise in which they alone should be participating. You are asking for real trouble if you do not solicit the input of the organization's involved staff groups such as tax, legal, and finance. These staff groups must be involved in the process. The designing of executive compensation programs requires the sharing of the expertise of many individuals from a wide array of internal professional sources.

* Keep the design simple and understandable. This principle is becoming more and more obvious today, but on many occasions, it seems to be forgotten. To me, the design of an executive compensation program is much like that of developing a new airplane airplane, aeroplane, or aircraft, heavier-than-air vehicle, mechanically driven and fitted with fixed wings that support it in flight through the dynamic action of the air. . In both cases, the designer should not be the only person who can run the compensation program or fly the airplane. If such is the case, the program will fail and the airplane can be expected to crash. The design of the executive compensation program must have features and workings that are understandable to top management, the compensation committee, the participants, and those who will be charged with its administration.

* Beware of approach favoritism. All of us -- board members, compensation professionals, and consultants -- have favorite approaches in the structuring of executive compensation programs. Much of this approach favoritism is based on past positive experiences in other business settings. It is difficult for most of us to accept the fact that an approach used so successfully in a past situation may not work in the current situation. For instance, the granting of currently popular restricted stock may not be appropriate in many business situations today.

* Realize that the executive compensation program is not the cause for many of the companies' problems. Most senior executives and board members seem to agree with this principle. However, when conditions get difficult and a "star performer" decides to leave, many times an immediate and strong focus is put on the executive compensation program. Critics of the existing program blame it for everything, including its lack of being able to retain "stars" to not motivating the executive workforce. Without a doubt, in some situations the allegations may be well founded. However, care must be taken in identifying the real underlying problem. Money is not always the solution. Use it prudently pru·dent  
adj.
1. Wise in handling practical matters; exercising good judgment or common sense.

2. Careful in regard to one's own interests; provident.

3. Careful about one's conduct; circumspect.
.

* Clearly define the population to be included in the program and keep it "pure." In many ways, current business practices are becoming more unstructured. I believe this trend can be very positive as long as we do not reach a point where essential defined practices are eliminated. The same reasoning holds true for the development of an executive compensation program. It is essential that criteria are developed which clearly define the people who will be included in the program. The defined population should include line and staff managers and also individual contributors who play an active and recognized role in making the business successful. If you have an individual who does not meet the program's membership criteria but warrants monetary recognition by the making of long-term incentive or annual incentive awards, give a special nonrecurring Non`re`cur´ring

a. 1. Nonrecurrent; as, the costs of a layoff are considered as a nonrecurring expense s>.
 grant. By taking this action, the membership criteria for the executive compensation program is kept "pure" and certainly future problems can be avoided.

* Keep the compensation committee informed. It is of prime importance that the compensation committee is kept informed as to the structuring and performance of the executive compensation program. Based on my experience, most directors do not want to be overwhelmed o·ver·whelm  
tr.v. o·ver·whelmed, o·ver·whelm·ing, o·ver·whelms
1. To surge over and submerge; engulf: waves overwhelming the rocky shoreline.

2.
a.
 with extensive details, but they do want to know on a continuing basis if the program is successful or if it is falling short and therefore may need some "renovation."

* The successful implementation/communication process is key. Many individuals who are involved in the development of an executive compensation program emphasize the design phase of the program over how it is implemented and communicated. If the program is not implemented and communicated effectively, its chance for success is very limited. Since it requires a particular focus on the structure and details of the program, the implementation/communication process unfortunately is viewed by some as being dull dull (dul) not resonant on percussion.

dull
adj.
1. Lacking responsiveness or alertness; insensitive.

2. Not intensely or keenly felt, as in pain.
 and offering few challenges. But I do believe that some meaningful steps can be taken during the communication stage which will help make the program more "real" to the participants. Here are a few for consideration:

--Conduct more small group meetings rather than large meetings for program participants. Usually participants feel more comfortable in asking questions with fewer people around than in an auditorium auditorium

Portion of a theater or hall where an audience sits, as distinct from the stage. The auditorium originated in the theaters of ancient Greece, as a semicircular seating area cut into a hillside.
 full of people.

-- Stay away from lengthy printed pieces describing the program. Executives will not read them. If you want to describe the program, craft a concise outline featuring its highlights (stay away from the details!).

-- Finally, give the participants the opportunity to value the components of the program by making projections on their personal computers. In today's high-tech high-tech also hi-tech
adj. Informal
Of, relating to, or resembling high technology.


high-tech
Adjective

same as hi-tech

Adj. 1.
 world, this can be done by offering tailored software programs.

* The current design of the compensation program is not forever. When I got started in the executive compensation business, cash compensation was the major element of an individual's base salary. Today, long-term incentive plans dominate the scene. Companies have favored stock options, but with the recent downturn Downturn

The transition point between a rising, expanding economy to a falling, contracting one.


downturn

A decline in security prices or economic activity following a period of rising or stable prices or activity.
 in the market, other long-term incentive instruments in the future may be emphasized. All of this means that your current executive compensation program is not fixed in design and should be under periodic review as to meeting the expected changing needs of the organization.

As a final thought, all of us who are involved in the development of executive compensation programs take appropriate pride in the results of our efforts. This is fine, but we should not permit our pride of ownership from keeping us from developing a more improved and useful product -- within the framework of the guiding principles as set forth above.

Fred (Friendly Rollabout Engineered for Doctors) A mobile medical conferencing unit. See videoconferencing.

1. FRED - Robert Carr. Language used by Framework, Ashton-Tate.
2.
 Meuter Jr. has far over 40 years worked with boards and management of a wide range of clients--from Fortune 100 to mid-size and smaller organizations -- in developing and implementing executive compensation programs. He founded his Fountain Hills Fountain Hill may refer to:
  • Fountain Hill, Arkansas
  • Fountain Hill, Pennsylvania
  • Fountain Hills, Arizona
, Ariz.-based consulting practice, Fred Meuter Jr. & Associates, in 1988 after serving for 16 years as manager of executive compensation for Xerox (Xerox Corporation, Stamford, CT, www.xerox.com) A major manufacturer of analog and digital copy machines, computer printers and document management systems. Corporate headquarters are in Stamford, CT, while manufacturing and marketing is in Rochester, NY.  Corp. A sought-after Adj. 1. sought-after - being searched for; "the most sought-after item was the silver candelabrum"
sought

wanted - desired or wished for or sought; "couldn't keep her eyes off the wanted toy"; "a wanted criminal"; "a wanted poster"

 speaker on compensation subjects, he has been program director for the Conference Board's annual compensation conference and executive compensation seminars for the past 12 years.

Role(s) of the compensation committee

Ed. Note: Fred Meuter Jr. has authored several important articles for DIRECTORS & BOARDS over the years, including "The Performance Unit Unleashing Its Power at the Operating Level" [Summer 1986] and "Questions the New Compensation Committee Member Should Ask" [Winter 1989]. The classic nature of the advice that this expert of some 40 years in the Compensation field brings to his writings can be seen in the following excerpt ex·cerpt  
n.
A passage or segment taken from a longer work, such as a literary or musical composition, a document, or a film.

tr.v. ex·cerpt·ed, ex·cerpt·ing, ex·cerpts
1.
 from his article "The Pragmatic Calling of the Compensation Committee," published in our Spring 1987 edition.

To accomplish what I like to call their "pragmatic" charter, the members of the compensation committee must individually and collectively take on certain roles:

* Defender -- not just of the shareholder's interests but also of the remainder of the company employees who may not participate in a plan which is being approved. Are their interests being hurt by this action? Is there some degree of internal equity being maintained? Are overall good business ethics business ethics, the study and evaluation of decision making by businesses according to moral concepts and judgments. Ethical questions range from practical, narrowly defined issues, such as a company's obligation to be honest with its customers, to broader social  and practices being followed?

* Initiator -- of new/modified actions and plans. The initiator mode can be activated activated

a state of being more than usually active. In biological systems this is usually brought about by chemical or electrical means. Commonly said of pharmaceutical and chemical products.
 by Committee members' reactions to data proposals being presented; to the questions they ask management and the replies they get; and to the statements made by management.

* Reviewer re·view·er  
n.
One who reviews, especially one who writes critical reviews, as for a newspaper or magazine.


reviewer
Noun

a person who writes reviews of books, films, etc.

Noun 1.
 -- of plans and actions presented by management. Directors furnish fur·nish  
tr.v. fur·nished, fur·nish·ing, fur·nish·es
1. To equip with what is needed, especially to provide furniture for.

2.
 another opinion; their past experience can be useful.

* Designer -- I call this the "suppressed sup·press  
tr.v. sup·pressed, sup·press·ing, sup·press·es
1. To put an end to forcibly; subdue.

2. To curtail or prohibit the activities of.

3.
 creative designer urge" which so many committee members have. Maybe it has been caused by their dealings with the professional consulting community. This is a role that many directors play very effectively, and now is their chance to use it. They do have biases, it is true, but they also are a resource which can be tapped as one moves through a plan design phase.

* Implementor -- by its approval of plans and particular actions, the committee acts as an implementor.

* Supporter -- a key to the overall role of the committee. It can give collective support for actions being considered by management. In particular, it can reinforce the actions that the CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board.  is considering taking or has taken in the compensation and other personnel areas.

* Counselor
See also:
See also:
A counselor (or counsellor) in mental health, psychotherapy or counseling
 -- very close to its role as a supporter. Who can the CEO talk to? Who can be used to try on management's succession plans? Who can the CEO use as a "ventilator ventilator /ven·ti·la·tor/ (ven´ti-la-tor)
1. an apparatus for qualifying the air breathed through it.

2. a device for giving artificial respiration or aiding in pulmonary ventilation.
?" This is a real role for the committee and its members and one which can be expected to grow in the future.

* Critic -- The committee member and the committee as a whole should be a positive critic, one which furnishes an intellectually honest second opinion.

One could conclude that the committee's charter and its members' roles could be completely open-ended o·pen-end·ed
adj.
1. Not restrained by definite limits, restrictions, or structure.

2. Allowing for or adaptable to change.

3.
. This is not true. There are certain activities that the committee should avoid:

-- Reviewing reams of data;

-- Responding to technical questions;

-- Deciding on particular actions concerning a large group of individuals;

-- Resolving differences in proposed compensation approaches; and

-- Becoming a "lid" on well-thought-out and useful compensation plans! strategies.

Most of all, the committee and its members should not make decisions which really should be made by top management. There is a fine line of distinction between the CEO using the committee as a "sounding board" and it becoming another required level of decision-making authority.

Fred Meuter Jr.
COPYRIGHT 2001 Directors and Boards
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2001 Gale, Cengage Learning. All rights reserved.

 Reader Opinion

Title:

Comment:



 

Article Details
Printer friendly Cite/link Email Feedback
Author:MEUTER JR., FRED
Publication:Directors & Boards
Geographic Code:1USA
Date:Mar 22, 2001
Words:2085
Previous Article:Stock options and optimal overhang.
Next Article:Roadblocks to the embrace of EVA.
Topics:



Related Articles
Director pay: the 'why' behind the 'what'; Establishing principles to address specific pay program amounts and components will help the board to...
A partnership approach to executive compensation: five steps for improving the dynamics between management and the compensation committee in today's...

Terms of use | Copyright © 2014 Farlex, Inc. | Feedback | For webmasters