By Marsha Cameron
In the past two years, modest compensation increases in the U.S. reflected improvements in business results, while here in Texas, economic growth exceeded other parts of the country. Texas CEOs indicate there are continuing concerns about the economy, which impacts the willingness to drive up compensation costs and/or reduce flexibility. Texas companies, on average, maintain more conservative compensation practices and preserve a higher level of discretion than their counterparts on the East or West coasts, which has served the economy well. On the other hand, many Texas CEOs are starting to ask questions about how effectively their companies are addressing current compensation concerns:
1. Do We Need to Increase Pay?
Given the shaky economic recovery, low inflation and high level of unemployment, many Texas employers have concerns about increasing base salaries. The first question to consider before giving increases is affordability. If a company is continuing to experience economic distress, salary increases are probably out of the question. If this is the case, it is important to communicate with employees and engage them in measures to help improve profitability.
Once company performance improves, it is hard to continue withholding salary increases. However, companies should balance the maintenance of hard-earned cost reductions with pay increases, and certainly, focus on rewarding high performers. Many companies have increased incentive opportunities which are “self-funding” (i.e., linked to profit improvements) instead of base pay increases. Generally, if communications are clear and consistent, employees will accept temporary sacrifices. On the other hand, lack of communication or perceived unequal treatment of employees at the top of the organization versus mid-levels or rank and file is a morale killer.
2. How Do I Know Our Compensation Structure Truly Motivates and Rewards High Performance?
Most organizations have placed higher emphasis on pay-for-performance plans in the past decade. Incentive pay programs have grown in many organizations as base salary increases were low or non-existent. However, motivating high performance requires more than adding or increasing an incentive opportunity. It’s important to remember the axiom “what gets measured gets done,” and communicating with executives and other eligible employees is key. Does your company set goals that can be communicated with eligible employees? Do employees understand the company’s and their personal goals? Are the reasons for merit increases or bonuses clear? In companies where there is a clear connection between pay and performance, the answers to all of these questions is a resounding, “Yes.”
3. Obtaining Shareholder Support For Public Company Executive Compensation Plans
New SEC rules in 2011 mandated shareholder “say-on-pay” votes at least once every three years. Many companies are seeking to improve their margin of favorable votes. There are a number of ways that companies can proactively influence a say-on-pay vote. Proxy advisory firms look for incentive plans with structured metrics and an objective basis for awards, a well-defined peer group for supporting compensation decisions, and transparent disclosure about both relative and absolute performance. In short, less discretion is highly preferred. Second, companies can reach out to institutional investors that voted against executive compensation previously and, to the degree possible, address concerns. If the company made changes to executive compensation plans or approaches in 2011, or are introducing changes in 2012 that are responsive to shareholder concerns, explain those in the “Compensation Discussion and Analysis” section of the proxy.
4. How Does a Private Company Compete With Incentive Opportunities?
It’s possible for private companies to have the same equity instruments as public companies, so the true limitations are likely to be relative liquidity of awards, ease of communication, and corporate philosophy regarding ownership. Lack of liquidity (i.e., limited ability to obtain gains without a triggering an event such as a change in control) can be a competitive disadvantage unless there is a clear plan for an IPO. Further, communications about award value are more complex because there is no easily referenced stock value to track. Also, private companies often have issues with diluting ownership. These are obstacles that can be overcome with more sophisticated plan design and effective communications, but a long-term cash program can also be considered. In this case, it is important to establish truly strategic metrics where achievements will make a critical difference to company success and also allow a significant upside in awards, depending upon results, that could match the value of stock options or restricted stock.
5. How Do We Attract and Retain the Best Employees in the Industry?
First, recognize that there is no one formula. Companies in varying stages of maturity attract diverse employees motivated by different compensation approaches. For instance, it would be typical to see higher incentive opportunities and lower base pay in a high growth, early business cycle company. It might be challenging for this type of company to attract employees from large, mature companies with highly competitive base salaries and less pay at risk. Further, generational considerations have become an important part of attracting and retaining employees in some industries. Industries employing a high proportion of younger employees have found themselves providing more flexible time-off programs, a casual work environment and an emphasis on work/life balance to attract the best employees.
There is no “one way” to address compensation concerns today. What worked for the company down the street is unlikely to work for another company unless there is a comparable stage of business maturity, similar strategies, economics, ownership structure, industry characteristics and employee demographics. Consider each business situation and priorities, understand the competitive landscape, and then maintain or implement programs and make decisions that drive the desired business results.
Marsha Cameron is a Partner and Co-founder of Dallas based Paradox Compensation Advisors. Marsha has over 25 years of experience in both public and private companies in the areas of compensation consulting, performance management, and the use of human resources approaches during mergers and other business transactions or strategic changes.
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