Executive compensation and compensation programs will always be under review as management and ownership aim to align compensation, especially at the highest levels, with performance. While the goals and metrics may differ by company, best practices for compensation committees can be applied across the board to increase compensation effectiveness (and, as a byproduct, company growth) and improve transparency.
Consider What Behavior Your Compensation Incentivizes
Compensation, especially when it’s tied to performance metrics, is designed to incentivize certain behavior. While increased profit is a common metric, there are other metrics that matter as well, such as employee retention, safety, or profit per business unit. Compensation committees should review these metrics regularly to make sure they align with company goals and values. The committee should make sure there are not any unforeseen consequences of directing executives toward particular incentives. Businesses must balance the focus of their compensation strategies to ensure profit and growth while still retaining core values.
Compare Your Program to Market Best Practices
One way to tackle compensation questions is to perform an executive compensation audit. You want to understand how your compensation program compares to others of similar businesses and make sure that the differences in your program support your business goals. The audit should help clarify the metrics needed to make intelligent pay and benefits decisions. It may also turn up some current market practices that could help recruit better talent or align executives towards business goals.
Create Clawback Policies
While you hope that you never have to use them, having clawback policies in place allows you to take appropriate action in certain circumstances. You don’t want to be the company whose executives misbehave, draw a huge amount of negative press, and then walk away with a golden parachute intact. Clawback provisions are another way to incentivize executives and ensure their behavior never strays beyond your company’s core values.
Look at Gender Issues
While this isn’t specifically an issue with incentive plans, executive compensation committees have the power to make an impact on company, industry, and even national issues like gender diversity in senior management and the gender pay gap. Committee members should consider whether there are real issues or perceived issues regarding gender roles. Further discussions should be had on how the company addresses those issues and how to take proactive steps allow women and minorities to succeed in the upper levels of management.