Friday, March 21, 2014

Trends in Executive Compensation

By Gravett & Associates and strategic HR, inc.

Executive pay continues to make the headlines, which seems to always turn a head.
The Executive Vice President of Human Resources and Diversity at Macy's filed paperwork to sell 46,000 shares of Macy's stock, a market value of $1,399,320 as of July 8, 2011

The CEO of Kendle International, Inc. will be receiving a $2.1 million "golden parachute" following the acquisition by INC., only having just taken the role in the last few months.

The highest paid CEO in 2010 was Philippe Dauman of Viacom, owners of MTV, Nickelodeon, and Paramount Pictures. His pay was $84.5M, just two and a half times higher than 2009.
Are their salaries justified? Some will say yes, but others will complain given the compensation of others within the organization, community, and beyond.
Nonetheless, attracting executives can be extremely challenging when the roles are so critical to the success or failure of an organization. Executive compensation has been examined very carefully in light of the ethical scandals. The Sarbanes-Oxley Act of 2002 has tightened compensation and benefits rules for CEO's and other executives, so companies are exploring ways to attract "the best and the brightest" and still protect shareholder interests and maintain a credible public image.
When it comes to executive compensation, we're finding that companies are focusing less on benchmarking to discover what the compensation level is for other companies' executives and more on aligning compensation decisions with how well CEO's protect shareholder interests over the long term and how well they achieve strategic objectives. Boards are discovering that simply following compensation practices of industry leaders only promotes unnecessary escalation of CEO salaries, with no discernible advantage to the company other than bragging rights about having the highest paid CEO. Shareholders in several companies have actively campaigned to put a cap on CEO salaries and bonuses.
An exception to this practice of curbing salaries simply based on benchmarking is for CEO's who are specifically brought in to turn around a failing company or division. The focus in these cases is still on being a compensation leader.
Some companies are leaning towards stock options as bonuses so that executives "share the pain" with other investors when the company is not profitable. A caveat for companies who are considering this approach is whether this might encourage executives to adopt risky strategies that will pay off short-term, at the expense of longer term sustained progress. Many companies are even starting to require executives to hold stock until they leave the company or retire.
An increasing number of companies are tying executive bonuses to measures of both profitability AND growth. More companies are now evaluating executives on performance and providing additional compensation on the basis of that performance (resulting in both long term and short term success). We recommend a written agreement be established annually about the performance-pay relationship to clarify the metrics that will be used to determine compensation. This will provide a method to track compensation programs over time and assess the correlation to achievement of strategic objectives.
Finding the right total compensation package for your executives is a challenge. There is nothing more disruptive to an organization than the turnover of an executive's role. Don't let the total compensation be the culprit for a key loss, but, balance this with knowing that most executive compensation salaries may eventually be public information.

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