Companies are trying to rethink executive pay packages in an environment of increased media, shareholder and regulatory scrutiny. New rules on pay are encouraging pay structures to reduce risk. But the problem of getting and keeping great employees is as pressing as it’s ever been. Meyer-Chatfield Compensation Advisors President Flynt Gallagher talks about ways to reward performance while reducing risk.
Is pay-for-performance the best approach to attracting and retaining key executives?
Pay-for-performance is not new, but it seems to get reinvented when the economy doesn’t cooperate. The idea seems perfect. In reality, however, the process of connecting pay to performance is far more difficult than it appears.
For the most part, a large percentage of an executive pay package is tied to the company’s stock. As a result, the market may not be rewarding the executives for doing a good job. The stock market is not a rational indicator of a management team’s success year to year. If a company’s stock price is the gauge by which an executive’s success is measured, does that mean that when the dotcoms had a high price they were well managed? Certain industries, even in bad times, are on the rise. Does that have anything to do with the quality of their management teams? There’s a mixed signal to executives asking them to take a long term view, yet they are measured quarter to quarter by stock market performance.
Is there a better way to handle executive compensation?
The key to our economic recovery is to remove the handcuffs and the government’s position on pay. We need to get back to the free enterprise system, the fabric America was built on, and provide the incentives for the talent needed. No company wants to over-compensate or under-compensate, but the decision regarding the amounts paid to executives certainly can’t be left to Washington.
Maybe it’s time for a little creative thinking. Companies need to be able to attract and retain the talent that will make a difference during this recovery and consider approaches outside the box.
Nonqualified deferred compensation is a device that can work in concert with a company’s strategy and unquestionably aligns the interest of the executive with shareholders. These plans are friendly to shareholders, as there is no dilution in ownership, nor does the company have any significant cost of providing a plan. The monies deferred are held as general assets by the company, subject to the claims of the company’s creditors. Executives are not taxed on those dollars until they are withdrawn, because they are at risk if the company fails.
What are the benefits of a performance-based Supplemental Executive Retirement Plan?
Traditional SERPs have been criticized by the media, shareholders, shareholder advocacy groups, boards and even the academic community. Their main criticism is that these plans have no performance element to them. Despite the negative sentiment regarding SERPs, there likely will be increased use of these plans, however, with a new design twist focusing the contributions on company performance. This concept is worth consideration for those companies looking for cost effective ways to attract, retain and reward key employees who can make a difference. A properly designed performance-based SERP can help companies reward executives for achievements that drive the company in the right direction, without the volatility of the stock price.
What words of encouragement can we provide to the industry?
The only way many companies can recover is to have the right people in key management roles; therefore, attracting and retaining people is critical. It’s time to think a little more creatively.
The media and Washington would have us all believe that the senior executives in major companies and their rush to line their own pockets are at the core of the nation’s economic woes. Executive compensation packages have been vilified and considered to be nothing more than corporate greed that is limiting our economic growth. But if we are going to get this economy turned around, aren’t these executives the same people with the potential to restore investor confidence and market growth?