Cafe Classic: Are Your Compensation Goals Getting You to the Top of the Wrong Mountain?

Editor’s Note: Are we doing something wrong when we incent our executives?  Do we design plans that drive their performance up-up-up to the summit and then find out we’ve not taken them to the right place?  In this Classic, Dan Walter examines the steps — and missteps — that sometimes take us to the top of the wrong mountain and reminds us that cool heads (ours) must prevail during the all stages of that climb.

So often we see companies whose executives are paid handsomely only to falter shortly after.  How does this happen? Goals were apparently met. Success seemed to have been achieved. But the final result of the goals and success is a large payout followed by a sharp corporate collapse. Are we doing something wrong when we incentivize our executives?

As the evolution of Dodd-Frank and mandatory Say-On-Pay quickly impacts executive compensation, more companies are incorporating pay for performance into their executive packages. I am a huge proponent of performance-based pay. When the ‘Big 3” of compensation: design, execution and communication are properly addressed in performance plans, they represent a healthy future for compensation programs. Unfortunately, when the Big 3 are not handled correctly, these programs may fail even more spectacularly than some of our past compensation debacles.

Designing your plan requires truly understanding where the company wants to go and what compensation instruments are required to get there. 

The main goal of any compensation program is like a mountain on the horizon. Like a mountain, your key goal must be visible from many angles. It must be large enough to be seen from a great distance. It must be a challenge to reach the top in order to ward off those who do not have the strength, fortitude or passion to earn the summit. Your final goal may be reached through the use of multiple or layered compensation instruments provided over several years.

Performance compensation must be specific enough to keep people focused and flexible enough to allow for modifications as the environment changes.

Climbing a mountain is a monumental task. You start in the flatlands on a basic trail. Like all trails it is never straight and often twists and turns through trees and valleys. At each break in the trees, you must reorient yourself on the mountain and redirect your efforts to reach it. As you progress, you will undoubtedly summit smaller hills. Some will be useful and lead to higher plateaus. Others will prove to be obstacles that had to be passed in order to get the final mountain. When you finally reach the base of your final mountain the summit can often be obscured. Therefore, the path must be carefully mapped since the final climb will be very hard. 

At this point many of you are thinking, “Okay! Enough already, I get the metaphor.” You already a performance compensation program in place. It seems to be working. Results are coming in and your executives are on board. You have progressed to a point where people feel close to their goal. What’s the problem?

As you close in on your goals, perspective becomes more difficult and more important.

The fact is being near your goal at the base of the mountain is the most dangerous place to be. This is not because of avalanches, although they may occur.  This isn’t because of a lack of the right equipment. (You have planned for this climb and, undoubtedly, made sure you have the right tools.) The base is dangerous because of the excitement of reaching the top and the lack of perspective when you are so close to reach your goal.

Regardless of the plan design and compensation instruments used, execution and constant communication are required for success.

Once you start climbing the mountain you need focus on the work directly ahead of you. Each step is a challenge and you may not have a view of the summit for long periods. You may be following a path that was roughly defined long ago, but does not provide the specific details required for your ascent. Without direction, you may create new paths and trust that as long as you go up, you will succeed.  This can result in reaching the top of the mountain only to find yourself gazing across the vista only to realize “your mountain”, the one you have been aiming for all this time, is actually the next summit over. For all of your passion and effort, you have actually climbed the wrong mountain. Getting from the top of the wrong mountain to the top of the right mountain is something few of us of have the time or passion to endure and failure becomes a legitimate option. This lack of perspective, especially at critical times, requires someone be watching from a safe distance, where perspective can still be had.

Compensation pros must retain perspective as performance goals come within reach.

Compensation professionals must serve the role of guide and navigator. Our programs must be clearly designed to get people to the correct summit. We must ensure that each step is executed in a manner that keeps our employees safe and moving upward. Our communications must be clear and specific. We must be cognizant of potential missteps and confident enough to redirect our team as needed, even when the euphoria of an imminent summit is before them. We are not always part of the team that plants the flag at the summit, but we are absolutely essential to ensuring that the flag is planted on the correct summit.

Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and considered a leading expert on equity compensation issues. Dan has written several industry resources including a recent Performance-Based Equity Compensation issue brief. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”“Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation.

This post originally appeared on Compensation Cafe
Author: Ann Bares