The current state of executive compensation is predicated on how executive compensation and company culture interact; the effect of the “war on talent” on executive compensation; Environmental, Social, and Corporate Governance (ESG) metrics in executive pay; and other important compensation-related issues that are top-of-mind for executives, compensation committees and shareholders.
- Rather than compensation programs being the lever to drive employees to the behavior a company wants to promote, culture and values should be the primary mechanism. Compensation should be a reinforcement engine for accountability.
- The war for talent is getting much tighter and that is impacting how companies are structuring executive compensation. How executives are compensated matters when attracting and retaining top executives and the broader employee base.
- Many companies today have more human capital-based metrics in their executive compensation framework. Broadly speaking, diversity and inclusion are being incorporated across industries. Utilities and engineering companies tend to lean more toward environmental and sustainability metrics, industrial and manufacturing companies may emphasize safety, and financial institutions might focus more on customer services and satisfaction.
- A company’s board should work with management to determine if and how it’s appropriate for their culture and business model to inject hard-wired measurements of ESG into an incentive plan. HR leaders should be prepared to act on any incentives presented to their board.
- Before incorporating ESG criteria into incentive plans, understand their impacts. There will be concerns about whether your criteria are qualitative or quantitative. If they include only diversity and inclusion, be prepared to explain to shareholders why you might not be measuring sustainability.
“Compensation is a reinforcement engine—an accountability mechanism…We want our morals and culture to be our employees’ guiding star.”
—James Garvie, Southern Company
In the current environment, companies need to carefully consider their executive compensation structure to help maximize the number of employees they recruit and retain, and minimize complications that could arise from prematurely proposing changes without understanding their full implications.