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We work with both publicly and privately owned companies. I suppose the public market place is more “glamorous” (in some sense). Larger issues. Layers of board decisions. Bigger impact. More intense magnifying glass examining results. However, Comp Committees of public companies often miss the mark.
Of course, Committee members are under a lot of scrutiny and pressure. The risk of regulator criticism (or worse) is always hanging over their heads. And there are always disgruntled shareholders. These are real hassles. As a result, the main benchmark they use is “peer review.” They look to the pay package of their peers to determine how to pay their own execs. Here’s how it works: (1) a consultant is hired and charged to pull proxies, review surveys and present results; (2) the consultant presents findings to the committee; (3) the findings (showing how the top 5 execs compare to the selected group) are examined by the committee members and discussed; and (4) the committee draws some conclusions and makes recommendations to the board. The result: over time most companies offer pay packages that match up with this group of “peers.” This is the safe result. Who can criticize the committee since they’re merely doing the same thing being done by everyone else.
Wise owners of private companies do it differently. They don’t begin with the assumption that the management team should be paid the same way as those of their competitors. (Granted, the urge to do this is strong. But hopefully someone is protecting them from going down this path.) Instead, they can begin with the question: “What is our strategic direction?” My experience is that private companies are often much clearer on this message than their public brethren. The strategic direction of the company should drive compensation strategy. What is our short-term direction? What is our long-term? What initiatives need to be launched or maintained to achieve those objectives? What people will we need to do so? How do we want those people to think about our company’s future? What do we want them to focus on in their daily work? How much value will we create if we achieve our goals? How much of that value should be shared with our employees? In what form should that value be shared?
These questions and answers will lead the astute business leader to discard old compensation practices and embrace new ones. Since the entrepreneurial owner(s) of the company are not as controlled by regulators, shareholders (and even their boards) they have more freedom to align compensation with strategy rather than peer data.
As we observe an increase in government oversight of pay practices watch for originality and creativity in the total rewards world to emerge from the private marketplace. Bureaucracy stifles freedom and creativity. Ignore the public practices. Let the entrepreneurs create!
