Building Unified Financial Visions

Okay, so Peter Drucker never really knew VisionLink.  That’s a detail.  However, his philosophy about pay at the executive and management level was “spot on” with what we believe should be a core tenet of rewards design:

Build world class compensation strategies that are rooted in pay for performance and drive measureable results.

In her November, 2009 HBR article entitled, “What Would Peter Say?” Rosabeth Moss Kanter shares the following insights into Drucker’s thinking regarding the recent executive pay brouhaha.

“Drucker would not have been surprised that incentives to take excessive risks contributed to the recent global financial meltdown.  Back in the mid-1980s, he warned about a public outcry over executive compensation…More than 20 years ago, Drucker pointed to a top-to-bottom ratio that was then rushing past 40 to 1.  Just before his death, the ratio was greater than 400 to 1.

“Drucker was not against wealth accumulation, but he was pragmatic about the work of organizations and society.  He held that the role of executives was to coordinate the actions of others whose motivation (and thus compensation) was necessary to get the job done.  But he also held that pay should be associated with performance; that was a major point of management by objectives, perhaps his most practical management contribution. Listening to Drucker might have headed off some of the excesses associated with Wall Street…in which bonuses not only were decried for their amounts but also were uncorrelated with company results…”

I suspect that most company leaders would find themselves in agreement with much if not all of the issues Drucker raises.  However, although many agree with a performance/pay correlation philosophy in principle, few are translating that belief system into consistent compensation practices.  Fewer still achieve a rewards strategy that could be considered “world-class”; one that places them in the competitive advantage driver’s seat.  A world class pay plan is one that fully integrates compensation into the business plan of the company and creates a seamless link between vision, strategy, roles, expectations and rewards.

What most companies need to bridge the gap between where they are now and where they should (and, hopefully, want to) be is a Missing Structure; a system or process that helps them effectively engineer compensation strategies that impact execution and results.   In our experience, that Missing Structure needs to include the following comp0nents:

• CEO/Board Level Leadership and Involvement
• A Clear and Written Pay Philosophy
• A Comprehensive Compensation Gameplan
• Fully Integrated and Correlated Pay Strategies and Plans
• Consistently Executed “Line of Sight” Review

These steps ensure a cohesive, consistent approach to talent attraction, retention and development.  Likewise, they provide checks and balances that protect the company from sacrificing good profits for bad or that substitute short- term performance bursts for sustained results.  When properly executed, these measures make sure that all incentive plans are self financed and pay benefits that are correlated with increased shareholder value, and other critical measures.

Many of the companies that have made headlines in recent years lost sight of these important principles as it relates to compensation development and management.  Again, Peter Drucker’s observation is a correct one.  He stressed that:

“…ensuring the long-term health of the company–and eschewing short hits that jeopardize the future–is executives’ primary job.”

We are happy to know that Peter Drucker agrees with us.