The CEO's Role in Compensation Development and Management

CEOs have a lot to worry about. (Okay, forgive my stating the obvious before even gettng started!) As a result, effective chief executives provide strategic oversight but empower others to make decisions and carry out the company's business model and plan. Ideally, that person has set up accountability systems that are both effective and efficient in their ability to provide relevant feedback to guide him or her in making adjustments and course corrections as necessary.

I recognize there's nothing new in that introduction. However, it's an important foundation for setting up a discussion about the CEO's role in compensation development and management. Here's why.

The leadership orientation just described, while typical and necessary, often puts the CEO too far out of touch with an essential role he or she needs to play in the compensation discussion. Pay is a strategic tool, not merely an expense that needs to be contained. It is an investment that needs to be properly allocated and the CEO should assume as much responsibility for the return the company achieves on that capital commitment as any that is made in the enterprise. In fact, given that compensation and benefits are usually the largest budget item on any company's financial statements, one could argue that the CEO should pay even more attention to ROI results being generated in this area than almost any other the company measures and manages.

At the end of the day, the person at the helm is primarily responsible for making sure that both financial and human capital are generating an appropriate return for shareholders--and then holding people accountable for performance levels that will ensure that outcome.

If this is true (and I submit it is), then exactly what role should the CEO play in the compensation discussion--and where (if anywhere) should handoffs (delegation) occur? Here are some suggestions and guidelines:

  1. Establishing Pay Philosophy. A chief executive officer must lead the philosophical discussion about pay. Given the performance outcomes demanded of that role, the person at the helm must make clear what the company will pay for--and how that philosophy will be manifest in practice. Where should company salary levels be vis a vis market pay? What balance should the company strike between guaranteed and at risk pay? How much of performance-based pay (incentives) should reward for short-term results (monthly, quarterly or annual) and how much should be tied to long-term results (more than 12 months)? Certainly, a CEO can solicit imput from key leadership members in this discussion (as well as outside consultants), but this is a core issue for which he or she must assume primary responsibility. Every other discussion about pay will cascade from this foundational stage and the groundwork that is laid by establishing a clear pay philosophy.
  2. Defining Strategic Outcomes. Specific pay programs may be developed under the direction of individuals given that stewardship by the CEO. However, in making that handoff, the person ultimately responsible for the "bottom line" must be able to clearly define the strategic outcomes and priorities the company is focused on. Every rewards plan that is developed must have a purpose statement--and that purpose must be tied to a specific, measureable result the business seeks to achieve. What is the role of the pay plan if not to drive the business model and strategy of the company? CEOs will be left wondering why they aren't getting better results from their people if they aren't paying attention to and fully engaged in this part of the process.
  3. Establishing Framework for Discussion. Compensation development and management is not a static activity. A company can't develop a plan, role it out and then "let it ride" forever more (although some companies do, by default, adopt this approach). As a result, the CEO needs to provide the organizational framework within which best practices for envisioning, creating and sustaining world class compensation strategies can emerge and thrive. He or she should decide who is essential to the compensation discussion, organize a committee to fulfill the oversight role and (with the help of those committee members) establish a schedule and agenda for ongoing management and monitoring.
  4. Determining Roles and Responsibilities. Related to area number three above, this category implies that those involved with developing a best practice approach to building and sustaining world-class compensation strategies for their company understand their specific stewardships. For example, who is ultimately responsible for administering a given plan? Who will take the lead in developing a promotion and communication strategy for the overall rewards strategy? Who will make sure successes are celebrated appropriately and in a timely fashion? Who will monitor any legal requirements associated with the plan(s)? How and under whose direction will the success of given pay programs be measured and monitored? What financial information, requirements and procedures have to be tracked and managed--and who will assume that responsibility? And so on. The CEO doesn't have to make everyone of these assignments, but he or she does need to ensure that these roles get defined and that there is accountability for their fulfillment.
  5. Approving Metrics and Measures. Compensation design is an outcome based endeavor. In many ways it's also an exercise in reverse engineering. We project forward certain results we anticipate achieving based on certain assumptions (revenue growth, expenses, manpower, etc.). We determine how such growth will impact shareholder value. We then determine what amount of that additional value we are willing to share to achieve that outcome. We then "reverse engineer" that future value to a present context so we can clearly state how employees will participate in the value they help create. In that process, the CEO must help define thresholds of performance (revenue growth, profit margin, ROE, etc.) that need to be achieved before the company will be comfortable sharing value. Specific measures and metrics for company wide performance, department or team performance and individual performance will ultimately need to be determined. While the CEO won't independently set the levels in each of these areas, he or she cannot disengage from the decisions that have to be "signed off on" if the plans developed are going to be financially viable and protect shareholders' interests.
  6. Insisting on a Clear Message. CEOs set a tone. They can make or break a meeting or announcement based on the level of attention it receives, the passion that surrounds it and the clarity that is provided. Likewise, a CEO must ensure that any message involving any aspect of the largest budget item on the company's financials (compensation and benefits) is clear and helps reinforce the organization's vision and mission as well as it's business model and plan. This doesn't mean the CEO needs to deliver every message about compensation. It does mean, however, that he or she knows what messages are being communicated and they are consistent with the compensation philosophy statement that was established and articulated at the start, under the chief executives direction.
  7. Leading the Celebration. While managers at all levels of a business should help their teams celebrate the successes they experience, the CEO needs to be the cheerleader in chief. That role carries a weight that can't be duplicated by others. When employees hear from the person at the top, there is a different priority level that message attains. CEOs should "pick their spots" but then be sure their voices are heard when good things happen. This can be done in writing, in meetings, on intranet postings, on Facebook pages and through "tweets." Whatever the channel, the CEO must engage in this activity.
  8. Measuring Productivity. Perhaps the most important question to be asked about a given compensation strategy is whether or not it made the workforce more productive. Did people become more engaged as a result of how they were being paid? Is execution improving. If so, are there measurable results to prove it? Having mechanisms in place that isolate the return on investment that the company is achieving through its human capital are critical to evaluating the effectiveness of its rewards strategies. While a CEO does not have assume the task of coming up with the specific means of making a productivity assessment, he or she must insist it be measured and consistently review the trends the analysis portends.
  9. Holding People Accountable. If a rewards strategy isn't working, the CEO needs to know that. And someone has to be accountable for the lack of results being generated. If the other areas outlined in this article are properly addressed, this will be an easy step to take. Roles and outcomes will have been clearly defined. Accountability in this arena means that everyone in those roles understands what will happen if the outcomes intended aren't being realized through the specific pay programs for which they have charge. When results fall short, it will not always mean that the specific plan in question is bad or not performing properly. However, those responsibile need to be able to "account" for why results are what they are.

Our experience has been that in companies where this level of engagement (in the compensation discussion) from the CEO exists, performance occurs at an accelerated pace. Presumably, this happens because alignment has a greater possibility of occuring in organizations where the person at the top understands the essential and strategic role of compensation in creating a unified financial vision for growing the business.

To learn more about this issue, please view our webinar recording entitled "Why CEOs Should Drive Compensation Strategy."

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