In today's business and political environment, executive compensation is under scrutiny. One could even argue it's under attack.
This is an issue that impacts primarily public companies, but even private organizations may find themselves defending their approach to upper tier compensation, especially that of the CEO. If that happens to you, what will your response be?
Pay for any level of employee is easily justified when it is rooted in a sound, well thought out, written compensation philosophy. Organizations need to be able to articulate what they believe about rewards, what value creation means in their business and how and with whom they intend to share value that is created. Here's an example of what I mean.
Recently, telco Singtel, a Singapore business, found itself under fire for "over-paying" its CEO. The company's annual report showed that CEO Chua Sock Koong took home S$5.6 million for financial year ended Mar 31, 2015. This consisted of S$3.83 million variable bonus and a salary of S$1.68 million, and was up from S$4.71 million that she earned the previous financial year. Singtel customers didn't like that, indicating their experience with the company was not up to par and therefore the compensation wasn't warranted.
As reported by Channel News Asia, the company's response was as follows:
"It is important to note that this bonus can be clawed back if Singtel does not continue to deliver sustainable value," the telco said. It also said there is a long-term incentive scheme in the form of performance shares to reinforce the delivery of long-term growth measured by total shareholder returns in relative and absolute terms," Mr Israel said.
Note the rationale this organization was able to offer for its CEO's pay package. Note also that its response begins with a statement of philosophy about compensation followed by an explanation of how that philosophy is applied. When a business takes this approach, it weakens the arguments of its critics. People may not like the amount of money executives earn in an organization, but if there is a core belief system that backs it up--and that philosophy considers shareholder, employee and customer interests--there is really no argument that can reasonably be sustained against the level of executive pay.
- Define value creation in clear terms.
- Communicate a clear philosophy about how value will be shared.
- Strike the right balance between guaranteed and "at risk" pay (incentives) and between short and long-term value-sharing.
- Measure the return on their total compensation investment (ROTRI).
- Make appropriate adjustments as ROTRI and budget considerations dictate.
In the end, compensation needs to be applied as a strategic tool to create a unified financial vision for growing the business. That unity comes when all feel a sense of partnership in what is being built. A compensation philosophy will help you frame that partnership and diminish the opportunity for critics to decry how much you are paying your best people.