Driving business performance - Hay No 3 - Driving business...Driving business performance through effective meeting planning 1 ... The discussion should center ... compensation philosophy.

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  • 2014 Hay Group. All rights reserved

    Driving business performance through effective meeting planning 1

    As advisors to the compensation committee, we are continually asked Are we running effective meetings? Our clients often wonder if they are focused on right things; in particular, they want to know if their calendars, and meeting planning, effectively allow the committee to spend time concentrating on key business metrics. Further, are they using those metrics to leverage business success? Lets examine some ways in which the compensation committee calendar could be improved.

    We have found five critical areas that the committee should consider in its meeting planning. While some of the issues currently may be a once a year (or even an every other year)

    topic, most should become integral discussions at each meeting. More importantly, the committee should understand how they tie back to the core business issues at hand. The five subjects are:

    Linking business strategy to human capital strategy

    Strong governance practices and risk management oversight

    Succession planning and CEO performance

    Education and continuous learning

    Effective communication.

    Driving business performancethrough

    meeting planning: maximizing the compensation committee calendar

    effective

  • 2014 Hay Group. All rights reserved

    2 Driving business performance through effective meeting planning

    Generally, we find that the compensation committee calendar is driven by the annual meeting and then working backwards. Once the annual meeting flow is established, the compensation committee can think about how it should set up the year. We have found this is the time to get proactive about the calendar, and making it a useful tool in the toolbox as part of the human capital strategy for the business.

    Linking business strategy to human capital strategyThe linkage of business strategy to pay may be the most crucial area. It is almost impossible to even consider the human capital and compensation challenges without looking at the business. More importantly, this is a time to evaluate how the company makes money, and consider whether the executive compensation plans align with the business cycle. Plans built to drive performance and business in a previous business cycle may not be relevant today. Further, as we see ongoing changes in many markets, it may be time to step back and consider whether the compensation programs are fully aligned with the companys business and talent strategies now and in the foreseeable future. The discussion should center on ensuring that the incentive plans are focused on value creation and financial performance. Ultimately, we need to determine if the pay programs actually reinforce the business model, strategy and vision.

    Once the committee has examined the business and its needs, it can reevaluate the current compensation philosophy. When it comes to compensation philosophy, there is no correct answer. Just because the organization has lived with one philosophy does not mean it is a static item. As the business changes and evolves, so too may the philosophy.

    For example, early stage companies may start off with a low cash, high equity model that is looking to create a package at or near median values. With the maturation of the business, there may be more cash available, and the firm may find that its industry or sector has become extremely competitive, and/or peer compensation may be a larger factor. In response, the pay philosophy may shift to a P65 or P75 model of cash, short-term and long-term incentives that use key business metrics and is truly performance-based. The end result is that each meeting should include a brief conversation on the state of the business, market dynamics, future goals, and how well the current philosophy is working, followed by a consideration of whether any changes are appropriate.

    Strong governance and risk management oversightThe fields of governance and risk management go hand-in-hand. Good governance at the committee level will help mitigate risk for the business. However, we always caution that best practices in any area of the business are informational, and ultimately the company needs to ensure that its practices, policies, and procedures fit the business, its philosophy, business stage, and life cycle. For example, even if it may be best practice to look at realizable or realized pay, it may not suit your business at a certain point in time.

    Today, financial institutions arent the only companies concerned about incentives and the potential for excessive risk. All industries are required by the SEC to disclose that they have reviewed their pay plans to ensure an appropriate balance of stretch with risk mitigation. In many cases these reviews have revealed plan design and/or governance weaknesses for the committee to address.

  • 2014 Hay Group. All rights reserved

    Driving business performance through effective meeting planning 3

    We also suggest taking a hard look at the short- and long-term incentive plans. A process of regular evaluation can help ensure that these programs are working as desired, and that the metrics in each plan are achieving the desired business results and are not causing excessive risk. We view risk oversight and risk management as ways to protect a companys assets while also creating long-term value. By including these topics for discussion at each meeting, the committee is treating risk oversight as a constant process that is embedded in the organizations strategy and operations. Ultimately, this will help when the next proxy season rolls around, and the committee, through the CD&A, can clearly explain to investors and stakeholders the process that the board uses for risk oversight and the monitoring of strategically important risks.

    Succession planning and CEO performance managementToday there is a much greater focus on talent management, and we see committees paying much closer attention to the future talent pipeline. At a time when general retention concerns may be ebbing, executive talent continues to be a hot commodity. Leading organizations are taking the time to look at how compensation supports executive and CEO succession planning and talent development. At each meeting you should be inquiring about any difficulties in recruiting or retaining your top talent, and also asking your leaders in human resources about the development of talent in the business. Key to the succession planning discussion involves also looking at CEO performance and CEO performance evaluations. Having honest discussions can help to identify issues early, and allow for conversations to occur over time around the fit of the CEO, his or her performance, the direction of the business, and future needs.

    Education and continuous learningAnother important area the committee should address at each meeting is education. The committee should regularly assess its own level of compensation knowledge (especially related to fast-evolving compensation or governance trends), and determine if further education or training is needed. This can be handled in-house, or at events sponsored by organizations such as ODX, NACD, NASPP, WorldatWork, The Conference Board or at other director level educational venues. Further, the committee should ensure that its members have a regular source of updated information on compensation developments and demand such information from management and its advisors. Continuous learning at the committee level will only foster better discussions, and also mitigate risk around compensation planning.

    Effective communicationWe are strong proponents of communication. Great plans without clear understanding can result in disaster. You need to know if your senior executives understand the rationale and design of their own pay programs.

    Do they see the clear link between business goals and whats required to drive results for your organization?

    Do they understand how their actions will affect their compensation?

    Discussions around creating and delivering messages about executive pay are essential. The committee should clearly delineate the roles and responsibilities for developing executive pay communication strategies and content, and the respective roles of the committee, management, and advisors. Communication is not just internal; the committee should ensure and understand the processes and mechanisms in place to allow investors to share their input with the board, the committee, and management. The process should foster a constant conversation between the company and key shareowners.

  • 2014 Hay Group. All rights reserved

    4 Driving business performance through effective meeting planning

    This article was previously published in the September 2014 issue of The Executive Edition, Hay Groups resource

    on executive compensation matters. To read the newsletter in its entirety or for additional information on this

    topic, please visit www.haygroup.com

    Irv Becker US national practice leader, executive compensation New York Metro +1.215.861.2495 irv.becker@haygroup.com

    Bill Gerek Head, US regulatory expertise Chicago +1.312.228.1814 bill.gerek@haygroup.com

    James Otto Atlanta +1.404.575.8740 james.otto@haygroup.com

    Brian Tobin Chicago +1.312.228.1847 brian.tobin@haygroup.com

    Cory Morrow Dallas +1.469.232.3826 cory.morrow@haygroup.com

    Tim Bartlett Kansas City 816.329.4956 Tim.Bartlett@haygroup.com

    Brian Holmen Los Angeles +1.949.251.5440 brian.holmen@haygroup.com

    David Wise New England +1.201.557.8406 david.wise@haygroup.com

    Martin Somelofske New York Metro +1.201.557.8405 martin.somelofske@haygroup.com

    Matthew Kleger Philadelphia +1.215.861.2341 matthew.kleger@haygroup.com

    Brandon Cherry San Francisco +1.415.644.3737 brandon.cherry@haygroup.com

    Greg Kopp Washington DC Metro 703.841.3118 Gregory.Kopp@haygroup.com

    Contacts

    Wrap-upAs you begin the meeting planning for 2015, now is the time to consider the calendar and ensure that you are focused on the core issues that will enable the committee to make solid informed decisions that will not only make the meetings effective, but also help to maximize the business opportunities in the market.

    Daniel P. Moynihan is a consultant in Hay Groups US executive compensation practice. You can reach him at +1.201.557.8423 or daniel.moynihan@haygroup.com. n

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