Why CEO’s reject typical pay decision processes for their executive team? (White Paper)
Another critical question for CEO’s of mid-small cap companies – or anyone
helping the CEO create and strengthen your firm’s executive compensation strategy.
Jack Byrne, Principal
What pay decision processes or tools do mid-small cap CEO’s use for their executive team? We’ve delivered fully defensible competitive market analyses of executive pay for many years to a wide range of CEO’s. While a solid market analysis is an essential initial step, we noticed that many CEO’s were frustrated proceeding through their own internal pay decision process. They often lacked a trusted pay decision model that is effective at the senior executive level. Our solution is frequently praised as an unexpected yet surprisingly helpful tool by new clients – and the inspiration behind this article.
Our surveys indicate mid-market CEO’s believe that traditional “pay decision” processes and evaluation tools – including their own company’s management version - are not suitable for their senior executive team. This isn’t just a belief – CEO’s shun using their own company’s pay or evaluation decision tools (I felt the same way with many processes that I inherited in my 20+ years at the C-level). Our findings also indicate the problem isn’t just limited to setting executive base salary. Any deficiencies here can also make it more difficult to create effective annual and long-term incentive plans as well.
What’s behind that finding, and what’s a CEO to do? In our extensive work for CEO’s and boards, deficiencies in three critical “executive level” categories were identified most frequently when they sat down to make their executive team and CEO pay decisions. In this article we’ll briefly identify these top three need areas and discuss solutions.
- Reflect senior executives’ strong “pay for performance” linkage and high bar for performance
- Metrics address team-driven results & behavior versus individual
- Means to rate or measure critically required seasoning & distinction at the executive level
Strong “Pay for Performance” Linkage: CEOs need a pay decision process and criteria that recognizes the very high bar set for senior executive performance results. They seek a more direct “pay for performance” linkage than is found in general or even managerial pay decision processes. Against that intent, executive pay at well-run companies is usually structured with a heavy incentive component tied to performance metrics. If well-designed and market competitive, the annual incentive portion will range from 25-50% of annual salary, which certainly sets a direct and sizeable linkage to performance.
So if a sizable incentive exists for executives, then adding a tedious process to indirectly value performance and drive pay decisions (as might be found in a managerial or “total company” pay decision-evaluation process) is rejected as unproductive by CEO’s. Their focus is better directed on assuring market competitive sizing, the right metrics and an effective incentive structure. Ascend has methodologies to quickly and effectively meet all three focus objectives for executive teams.
Team-Driven Results: But how are those metrics best kept focused and direct? Many CEO’s also want to promote team-driven results and behavior at the top, and thus want a pay decision process that reflects more on team performance than individual criteria. Very few company pay decision processes meet this criteria, leading to their overwhelming rejection. A shared set of metrics for the executive group meets this team requirement and is also much easier to manage than multiple individual criteria. The Ascend pay decision model fully supports creating and applying executive team-driven metrics.
Seasoning: Retention is much more imperative at the senior executive team level. The skillsets and experience required are both more critical and rare, built over years in the industry and/or company. The capacity for strategy and decision making is broader than any typical general company evaluation process will measure. If your pay decision process doesn’t practically factor for these, it will not meet your compensation goals for retention and resultant company performance.
At Ascend we grouped these factors into a unique and powerful “Seasoning” assessment rating to fill this gap. Subsequent CEO testing and refinement created a highly effective “Seasoning Rating” that is practically applied and well-correlated for compensation impact at the senior executive level. It’s also more likely to be consistently rated by CEO’s and executives – which everyone appreciates. This Seasoning rating is now included with all Ascend’s executive compensation analyses and pay decision models.
Distinction: Senior executives are also held to a very high standard for leadership, nuanced cultural contribution, leveraging external relationships, and demonstrating distinguishing technical capabilities. These reflect in their ability to parlay influence and performance broadly across the organization and market, beyond just their functional areas. Any or all of these four criteria may combine to create a “we don’t want to lose him/her” executive situation. As with Seasoning above, Ascend also found that these criteria were inadequately addressed by general pay decision processes. We created and refined a highly effective “Distinction Rating” that has proven very effective with CEO’s. The Distinction rating is part of all Ascend executive compensation analysis and pay decision models.
Next Steps: Like many CEO’s, you probably cast aside your company’s pay-evaluation decision process when it comes to your executive team. But does your own alternative approach deliver the results you need and adequately address the above deficiencies? If not, then you miss opportunities to align executive team performance, and put your retention goals at risk. If your senior executive pay decision process or overall compensation plans aren’t adequate, you likely don’t have the time or the in-house experience to craft a verified solution to meet your calendar - and get it right the next time. The expertise of an executive compensation consultant, especially a firm with real-world C-level experience, can deliver solid solutions and save you time through their market competitive knowledge and greater familiarity with different options.
Ascend will gladly review your pay decision practices and discuss verified improvements successfully implemented for other companies. With our experience, we can help create an aligned and effective senior executive pay decision process - fully evaluated and defensible as market competitive = to meet your performance and retention objectives. We’re also happy to discuss the Seasoning and Distinction ratings and their elegantly practical advantages for CEO’s that we’ve demonstrated over the years. We do not charge for an initial consultation meeting, so give us a call or contact us through our website.
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Since 1999, Ascend has delivered independent competitive intelligence, seasoned guidance and powerful solutions for executive and board compensation. Clients are successful CEO’s and boards who benefit from Ascend’s unmatched combination of expertise, C-level insight and unique mid-small cap modelling. Jack Byrne joined with his partner David Lough as principal of Ascend Consulting after 20+ years of CEO/COO experience leading successful Northwest companies. You can reach Jack at firstname.lastname@example.org or website www.ascendnw.com.
Ascend Consulting Seattle, WA email@example.com 206-849-3110
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Interested in a quick checklist to evaluate your overall total compensation strategy and plans? Our one page “Checkup – Quick Checklist” is a great CEO tool for an annual or periodic assessment.