The current zeitgeist of pay, particularly executive pay, treats shareholder return as the sole mission of an organization, without regard for any externalities and costs born by other stakeholders.

Compensation programs that continue to be changed or “tweaked” point to an underlying design weakness.  Pay practices that are rooted in organization strategy and life cycle phase need only change as often as those.  This means sometimes adding more structure than is needed in earlier years and accepting more informality than typical after a large increase in scale.

No compensation program should be so complex that stakeholders with a typical level of business knowledge are unable to understand the program.  Bankers, suppliers, customers, and employees all receive compensation from their employers and should be able to understand the compensation of your organization.  Overly complex programs create cynicism and mistrust.

Some change-in-control (“golden parachute”) provisions in compensation plans provide an unbalanced incentive to get acquired rather than determining ownership transactions in a manner that benefit all employees.  Given the high failure rate of mergers and acquisitions, providing a premium payout relative to the pay for maintaining the organization can lead to distorted decision-making.

Companies with unique cultures, strategies, hiring criteria, management philosophies, and organization styles should assume that those together attract a certain group of workers that may collectively have unique needs and interests.  Don’t let survey data drive you to provide forms of pay that are “popular” in organizations that are nothing like yours.

The accounting profession has institutionalized the notion that a “fiscal year” is a meaningful time period with meaningful beginning and end dates that likely are completely irrelevant to how you actually need to run your business. There is no rule that says bonuses or anything else need to be based on the accountant’s 12-month period or, worse, the investment community’s 3-month calendar quarter.

Team members in the same job or at the same level will bring different levels of knowledge, skill, experience, and performance to the role.  The marketplace differentiates pay based on these factors and organizations must recognize individual value consistently.

Most organizations can afford to pay employees more than they do and still balance the needs of other stakeholders.  This principle is particularly important during the extreme ends of the business cycle – layoffs and pay cuts in business downturns, and excessive short-term payouts in business boom times. This must be scrutinized at the “top” and “bottom” of the organization pay hierarchy – consideration of a living wage at the bottom, and reasonableness at the top.

Team performance is what matters but individual contributions to that performance cannot be ignored.

The method of setting pay should be clearly communicated and should result in different observers arriving at a generally consistent decision on pay value for an individual.  But few organizations do this well enough to allow them to publicize individual pay without incurring organizational damage.  Make decisions like everyone’s pay is available on a web page, but don’t actually put it there.

Compensation programs that require excessive investment in additional staff, systems, and advisors typically spend a disproportionate and untracked amount of money in delivering compensation.

Compensation reinforces behavior only when workers have the information they need, the education to interpret that information, and the power to act on it.  Absent those, any purported “incentive” is reduced to hoped-for pay.  Providing information, education, and empowerment, without financial incentives is typically more effective than incentive plans without those in place.

Fred WhittleseyConscious Compensation