In part one of this series, we discussed how executive compensation discussions can “wag the dog,” uncovering gaps in underlying premises and promoting important and deep discussions that clarify strategy. This article examines how compensation can expose talent gaps and cultural risks.
For instance, discussions regarding changes to compensation plans can surface:
- Skill gaps necessary to implement strategy
- Disconnects in differentiated recognition of top talent
- Organizational culture issues
By examining three case studies, we’ll explore how compensation discussions can illuminate underlying talent shortcomings, catapult necessary talent planning actions into motion and lead to pivots in a company’s people strategy for the next phase of a company’s growth.
When these moments surface, they present opportunities for the board to discuss the talent and culture strategies needed to move the business forward.
Uncovering Talent Gaps Through Performance Metrics
In one organization, a new growth metric that required the company to enter new markets and channels to re-ignite stock price growth was introduced into the executive compensation plan to drive higher performance. The company’s operational performance and productivity improvements had been strong over the years, but the stock price remained stagnant.
Investor conversations highlighted the need for top-line growth as key to regaining their interest. The issue arose when the compensation committee approved this metric. They began to understand its difficulty and realized that several leaders lacked the necessary skills to drive growth or integrate acquisitions, which were crucial for the implementation.
This realization prompted a thorough review of what it would take to achieve the goal and the talent needed to execute it. As a result, the board worked with management to make several crucial decisions about talent realignment and development. They also created a new channel development role targeted at an external hire with proven experience.
What was intended as a simple performance measure became a critical tool for evaluating and optimizing executive effectiveness. In this case, the performance metric highlighted a misalignment between executives’ abilities and the skills needed to drive growth. Compensation plans can reveal skill gaps that may not be visible through regular performance reviews.
Compensation Analysis Reveals Tenure Rewarded Over Performance
One company prepared for its end-of-year pay decisions by analyzing the key drivers of changes in executives’ pay over time. They expected that their highest performers and highest potential executives would have received pay increases over multiple years that were substantially different from others. To their surprise, the most significant pay changes were tied to executive tenure, with performance driving negligible differences. As a result, the committee worked with management to rethink the performance management and talent evaluation systems to ensure the best performers were singled out for differentiated rewards over time.
A simple pay analysis revealed unintended outcomes and breaks in the performance management system. The insights gained were instrumental in making informed adjustments to both performance management and future compensation strategies.
This case also underscores the importance of conducting analyses that test trends or sensitivities around compensation. Companies can unlock broader insights and address/prevent unintended outcomes by examining different variables more deeply.
Incentive Program Actions Highlights Fiefdoms and Cultural Breakdowns
Another company’s CEO wanted to drive accountability throughout their leadership team. To support this objective, the company implemented an annual incentive that rewarded regions 70 percent for their own sales and earnings performance and 30 percent for the company’s performance. Over the course of the year, Region One was taking off and would benefit from additional raw materials and product from Region Two. However, the Region Two executives insisted they didn’t have additional resources to share, intent on not tanking their own numbers. As a result, things became tense in leadership meetings, and tempers flared. All the while, the company was missing its numbers.
Ultimately, the compensation committee intervened, expressing willingness to make an exception for Region Two if they “did the right thing” and shared product with Region One. However, the experience made the committee aware that larger cultural challenges were afoot: regions were more focused on optimizing their own performance than serving the common good. This culture also bled over to prevent the sharing of talent resources, even when it was best for development. The CEO was so intent on driving accountability that he missed the harm being done to the organization.
The experience led the committee to work with management on an exercise to assess priorities and rethink the company’s purpose and mission. As the company went through this experience, it became clear that operating as one company would create more shareholder value. Of course, this cultural change could not happen overnight. It required new messaging and hard choices about talent that could embrace a new way of working. As leadership learned to operate as one team, they developed new ways of sharing market information and evaluating trade-offs to be agile in making resource allocations and investments for the highest value outcomes. The company’s purpose and mission stood at the forefront, and the new enterprise focus led to stronger, more trusting relationships and shared success.
Conclusion
Compensation topics can often be diagnostic tools, revealing deeper issues such as skill gaps, misaligned incentives and cultural challenges. These case studies are only a few of many examples where compensation can “wag the dog” and bring the focus to critical leadership decisions and actions. By leveraging the insights from these discussions, companies can make informed decisions about talent management, leadership development and cultural risks to ultimately strengthen their organizational effectiveness and better position them for future success.
Stay tuned for the third part of this series, where we will delve into the impact of compensation discussions on how work is done, a critical component of organizational transformation.
