Compensation discussions often follow strategy discussions, but there are some notable cases where the inverse can be just as helpful. In part one of this series, we explored how discussions around executive compensation sometimes “wag the dog,” sparking fruitful dialogues about underlying business premises and strategic priorities. Part two dove into examples where compensation programs revealed talent gaps and cultural risks that previously went unnoticed.
In this third and final article, we’ll focus on three cases where compensation discussions changed how the actual work was accomplished. By examining how compensation programs reward and reinforce workflows, companies can reveal new areas for efficiency, help structure succession plans and better incentivize long-term growth in key areas.
Not All Roles are Created Equally: How Discovering a Pay Gap Inspired a More-Efficient Org Chart
A compensation committee recently discovered that the pay gap between a CEO’s direct reports and general managers (GMs), who were only one level below the direct reports, was enormous. Direct reports were being paid nearly three times as much as the GMs, leading to huge, disproportional pay increases whenever a GM was promoted. Clearly, there was a disconnect: Were direct reports being paid too much, or were GMs being paid too little?
As the committee delved deeper, further analysis revealed an opportunity to simplify the organization structure and increase spans of control. There were far too many GMs in the organization, some with substantially smaller responsibilities than others. All the GMs, however, were being paid in the same pay band, regardless of each person’s individual scope. The flat pay structure that kept all GMs at the same level limited the development path for high-performing GMs and ultimately limited their compensation. As a result, significant pay increases were required when they were promoted to the CEO direct report level.
By examining the “tail” of compensation, the board identified a problem and restructured accordingly. Going forward, the organization created differentiated tiers of GMs. This streamlined workflows and established a clearer development plan and pay track for the GMs with the biggest impact. This beneficial reorganization was sparked, and supported, by compensation discussions.
Smart Succession: What A Proposed Retention Grant Revealed About C-Suite Roles and Responsibilities
When a company suggested paying a key executive more to ensure they stayed with the organization, management worried that an increase in pay without a corresponding increase in responsibility might send the wrong message to other leaders. Though it began as a discussion about compensation, the ensuing conversation ultimately led to a broader re-think of C-Suite roles and responsibilities that set the organization up for long-term success.
When pressed about why this one executive needed to be retained, management focused on the fact that they were a promising candidate for long-term growth and thus worth the higher pay. Furthermore, they were a high-potential candidate in several succession plans. As a result, the management team agreed to transfer additional operational responsibilities to the high-potential employee, combining their pay increase with a new developmental role. The pay increase discussion prompted the opportunity to build the high-potential candidate’s skill sets further and test them in new situations.
Ultimately, by examining the “why” of a proposed compensation plan, the board was motivated to adjust key work responsibilities, allowing the company to grow and retain key talent simultaneously. By starting with an honest discussion about compensation, the organization uncovered a new long-term strategy for success and adapted workflows accordingly.
Loud and Clear: When Compensation Discussions Strengthen Communication Skills
An organization that had recently IPO’d was struggling to adapt to new public responsibilities. There were significant flaws in their forecasting process, and the board’s communications strategy mistakenly prioritized positivity over clarity. As a result, they had a hard time accurately communicating and forecasting earnings, and the company missed earnings several quarters in a row.
The company needed help developing a new bonus structure. However, the proposed compensation plan revealed some organization-wide discomfort around tying executives to objective goals that were aligned to external guidance. Despite going public, the management team wanted to continue operating the company as if it were privately owned. As a result, they had delayed developing some key forecasting and execution skills needed to truly succeed in the public marketplace.
In discussing the “tail” of the company’s bonus programs, they revealed a larger issue with accountability to deliver on business priorities. As a result, they worked with the Board to first articulate critical outcomes. They then tied those outcomes to compensation to incentivize execution against guidance in the bonus program and key drivers of shareholder wealth creation through PSUs. The “tail” thus came full circle: compensation discussions drove a change in the goal-setting workflow, which was then reinforced by a redesigned compensation program that rewarded achievements related to the new work.
Conclusion
No matter which one is “wagged” first, compensation and strategy will always be intertwined. When compensation programs cause friction, spark questions or raise alarm bells, it almost always behooves boards to dive a little deeper. A thoroughly vetted pay philosophy is a vital tool that can be used to promote greater organizational efficiency, clarify and strengthen strategic priorities, and ensure long-term success. Conversations about compensation can, and should, be about much more than dollar amounts, and having these conversations early and often will help ensure you’re sending the right message with your pay programs.
