One size does not fit all in compensation.
What works best to incentivize people in one company culture may not be effective or appropriate in another - a startup is different from a more mature organization. Similarly, the leadership characteristics and behaviors required to execute a strategy will vary between companies, including possibly those in the same industry. One company might be driving an innovation strategy whereas another may be exploiting a geographic opportunity. One may be organic, another could be acquisitive.
Compensation also moves in cycles.
During economic expansion or in emerging economies, companies pay up for talent; during retractions or in more mature markets, they scale back or have more talent to choose from. The current cycle is one of innovation and consolidation, Western market saturation and emerging global consumerism. Underlying all of this is tremendous scrutiny – by politicians, regulators and shareholders.
The compensation whiplash from the great economic train wreck has been “say on pay” and calls for greater transparency. Who could argue against transparency? But transparency should not be replaced with a false sense of security – a focus on form and not substance.
Take “pay for performance” – it’s a popular term these days. The underlying principle is straightforward, but its interpretation is less than clear. What performance? Internal benchmarks? Stock price? Shareholder returns? Then over what timeframe? Who are the shareholders? It’s been reported that the average holding period of a U.S. stock is currently seven months. On the other side, the average tenure of an S&P 500 CEO is five years. Both are remarkably short and, unfortunately, reflect today’s culture of instant gratification and an inherently short-term view.
In most things in life, excess is never healthy.
Compensation is no exception. Balance is needed. No matter what the economic or competitive climate, compensation needs to be grounded in a framework that is aligned with the company’s strategy. That framework must include specific targets for growth, profitability, and achievement of objectives. Metrics and measurements must be established to determine if targets have been reached or even exceeded.
Lastly, compensation is a process—it should neither be episodic nor change with the wind. It should allow for subjectivity and always be grounded in substance rather than form. Compensation like a company’s strategy must evolve over time.
The constant is to focus first on the why and then to consider how much.
Gary D. Burnison is CEO of Korn/Ferry International , headquartered in the Firm’s Los Angeles office. He is also a member of the Firm’s Board of Directors.