So, I was recently doing my civic responsibility by serving on jury duty. As it happens, when I am just sitting around, my thoughts turn to compensation issues (just like yours!). A strange and crazy thought came to me. Imagine if your peer group for compensation was selected in the same manner as a “jury of your peers” in a criminal court case. Besides it being almost glacially inefficient, how would this historically proven method (even the ancient Greeks used it) for choosing one’s peers impact the world of compensation?
Let’s first review the current compensation peer selection process. A company sets its goals. Next, it decides on its peers, sometimes with the assistance of an outside professional, other times using only internal expertise. Key components usually include the industry and size of the company. There is sometimes a bias toward companies with similar compensation philosophies and/or pay levels. In all cases, companies use a combination of quantitative and qualitative factors to create a group that meets their specific needs.
Then shareholders, or their advisors, choose a peer group based on their goals. These peers are chosen more “scientifically” and often do not take into account company culture, idiosyncrasies, history or future business plans. The peers chosen by the company and those chosen by investors are often quite different. Imagine if criminal trials worked this way.
Look at it from the defendant’s perspective. The defendant would have a professional, in this case a lawyer, simply pick twelve people who have similar interests and backgrounds. Perhaps all of them would have a criminal history. Maybe all of them had been falsely accused in the past. Maybe interviews showed the group unanimously did not support the law that was allegedly broken. Justice would be easy. The charges would prove groundless and the case would disappear. People who disagreed would scream and yell from the sidelines and demand to have a voice.
How would this look if the prosecution controlled the process? The prosecutor would gather a group of citizens who had previously indicated that they not only supported the law, but also blindly trusted the people enforcing the law. The prosecution would just need to explain why the person was on trial and the verdict would likely go their way. Of course, both extremes are equally unjust.
In the world of compensation, especially executive compensation, we have both scenarios happening at the same time. Because both sides choose peer groups based on their own perspective, they both feel they are right. Because each side is 100% right, the other side is required to be 100% wrong.
Now imagine a world where peer groups were chosen through a debate between companies and investors, with a trusted overseeing figure making final decisions (the “Comp Judge”). Each side would put up its list of peers. The company and the investors would then evaluate these at the same time. Each side would be given the opportunity to remove some, but not all, of the peers suggested by the other. The Comp Judge would be able to replace rejected peers with new peers until an uncomfortable balance was achieved. Neither side would be perfectly happy. Neither side could say the peers were completely wrong. Final compensation levels and strategy for a given company would be linked to peer group market data that was specifically chosen for the current season and neither side could immediately dispute the decisions made.
Each side could appeal in future years (let’s two or three) and attempt to modify the peer group. This would only be allowed as long as a Comp Judge could be persuaded that there was a real issue with the last peer group decision.
Of course, this is all fantasy because companies would never give up their autonomy and some shareholders will always think that some companies are trying to game the system. But, you have to wonder if compensation creep (the inexorable rise of pay) and the related wailing and tearing of clothes would calm down a bit and let us put more focus into strategy, communication and business results.
Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.