As children, we play Follow the Leader with the goal of fitting in. In this game, kids will do whatever the person in front of them does. I have actually seen kids fall down, just because the person in front of them tripped and fell. As adults, we learn that to be a leader, you must worry less about fitting in and more about doing what is right for a given situation.
As compensation professionals, we are constantly asked to build a balance between two worlds: the world of homogenization and that of innovation. From one side, we are asked to build programs based on survey data and peer group analysis. On the other side, we are asked to create programs that mesh with our business goals and company culture. Far too often the survey data wins this battle, based not on “best fit”, but instead on a mythical “best practice.”
Often compensation survey data reports on a self-fulfilling prophecy. The data only reflects what people were told to do the prior year and that data reflected what the market data showed from the year before that. Imagine if you stood outside a hamburger shop at 2:00PM and asked people what they ate for lunch. Very few would say tacos, poppadum or chow mein. Most would reply with some form of hamburger, fries and soft drink. Compensation data can be quite similar to this.
As an example: When companies look at current survey data they see that nearly every company that is issuing RSUs offers them with a three-year vesting schedule. Some might believe that this is because three years has been shown to be the perfect timeframe for most companies. I would argue that this is simply because most prior plans have had a three-year vesting schedule and survey data works to perpetuate that trend. Of course, there is nothing inherently wrong with three years, but for many companies something shorter or much longer may make far more sense. Even if a compensation professional determines that a different vesting schedule would likely be more effective, they are likely to be faced with the incessant question of: “What does everyone else do?” As I mentioned, the survey data does not show what is best, it just shows what is being done.
This same problem is applied to nearly every compensation instrument or pay level. It leads to a lack of innovation and creativity in broad-based plans. It is also a main culprit behind the consistent growth in executive pay, regardless of outcry, proof of effectiveness or, in some cases, corporate or individual performance. On the bright side, Say on Pay has pushed new innovation in executive compensation. Perhaps this will lead to broad-based programs being allowed to break out of the “norms” and focus on best answers, instead of best practices.
We know that Follow the Leader often leads to us walking off a cliff, so why do we do it? The alternative is leading and innovating in a publicly reported world. Even with the current disclosure it is difficult for investors to sort out compensation. The recent growth of performance-based awards has only added to the complexity. If you innovate too much, you risk singling your company out for unwanted attention. Because of this, innovation can be dangerous. If you try something new and it doesn’t work, failure will likely be blamed on your unique approach. It doesn’t really matter if the old method may have also failed. A new method can provide job instability for compensation committee members, executives and compensation professionals. Better to be wrong in the middle of a herd than wrong and exposed.
I guess this post offers less in the way of solutions than questions on this issue. Have you really tried to innovate? Did you have to fight for a new solution? Ultimately, did it succeed or fail? Do you believe that innovation is limited because of market data or fear of failure? I would love to hear from other professionals on this topic.
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” and “Beyond Stock Options.” 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
Great post, Dan. "Best practices" usually are just "common practices" and often prevent real innovation from happening.
You are right - compensation professionals often just take the easy road, and rely on data as the answer. It's NOT the answer -- it's just data. Interpretation of the data requires judgment, knowledge and expertise,and it is this part of the process that allows you to bring into focus the unique aspects of your organization's business and operate at the strategic level.
In short, don't be lazy, but use the data to make informed decisions. Don't strive to be be average unless that is all you wish to achieve. And sometimes it's best to reject traditional thinking because, well, it's traditional!
Posted by: Warren Heaps | 02/29/2012 at 10:57 PM
Great Dan! Sort of like "damned if you do and damned if you don't". I personally think we will start seeing less emphasis on competitive practice due to a lot of issues. But this is a mantra for me ---- compensation is an art not a science.
Posted by: Jacque Vilet | 03/01/2012 at 12:15 AM
Hoorah for Mr Sensible. The companies that say their pay scales/rates are market driven have a lot to answer for. Affordability and fit to the company's own position in the economic cycle appear to have been abandoned in some business sectors.
Posted by: John Nichols | 03/01/2012 at 02:48 AM
Any competent researcher can cherry-pick their peer group or craft their survey benchmark matches so as to derive a self-fulfilling prophesy. Then, after carefully customizing a backstory that predicts exactly what they want to show, they can claim their decision was determined by the data. Ha! If that generality was true, every employer would pay exactly the same as its direct competitors; yet, virtually no two firms pay the same for the same jobs.
Posted by: E. James (Jim) Brennan | 03/01/2012 at 11:30 PM