Cafe Classic: Executive Pay Can’t Be Fixed! But….Here Are 3 Things To Consider

Editor's Note: Dan Walter shares some Classic insights and advice for those in search of the silver bullet that will right all the wrongs of executive pay.

Several times a year, I see articles and presentations discussing how to “fix executive compensation”. This presumes that executive compensation is some sort of monolithic thing. In fact, executive compensation is simply a topic linked to a wide range of purposes, data, facts and opinions. You can no more fix executive compensation than you can fix sports or music. It is simply too broad and varied for any fix or fixes to apply universally.

Executive pay is effective and problematic because every company and executive is different. Yet, somehow, every magical fix for executive compensation includes a set of rules that will work for the tens of thousands of unique companies and individuals that will be impacted. Let’s set the facts down clearly. No one “solution” will work for the majority of companies. There is no “silver bullet”. Heck, there isn’t even a box of silver bullets that can fix executive pay. So, if executive pay is broken, but it can’t be fixed, what should we do?

1) The secret is there is no secret.

Focus on you. There is no special sauce that will fix executive compensation. No secret formula, no wish upon a star. The only way executive compensation can be fixed is for each and every company to understand their business strategy and how their compensation philosophy and programs can support the delivery of that strategy.

2) It’s not only about how much is paid or how it is delivered, it’s about both.

In an attempt to gain instant acceptance from the compensation community, academics, consultants, shareholders, politicians and the media frequently frame their “solutions” as either being about the volume of pay or the structure of pay. Any credible compensation professional will admit that any solution must deal with both (and many other things). Any solution that claims it can fix things on one side without impact to the other, simply doesn’t understand the complexity of compensation.

3) The solutions provided are usually solving THEIR problems, not yours.

Until Copernicus, it was generally believed that the sun revolved around the Earth. People saw the world from their perspective and created an answer that met their expectations. Executive compensation is similar. When you see an article discussing fixing pay, you probably read the first paragraph and decide if you can relate to the writer’s point of view. You won’t read much farther if you determine they don’t understand your issues.

Each company must do their best to look at executive compensation from two perspectives. First, from their unique internal perspective with the personalities, idiosyncrasies, politics and budgets that comes along with that. Second, look at it from a global perspective. This is harder since you must step back from the problem far enough to see the issue from everyone else’s perspective. You may also need to make decisions on who needs to be marginalized, or even ignored, to meet your current goals. As long as you have considered everything thoroughly, you will have a reasonable defense (or offense) for the decisions you make.

There is no “fix” to executive compensation that isn’t specific and unique to each company. Like any compromise, a good solution will leave every party a little less than 100% happy. If any stakeholder is perfectly happy, it means that another was probably too marginalized, or simply ignored, in the final solution. As every compensation professional knows, it’s never about one thing, it always about everything.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. He has three metaphors for every occasion and is a leading expert on incentive plan and equity compensation issues. He has written several industry resources including the only resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.

Comments

[Paul Pittman]

Hey Dan well said agree with all that but would add to "There is no “fix” to executive compensation that isn’t specific and unique to each company" and their shouldn't be but GL and ISS are trying.

[Dan Walter]

Thanks Paul. Good point! But also too long to be the title LOL