Pay Policies Pay Off

Peter sat back down and thanked the Compensation Committee for listening to his presentation. The annual ritual had begun – where the CEO delivers his salary and incentive recommendations for his direct reports.

He didn’t object to the process in fact he welcomed it. The preparation caused him to be brutally objective in judging his people and rigorous in developing appropriate rewards. From a governance perspective he acknowledged that it truly benefited shareholders and helped him build a stronger internal culture.

The Chair was the first to comment and thanked Peter for his work. He said that Peter had given the Committee a number of things to think about in terms of the talent available in the organization, their contribution and how they should be rewarded and before passing comment he wanted to refer to decisions made at previous meetings, the precedents and principles that had been previously established. He wanted to consult with the rest of the Committee and the minutes of prior meetings.

This was Peter’s third compensation review. He tried to manage the Committee on a two meeting cycle. At the first meeting he provided an outline or “heads up” of what he was intending to present and was going to acquire approval for at the next meeting. He was coming to recognize however, that that wasn’t enough for Compensation. The pressure from shareholders and their advisory groups placed added pressure on the Board to justify and explain executive compensation. He needed a document that captured the “current state” or “the Pay Policy and the Changing Workforce story so far” of pay within the company as a Committee reference document. An easy to read template that captured all of the precedents and principles that the Committee had previously established. Something that could serve as a pre-read before the second meeting. A document that would provide the Committee with the confidence that they would make decisions consistent with their past considerations.

He ticked off the reasons why a pay policy would be helpful to the organization:

1. Provide a ready reference for managers at salary review time who needed a refresh on salary administration and range progression practice
2. Offer guidance on promotional increases
3. Explain the basics of job evaluation, the methodology and process for re-evaluating jobs and the treatment of outliers
4. The basis for competitive comparisons; who the company compared itself with and how it positioned itself within that market e.g. 50th percentile
5. How pay targets for each position or group of positions are to be calculated and the rationale for paying above or below these
6. Detail the short term incentive design, how payout is to be calculated and the metrics to be included
7. Set out the rules for determining short term incentive payouts and how if any, discretionary adjustments might be applied
8. Setting out the basis where necessary for international and mobility pay management

For the Board and Compensation Committee and as an aid to the CEO, the guide would assist with the preparation of recommendations, such a document would improve efficiency by being:

1. A living document, updated after each meeting capturing in one place the decisions and precedents established
2. An emerging statement of policy transferrable into the board’s year end disclosure documents
3. The Board’s written philosophical explanation for adopting its position on items such as proportion of pay at risk, the type of incentive to be utilized and target market positioning
4. The depository for preferred methodologies for calculating the value of and comparing pay components with competitors. For example, how long term incentives are to be valued when competitors use a mixture of stock options, restricted stock units and cash and whether each item is be positioned the same (e.g. percentile rank) etc.
5. Coupled with a recent pay history table for each executive and the CEO’s succession and development plan, a powerful tool for ensuring that compensation aligns with talent management activities
6. A guide to the required information and its presentational layout preferred by the Committee in order to review and approve compensation changes

Peter determined to work with the Compensation Committee’s pay consultant to develop a draft for review by the Committee at their next meeting. He now had no doubts that such a document would:

• Improve the efficiency of pay management from the Board on down
• Lead to better informed and more consistent decisions; in fact, improve pay governance generally
• Contribute to engagement by ensuring that pay was aligned with strategy and related HR policies