07 Jan Which Compensation Casualties Are on the Horizon?
In recent years, investors have begun to focus on organizations’ corporate responsibility, and employees are also growing increasingly concerned with a company’s commitment to environmental, social, and governance factors. This shift has prompted HR and compensation teams to adopt a new framework for plan design.
To accommodate the changing landscape of compensation, it’s likely we will begin to witness some significant casualties over the next few years. Keep in mind that these are only predictions. With that said, being mindful of the possible shifts you could face in advance will give you the time needed to prepare and be agile in making any necessary updates to your compensation plan.
Possible Compensation Casualties
- 3-year TSR “long-term” plans
Most investors do not have a timeframe of three years, and in fact, high-frequency investors typically hold shares of stock for less than a minute. More than half of stock market trades are conducted this way. Conversely, pension funds and insurance companies my need to have a 30-year timeframe, so three years is a very artificial time frame.
- Actuary-designed Long-Term Incentive (LTI) plans
LTI plans that require actuaries to design wind up being incredibly complex. Oftentimes, executives don’t understand them, and employees certainly don’t either.
- Change-in-control provisions
When everything is vested right away upon a company being acquired, there is a greater incentive to sell companies. Thus, change-in-control provisions may be addressed to reduce the incentive to single-mindedly focus on selling the company instead of operating an ongoing concern pursuing a social or environmental mission.
- Survey data-driven decisions
Surveys are backward-looking and therefore don’t fit modern, future-focused compensation practices. They tell us what companies did a year ago but not what they’re doing now, which is important considering how rapidly compensation is changing.
- Annual executive incentive plans
Annual executive incentive plans have become a big part of executive pay, but contribute to “short-termism.” They also make may encourage companies to manipulate financial results.
- Salary ranges that are +/- 20%
Research shows that the most productive workers are five to ten times more productive than average workers. Why, then, are we only paying them 20% or 40% more? Already, we are seeing these salary ranges change, and it’s likely they will continue to do so.
- Survey-based target and max incentives
Similar to the point mentioned above, what happens to employees who increase their output beyond maximum incentive performance levels? Companies may move away from survey-based target and maximum concepts to address these issues.
- Individual merit salary increases
Of the casualties on this list, individual merit salary increases are likely to die soonest. Spending weeks or months deciding how to allocate 3% merit increases – especially if a large percentage of the workplace gets promoted and receives a significant increase thereafter – is no longer an effective practice.
- CEO pay ratio disclosure
While there is a current focus on this at the moment, the media will soon find something else on which to focus their attention. We’ve seen that the most correlated factor in significant pay ratios is the size of the company in terms of the number of employees. Thus, larger enterprises will inevitably have higher CEO pay ratios than smaller companies.
- Over-engineered sales incentive plans
Compensation professionals tend to have no power over the incentive plans designed by line managers and sales groups. Yet, without compensation experience, these parties tend to over-engineer plans.
- “Employee communications”
Employee communication is a broad topic in compensation. If we’re only communicating to them, we’re not doing anything to truly educate and empower our employees. Generation Z and Millennial workers want to be empowered and educated on how the business works. To get messages across, information must appear on the first screen on a phone, as most audiences won’t scroll down.
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