Executive compensation strategy

V.G. Narayanan tackles the thorny issue of executive compensation on BusinessWeek.com, insisting that pay must be structured to attract the right executives but effective incentives should be offered in return for leading their companies to great performance.

Narayanan says: "The poor showing of too many firms, despite ample CEO salaries and equity packages, and excessive compensation at times of poor performance shows that pay typically isn't structured correctly and that executive compensation practices need serious reform."

The author believes that effective incentive systems should target organizational learning and growth, process improvements, and customer-related metrics and milestones.
Also, companies should tailor compensation packages to attract the right people according to the company's overall strategy. For example, below-market salaries coupled with aggressive incentive pay linked to individual performance would be suitable for attracting self-motivated entrepreneurial executives.

Narayanan also argues that there is an urgent need for boards to evaluate their executives' performance annually to determine their progress on long-term goals. He adds: "Simultaneously, boards should engage in active succession planning so that they do not find themselves looking for a superstar CEO to rescue them from their financial problems. It is precisely in those situations that CEOs are able to negotiate outrageous compensation packages."

Narayanan concludes: "While compensation reform is needed, it must come from within — from executives and boards, acting in the company's best interests."

 

Getting Executive Compensation Right
V.G. Narayanan, BusinessWeek.com, 22/06/09