Developing a Principled Approach to Executive Compensation
Background
A global consumer electronics retailer with significant market share employs approximately 180,000 employees worldwide. The Company had numerous compensation programs in place to motivate and reward its employees. Given that the plans were designed over the course of the Company’s history, the plans lacked commonality and consistency up, down, and across the chain of command and across the globe.
The Compensation Committee of the Board of Directors of the Company engaged The Delves Group to develop a consistent and conceptual framework that the Committee and Human Resources could use to set and communicate a direction for compensation across the world.
Approach
The Delves Group held discussions with members of the Compensation Committee and Management to develop a set of six compensation principles that stand as the pillars for compensation across the entire organization. Based on these discussions, The Delves Group articulated the meaning of each principle in straightforward definitions.
Once the Committee and Management agreed to the set of principles and how they were defined, The Delves Group evaluated each compensation program that the Compensation Committee is responsible for overseeing, which includes the top 130 individuals of the company. The outcome of this assessment yielded a clear picture of where the compensation programs were working and where they could be improved.
Recommendations
The assessment showed limited alignment between short-term and long-term plans in terms of performance measures, goals, and objectives. It also showed some alignment to long-term shareholder value, but not as much as the Company desired. Finally, the assessment showed a lack of commonality between domestic and international plans and a lack of connection between the international plans and overall corporate strategy or goals.
The Delves Group recommended that the Company train the Human Resource staff to understand how to use the principles in designing compensation plans going forward.
Results
The implications of the principles-based assessment were immediately clear to the Compensation Committee, the CEO, and senior HR leaders. After the assessment was presented to the Compensation Committee, the CEO immediately sat down with the Chairman of the Compensation Committee and The Delves Group to develop a new, comprehensive short-term and long-term incentive plan for the Company’s key executives, which was implemented based on the principles.
After the Compensation Committee fully discussed the assessment, observations, implications, and next steps, The Delves Group presented an abbreviated version of the assessment to the full Board of Directors to keep the Board informed of the cutting-edge work the Committee was pursuing.
Finally, the Company engaged The Delves Group to develop and deliver a training session for corporate staff responsible for developing and implementing compensation plans. Participants in the day-long training session included individuals from Human Resources (compensation and benefits), Legal, and Finance. During the training session, participants learned the theory of the principles and how to use them in practical situations faced by the Company.
The Company now consistently examines any compensation recommendation made to the Compensation Committee through the lens of the principles framework. Management’s assessment of each proposal is included in the Board materials following every proposal. This allows the Board to remain consistent in its decision making and allows discussions of recommendations to have clear focus and direction.
