Designing executive compensation packages that drive performance
Organizations are required to design and execute compensation practices and plans which meet multiple objectives. So right from catering to various stakeholder expectations to ensuring the right linkages with the business strategy, maintaining external competitiveness, internal equity, meeting the changing talent priorities, managing the cost pressures, and also abiding by the ever increasing governance norms.
Sounds like a bit much, doesn't it? It probably does. And hence, it also articulates the need for a very well defined executive compensation strategy. In this fireside chat with leaders Ankur Jain, Senior Director Organisation Development (Performance & Total Rewards), Delhivery; Aakriti Chandra, Senior Director - Rewards, HR Operations & Technology at Flipkart and Roshni Das, Head Rewards & Talent Management, Marico Limited, take a look at some of the practical insights shared by them which needs to be considered while designing and executed compensation plan which can be a win win for both the organization as well as the employee by ensuring that it not only incentivizes the top executives achieve the aspirational business targets but also is able to establish the right
Evolution of Executive Compensation Outlook through the past 18 months
Whether we are designing it for executives, or for the organization, leaders have to consider elements across the base depending on the short term incentive and long term incentive and benefits and purposes, which further needs to be balanced.
Flipkart’s Aakriti Chandra shared that this balancing act becomes really crucial. Questions like: What is going to be the variable to Fixed Ratio? Do you consider the expectations, do you consider the competitiveness? Do you consider internal equity? How much is the short term vs long term focus? These must be answered before formulating the compensation strategy.
Long term incentives are connected to the long term strategy and vision. And that is the single biggest thing from an executive that one needs. Investors, shareholders, stakeholders, when they are placing the executives in those roles. They have an expectation that this team or this individual is actually going to be delivering to those asks.
It's sufficiently clear that a higher skew towards short term incentives may actually drive executives to take short term risks. Which again, kind of limits the focus on long term performance of the organization as well as the economy. And then what ultimately gets questioned is whether the firm's is actually acting in the best interests of the shareholders in the long run and is completely aligned with you when you say that the need of a long term focus being clearly built into the executive compensation design is critical, added Marico’s Roshini Das
But what is the mechanism of creating a long-term focus on this kinda design? Delhivery’s Ankur Jain shared that it should be a mix rather than standalone. Different organizations will have a different route to follow as their definition of long-term will be different altogether. Another important factor would be to maintain the balance in terms of the KPIs as what people are sort of targeting for, are there some long term KPIs as well when I say long term KPIs, which are enabling KPIs. We should have employee attrition as part of our employee engagement scores as part of ourKPIs of what executives should be looking for.
It's not only the instrument, it's clearly the metrics, which need to be identified. aligned to your business strategy to your paradigm of long term and clearly communicated for clarity. So that one knows what one is chasing.
Differentiating practices for Executive Compensation strategy: the startup way
From an FMCG sector, the nature of the industry itself, drives a very healthy balance between the short term and long term priorities. They ensure not only a very competitive positioning of fixed fee for the top executed, but also often witness an upside to the short term incentive targets. Apart from that, in terms of long term incentives on performances and RSUs, which at least, have very strong linkage to the business milestones over a three or a five year time horizon. And thereby a cliff vesting or a graded vesting is common.
For startups and emerging unicorns, the system is different. People are more open to equity as compared to earlier times as they understand it better. The current economic scenario offers easy liquidity such as ESOPs, Buyback as employees have started to see value. This works both ways for employees and employers.
Another set of trends in this ecosystem is that the speed of wealth creation is more. The creativity is at its peak now. Creative ideas of offering and creating value for them has also become super crucial. Talent movement is now proactive and mobile and adding the culture of ‘more’.
Did the pandemic hit hard?
It was a time when employers had the upper hand. But in this pandemic induced world of work, the talent has now much more ease in opting up what’s best for them. The executives are clearly looking at long-term plans and practices now. Strategic skills are now being outsourced. More organizations are now picking up fundings. Focus on wealth creation plans is going up going forward, said Aakriti.
We are also witnessing that certain pockets of talent are either becoming supercritical or super scarce in the market. There is a bit of disparity in terms of talent, said Ankur. The companies are now looking at changing the philosophy of talent management. They also need to be very flexible in order to adapt to the ever-changing world of work.
Uncertainties in the economy due to the pandemic will continue and hence the appropriateness of how companies respond to these macroeconomic conditions or even how boards take a variety of decisions. To remain competitive to remain successful will really depend on each company's specific, unique circumstances and/ or with you such that this space of not only executive compensation but total rewards as such will continuously evolve, concluded Roshni.