An organisation’s reward policy impacts directly on the behaviour of people as well as on the company’s ability to attract and retain the best talent in the market. A well-design and implemented performance management and aligned incentive compensation strategy is therefore a key source of competitive advantage, especially in markets where competition for scarce talent is rife.
Equity-based reward plans are often used as part of a reward strategy, in the belief that they will align managers’ interests with those of their shareholders. This is however not always the case in practice, for the following key reasons:
- In a volatile equity market, much of the up and down movement in an organisation’s share price is due to factors extraneous to that of actual company performance
- Many organisations structure share plans in such a way as to provide managers with the potential of earning the same currency amount, regardless of company performance. After a bad year, the plan is paradoxically typically updated either by increasing the number of performance shares or option grants
- Equity reward options are often extended to senior and middle management, adding a significant overall cost to the incentive scheme, but without a complimentary increase in company performance. The reason for this is that the line of sight between the average manager’s individual actions and the organisation’s overall share price is so weak as to have little or no incentive on changing their behaviour, beyond perhaps retention
- Where relative measures of equity performance are used, organisations often use the incorrect peer group and may pay or not pay bonuses not well aligned with market levels of performance
An alternative for reward, especially below the board level is incentive schemes that accurately measure and reward increases in a suitable proxy for an increasing share price. Schemes that measure and reward improvements in metrics like Economic Profit, Cash Flow or Return on Capital measures can achieve this whilst still providing a direct line of sight between individual and team performance and the measures and targets used. The identification of the correct measures and KPIs at all levels of the organisation is however imperative in this approach.
Whichever performance measurement method is adopted, a good performance management and incentive plan will support the following objectives:
- Alignment – the plan must properly align team and individual behaviours with organisational goals and objectives
- Materiality – in order to have an impact on behaviour, the potential incentive must be material and market related
- Objectivity – the performance metrics and the targets must be determent objectively and not changed mid-course
- Retention – the incentive scheme must encourage the attraction and retention of good performers
- Cost – the incentive scheme must achieve these objectives at a competitive total cost to the organisation
Paul Hunter, Principal at People. Performance. Reward.
Paul is the founder and Principal consultant at People. Performance. Reward. an independent Reward Consultancy, established in 2020 and based in London.
Paul has over twenty years’ experience in a professional advisory capacity and has held leadership positions previously with ‘Big 4’ advisory firms, boutique advisory practices, as well as large multinational advisors in the human capital and pension fund industries. Paul has been a keynote speaker at conference, industry and client events across a wide variety of industries and his advisory experience spans across the UK, EMEA and Asia Pacific regions.
He has been published in, amongst others: Executive Compensation Briefing, CIPD’s ‘People Management’, CEO Magazine, Business Report, the University of the Witwatersrand’s Business School Journal and he has been a keynote speaker on CNBC on performance and reward matters.
In his career as a professional management consultant he has advised more than 150 organisations to date.
Paul has deep expertise and significant experience in, and advises clients on, the following areas:
- Pay and Reward
- Executive Remuneration and Governance
- Organisational Design
- Performance Management
- Strategic Workforce Planning