Linkage Between Business and Compensation Strategies

The Issue

There is at least one thing about which boards, management, shareholder advisors, and shareholders all agree: a company’s executive pay program should link to its unique business strategy. In one of NACD’s Compensation Committee Chair Advisory Council meetings, of which Farient is a co-founder and current partner, the group of Fortune 500 directors and investor participants determined that a guiding principle for executive compensation is that it should be “designed to drive a company’s business strategy and create shareholder value.” To that end, executive compensation and talent should be inextricably linked to ensure executives are focused on those activities that drive the strategy and sustain the business over the long haul. By now, most companies have learned that a one-size-fits-all approach to pay just doesn’t work. But how can companies ensure they are, in fact, linking pay design to business strategy and talent development, and not just designing “me too” programs that skate under the radar?

Farient’s Point of View

Farient believes that a key role of executive compensation is to focus executives on those strategic factors that will have the greatest impact on driving value for shareholders. As a result, we believe the executive compensation program needs to be both tailored to the company’s business strategy and in keeping with best practice norms. Moreover, program measures and goals should be strategically attuned and transparent (to the extent that they do not reveal trade secrets), and the reasons for unique program features should be readily explainable to investors.

How Farient Can Help

Farient’s senior professionals have a unique understanding around business strategy, profit models, and how various strategies are likely to translate into financial performance and value. That’s why the pay programs we design for our clients are sensitive to both the strategic needs of the organization and the value creation needs of investors. In assisting our clients, we design pay programs that consider how our client’s strategy will create value for its shareholders, as well as market norms. In other words, we balance the “inside out” and “outside in” perspectives. This makes the pay programs most relevant to the people who operate under them, as well as explainable to investors.