September 12, 2019

NACD Directorship – Reinventing Compensation in Transformative Times

By Robin Ferracone

With the onslaught of technological, workforce, economic, and other disruptive forces, no company can afford to be complacent with respect to its executive compensation plans. However, investors take a dim view of perennial changes to executive compensation, citing complexity as a pet peeve. As management teams respond to disruption by developing transformative strategies, more and more boards are asking how, when, and to what extent their companies should change their executive compensation plans.

While no company can afford to remain static in its business, the degree and rate of change vary greatly. In the normal course of doing business, companies tend to change aspects of their short- and longterm incentive plans (usually measures and weightings) about once every three or four years. Conventional wisdom might suggest that companies undergoing major transformations need to change their incentive plans more frequently. However, this is not the case. Companies going through “lifechanging” events often will reinvent a system and then stick with it throughout the transformation period or even indefinitely. The trick is to design the right system in the first place.

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