Aligning Executive Performance and Pay
Today’s organizations are under intense pressure and unprecedented scrutiny to redefine their standards for accountability when determining executive compensation. Fair Pay, Fair Play offers board members, executives, HR and compensation professionals, and investors a new way to think about executive compensation; suggests a model for establishing common standards of fairness and propriety; and shows how our collective actions can help develop a more efficient market for executive talent. Fair Pay, Fair Play adheres to the overriding objective that executives should be paid on the basis of how well they perform for their shareholders over the long-run, relative to the external market, within contemporary standards of fairness and propriety.
In this groundbreaking work, noted executive compensation thought leader Robin Ferracone, with more than thirty years experience, provides a clear examination of executive pay and offers guidance on how to determine fair pay packages, pay actions and program designs. Fair Pay, Fair Play draws on a database of nearly 50,000 data points or “cases,” defined as named executive officers in the S&P 1500 over the last 15 years. Using this data base, she shows how pay has historically moved with company size, industry, and performance.
Using this data, Ms. Ferracone offers the ability to analytically determine appropriate compensation relative to the performance delivered, controlling for company size and industry. In addition, Fair Pay, Fair Play is filled with real-life stories and perspectives from compensation committee members, executives, shareholder advisors, academicians and other authorities. She also presents case studies of how her Alignment Model can be used to identify issues and solve problems.
Author Q&A – Robin shares answers to common questions about her book, Fair Pay, Fair Play.
- Why did you write this book?
- How is your book different than other executive compensation books?
- What are the key takeaways from your book?
- Who should read your book?
- Is public perception of executive compensation correct?
- Do you see your book changing how businesses approach executive compensation?
- What are the potential consequences if corporate America fails to fully embrace the idea of aligning executive compensation with performance?
- Who should be in control of establishing reasonable executive compensation: shareholders or the government?
Why did you write this book?
Robin: Companies say that their objective is to align pay and performance, but they don’t have adequate tools to measure whether or not they’re doing this. At the same time, investors say they’re concerned less about the absolute levels of executive compensation, and more about the lack of alignment between pay and performance. After 30 years of working in the executive compensation consulting business, and being frustrated about the lack of tools for defining and measuring alignment, I set about to ‘crack the code.’ I wanted to develop a definition for alignment, determine the extent to which alignment is an issue, and develop guidance around how alignment can be achieved. Fair Pay, Fair Play provides guidance, within a range of reasonableness, on how much executives should be paid for the performance delivered.
How is your book different than other executive compensation books?
Robin: Other books are ‘how to’ books on executive compensation. For example, they talk about how to choose peer groups, how to determine target pay levels, how to value stock options and what legal constraints affect executive pay today. These books are helpful, but are more technical and tend to be read by compensation professionals.
Fair Pay, Fair Play discusses a new and practical way of determining whether pay and performance are sufficiently aligned, and if not, what to do about it. It provides insights from those on the ‘front lines’ who have faced issues of misaligned pay; people like compensation committee members, board members, CEOs, CHROs (i.e., HR executives), investors and shareholder advisors.
What are the key takeaways from your book?
Robin: Readers will walk away with convincing proof that the real problem is the alignment between performance and pay, not the absolute levels of executive pay. In addition, they will have a clear understanding of the definition of alignment, and how to determine whether a given company’s pay is aligned or not. Finally, they will develop an understanding of the root causes of misalignment and what to do about it. For example, ad hoc pay decisions that occur outside of the normal pay programs, and frequent changes in program design, can wreak havoc with alignment.
Who should read your book?
Robin: Anyone interested in the topic of executive compensation might benefit from reading Fair Pay, Fair Play: Aligning Executive Performance and Pay. Those who are charged with setting and administering executive pay levels and programs will find the book especially valuable as I write about the philosophical, strategic, psychological, emotional, practical and particularly challenging aspects of determining pay. Moreover, I provide accounts of people who walk in the shoes of board members, CEOs, CHROs, and investors.
Is public perception of executive compensation correct?
Robin: Enormous bonus payouts in the financial services sector for 2007, followed by the widespread financial meltdown in 2008 and 2009, caused the public to believe that executives generally are egregiously overpaid. But this perception is not correct. Fair Pay, Fair Play reveals that CEO compensation, adjusted for company size, industry, performance, and inflation, has been virtually flat over the last 15 years. In fact, CEOs earning those outlier pay packages are a small minority (approximately 5%) of the population. Most executives are paid well below these eye-popping levels, even though pay and performance often are not aligned.
Do you see your book changing how businesses approach executive compensation?
Robin: There is an appetite building among investors and boards to better understand the link between performance and pay. I believe that because of my book, people charged with designing and administering executive pay programs will embrace the concept of analyzing Performance-Adjusted Compensation (PAC) relative to performance, and will incorporate the alignment model into their work. Moreover, I believe that companies can use Alignment Reports to more effectively communicate how and how well they align performance and pay, and why this is good for their investors.
What are the potential consequences if corporate America fails to fully embrace the idea of aligning executive compensation with performance?
Robin: Over the last 10 years, we have seen repeated patterns of how financial disaster leads to a perception of how executive pay caused these failures, or how executives were paid handsomely despite these failures. In turn, this real or perceived excessive executive pay gives corporate America a reputation black eye, which then can lead to new (or threatened) legislation. This legislation often further burdens our free market system with additional taxes and other frictional costs being levied.
Fair Pay, Fair Play gives powerful guidance on what levels of pay are appropriate for the performance delivered. If this guidance is followed, we can avoid the ‘heat and light’ from perceived excessive pay, and may be able to avoid the increased frictional costs of greater government intervention. My view is that such convergence can potentially lead to a better economic result overall.
Who should be in control of establishing reasonable executive compensation: shareholders or the government?
Robin: Compensation committees, at the behest of shareholders, should be in control of establishing fair, reasonable and motivational executive compensation programs. Compensation is a complex matter that needs to be determined by people who are willing to spend considerable time understanding and resolving these issues. Moreover, an efficient capitalistic system depends on our free market, not the government, establishing the price for talent.