Compensation structures tied to measurable outcomes help ensure performance. Aligning top exec’s pay with performance not only promotes accountability but also drives growth and shareholder value.
Senior executives in India are commanding compensation packages that rival those in developed nations, reflecting the country’s robust economic growth and the corporate sector’s capacity to offer competitive remuneration.
However, to ensure performance at both individual and enterprise levels, there is a need to have compensation structures closely tied to measurable outcomes. This how it should ideally work:
SKIN IN THE GAME:
If the CEO can set an example of accepting higher variable compensation and not aspire or demand increase in fixed cash every passing year, that sets the tone. Even in instances where the CEOs shift assignments and land up in new roles, they should display tact and maturity to structure the package with higher component of variable pay (even over 50% of the package).
PERFORMANCE CRITERIA:
With sophisticated tech systems supporting the human resource function and other business areas, measuring performance on monthly, quarterly, and annual basis is not enough. However, the management must clearly lay out the criteria on which the performance is measured — at the company and executive levels, both of which play a role in determining the variable pay for them. Company-level metrics such as profit after tax, return on investment, free cash flow, market share, and stock performance are benchmarks.
VARIABLE PAY LINKAGE:
In many cases, companies set up formulas to link variable pay to performance. However, companies at times introduce roadblocks to curtail the variable pay. For instance, they might adjust the profit-after-tax by subtracting potential bad debts from receivables, thereby lowering the payout. Companies should communicate any such criteria in advance and not add it as an afterthought. The calculation of variable pay should be so clear that, on the designated day, the payout is processed smoothly without confusion. It is only then that people will have faith in the variable pay system.
LESS CASH, MORE STOCK:
Executives need to place emphasis on stock options in their compensation packages. This approach aligns the executive team’s goals with those of shareholders — both aiming to boost the company’s valuation.
