Related Topics:
			Business Research: Business, Finance, Workforce Vendor Research: Authoria, Cognos, Epicor, Halogen Software, HR Smart, Infor – Extensity/Systems Union, Intacct, Kenexa, Kronos, Lawson, Microsoft, NetSuite, Oracle, Plateau, Saba, Sage, salary.com, SAP
			Printer friendly version Email this article Send feedback to editor

Summary
As predictably as the rising of the tides in response to the pull of the sun and moon, the arrival of challenging economic times has led to outrage over executive compensation in the United States. The gnashing of teeth may impact what companies report to shareholders and how they report it, which in turn will affect senior management and individuals involved in external reporting matters. Thus far, this is a stakeholder management issue, but it may not remain so. Thus, the question senior finance and human resources executives ought to be pondering right now is what they will need to do if the demand for increased transparency and shareholder input on compensation translates into new requirements. Indeed, whether or not substantive changes take place in regulations or typical pay structures, public companies likely will find it necessary to make changes to the methods they use to calculate and report on compensation.

View
It will be interesting to see to what extent concern over executive compensation survives this recession. Discussion of salaries, bonuses and the like waxes in difficult times but then wanes when the economy picks up. In fact, most larger corporations already structure executives' incentive compensation using industry and performance metrics and in consultation with consultants specializing in this area. However, the pressure of the current environment may force many companies, and, indeed, many compensation consultants, to explore adjustments to clarify and strengthen the connection between performance and pay. In some companies where there are many highly paid individuals - financial services comes to mind, for some reason - it may even be necessary to extend the scope of compensation planning and reporting to make it possible to demonstrate the link between pay and performance for a broader group of people.

Beyond the noise, one of the consistent themes emerging from the current outrage is the need to determine incentives based on longer-term performance measures in order to better align the interests of senior management with the shareholders. Installing longer-term pay-for-performance presents companies, and the compensation committees of their boards, with at least two sets of challenges. The first involves setting the compensation metrics; can they establish performance metrics that provide an accurate measure of an executive's contribution while ensuring that their interests are aligned with shareholders and other stakeholders? The second is the requirement to provide increased transparency - the ability to demonstrate that the compensation is justified.

The recent ruckus over bonuses at financial institutions in particular demonstrates the inherent difficulty in reporting compensation. It's not difficult to imagine a situation where a CEO is paid on a six-year deferred compensation plan in a year when sales are off, the company is losing money and the stock price is in the tank. Under the terms of the agreement, the CEO may have received no bonus and taken a cut in base pay for that last, difficult year, but the outraged headlines will report he or she was paid a huge amount of money for poor performance. How do you ensure that the nature of the compensation is easily understood?

There is no easy answer to this. Indeed, the new interactive reporting requirements enacted by the SEC acknowledge this by excluding the executive compensation table, largely because of the issue of comparability. This means that corporations seeking - or needing - to justify executive compensation are on their own. They must be able to easily collect the needed compensation data and associated metrics, perform the analysis and present the findings accurately and in the proper context. However, many companies lack any way to manage centrally the details of their executive compensation policies, plans and metrics. They may be able to cobble together reports on executive compensation, but not quickly and not in a consistent, comprehensive and auditable fashion. Even if the furor over compensation does not survive the recession, boards will need to focus on having these capabilities simply because it's good governance.

Assessment
Existing systems for managing executive compensation are largely ad hoc and rely heavily on spreadsheets to store data and perform analyses. This approach has proven adequate to satisfy public reporting and compliance requirements, but just barely. Pay outrage may lead to demands for changes that will make the analytic and reporting processes much more complex, forcing public companies to take a more formal approach to analyzing and reporting the pay for a broader set of individuals. No doubt senior executives and board members are keeping their eye on the situation. If circumstances dictate change, Ventana Research believes it will be important to have the information and technology systems available to handle the new performance management requirements.