March 28, 2009 - It is all over the news:  AIG, Merrill Lynch � why repeat the litany of culprits.  Sadly, far too many companies fall into the category of inflated, arrogant Executives, chasing the quick buck and delivering disastrous results and institutional calamity.  Where did all this bonus and contractual mayhem come from?  It came from your high priced Organizational Consultants, your Compensation Committees, your short sighted Boards of Directors and timid stockholders. 

It all begins with �comparables� when you are establishing compensation parameters and an Executive Compensation Plan.  (Comparables � think Real Estate and selling a home � wait a moment, isn�t that where the trouble all began?) Well anyway, XYZ Company is paying their CEO or CFO, CIO, CMO � whatever Chief, �X� amount of compensation (a mix of cash, perks, deferred income and the like).  You think, we are a similar company and must keep in the game, retain our talent and attract top-notch, new meat.  And, we want to make it �sweeter�, so a little added perk here,  a signing bonus there, a starting salary closer to the top of the Range, and so forth to make us ever so attractive and progressive.  Your Compensation Committee reviews this Plan with �vigor�.  But, they, just like all the members of your Board come from similar surroundings of comfort, so they do not want to �rock the boat�.  So, every year the Pot grows, not so subtle Compensation Creep.  Your Stockholders begin to squirm; they want to reduce terms on the board, more rotation, greater accountability, and payouts related to performance, long term stability versus short term spikes, etc., but they need blocks of votes to accomplish this.  This activism makes your Board uncomfortable.   Thus, no end was in sight with this dance, until now.  You wanted a correction, and you got a revolution, and one item for review, beyond survival, is how you now compensate your Executives on your righted ship.  

Naturally, we want to incent our Executives, push for results, and drive for the numbers.  The Bottom Line, ultimately, is how we evaluate Performance, what pleases our stockholders, and, theoretically, encourages our stakeholders.  And, with a solid reward program, Pay for Performance, in place, we are set to go.

The concept is very straight forward.  You simply benchmark objectives, set a performance bar and create a reward scheme, usually a percentage of one�s base salary. As almost all objectives can be quantified, those goals (meet, increase, reduce, exceed by a %, a $ amount or a date) are explicit, clear and concise.  Simple and straight forward at the onset.   

However, the means can get in the way, just as the ends can become illusive.  Therefore, the Plan you have deftly crafted to incent performance, meet organizational strategies and push profits can become dysfunctional, cumbersome and, actually, a gravy train for your Executive Team.  It becomes an accountability blur!

The best Performance Plan is kept simple, and it is usually composed of two sides of the ledger:  Company Revenue and Participant Objectives. The Company needs to meet or exceed its numbers, just as the Management participant must meet their Objectives.  These Objectives can be hard, like increase Sales by 20% or softer, like reduce Customer Complaints by 10% or Turnover by 5%.  The Company�s Strategic Plan Objectives are disbursed, distributed through the Management ranks, thereby also becoming shared objectives for the participants.  Theoretically, if the majority of these goals are met, the Company prospers and everyone benefits.  Looks like a Plan; sign me up! 

Experts far more sophisticated than I will demonstrate that this compensation �onion� can be sliced many ways and in many angles and layers, but the above is the typical framework.  I am of the school the more complex, the more distant; I want immediacy and simplicity � something I can touch and understand, rather than try to translate.

On paper, this sounds reasonable and easy to administer.  But, hold the phone.  Firstly, Management Goals and Objectives must be approved by very Senior Management or Directors, the initial stage of your negotiation, if you can catch them and sit them down to mutually target and agree upon objectives.  The next barrier is the measurement of our progress, typically tracked by the Budget.  

How in heavens name can you place any credibility on a 12 month budget, much less a Five and Ten Year Plan, I might add.  There are far too many assumptions which whack the numbers and the projections.  Also, managers understand the directive to stretch themselves and their resources, but in this age of doing more with less, we shoot ourselves in the foot, and who ever submitted a reasonable budget? And, now, we really need to hold the negotiations on a monthly basis, in order to retain or regain the light, rather than further the blur.  

On the other side of the Ledger, privately held companies,  particularly, can practice very creative accounting, as they �chase the rockets�, those sure-fire, often secretive ideas with the expense (and the loss) then buried in the P&L.  Publicly traded companies have also not fared too well either with blatant malfeasance or unbelievable stupidity. Finance people, please do not take offense, it is just about the �buckets�, but I do not control them, name them or assign expense to them.   No matter (right!), our Budget is typically a major determinant, so start your documentation now. 

The landscape does shift, priorities change, the market is   variable, so a Quarterly Review is suggested, at minimum. This is where the worthwhile discussions (battles) should take place.  It is timely, and plan accountability is critical.  Objectives can be adjusted or modified accordingly, if you can snag those adjudicators, who are very much in action � hard to hit that moving target.

Year End is the Final Report.  Gather your data, compile your documentation, compare actual to plan objectives, and submit the results.  Hopefully, your side of the Performance Plan Ledger is favorable.  Now, we await the manipulation of the final figures for the P&L, and wait, and wait.  And, of course, you now are in the next year of the new Plan, laying out what you expect to accomplish in the upcoming year.  The cycle continues.

There is no perfect reward plan out there.  Personally, I cannot think of one company which has had the same plan in place for the distance.  The Consultants come in and recreate and redecorate the modules and methods.  It usually boils down to the same gift, just packaged differently.

Does such a Pay for Performance Plan for Executive Management make sense? Absolutely!  Share the strategic goals, regale in the progress and share the bounty!  What happens is that variables and inattention can scuttle your best intentions.  Some parameters to keep in mind:

• Keep the Formula simple.
• Objectives must be in the control of the participant.
• The Financial Reporting System must have some credibility.
• This is not an HR project.  They can administer the Program, but your Board of Directors must be the driver.
• Scheduled Progress Reviews are essential.
• Remuneration must be made in a timely fashion.
• And, of course, the Company made a profit.

This is all about Performance.  If I do not deliver, I do not deserve a reward beyond my already inflated base salary.  If my performance is dismal, cut me loose.  I would certainly like that Golden Parachute, but I really only deserve an umbrella.  The rightsizing of our companies should start at the top of the Organization!

About the author:  John Hendrie of Hospitality Performance believes that Remarkable Hospitality is the portal to the Memorable Guest Experience. He has designed numerous Compensation Plans.  Look for solutions at:  www.hospitalityperformance.com

John Hendrie 
[email protected] 
www.hospitalityperformance.com