Executive compensation grounded on the data derived out of the Operating Model
The COVID-19 pandemic has had significant devastating effects on the world. This explains why businesses seek new modes of work management in a post-COVID-19 era. There are still debates on innovative models such as human cloud and asset-light companies.
The world is now a global village, thanks to technology. Today, people can work anywhere in the world. Besides, companies can hire talent given the presence of online marketplaces, and this has introduced the human cloud. Digital platforms are used by digital nomads to make ends meet by working from any place in the world. People can now work and create value differently. In the same vein, businesses are now operated differently. The traditional brick-and-mortar companies are paving the way for Grab and other asset-light companies. Forward-thinking organizations are scaling and capitalizing on the best methods of talent hiring and management in order to address customer needs. A change in work management has triggered a similar transformation in the modes of compensation.
One of the crucial organizational performance issues arising from the crisis induced by the pandemic is its effect on incentive-based pay for executives and senior management. Paying executives and senior management based on their performance has become the bedrock principle of efficiency and effectiveness over the past decades. The idea behind this organizational management approach may have been simple and driven mainly by the aspiration to align the interests of the business leaders and shareholders on the assumption that the organizational performance will be better if they are incentivized. That said, as organizations are pivoting out of the crisis and changing their operating models, it requires a smart design to ensure that incentive-based pay doesn’t fall victim to bureaucratic sprawl or miss the target altogether.
As the global economies are gradually reopening, it will still take time for a return to normalcy. From an economic standpoint, companies will search for strategies to help them achieve a competitive edge by overhauling their pay models. The key reason for this change is that executive pay is now a significant factor in guaranteeing organizations’ stability and their ability to rebound from the crisis. As this pandemic has also altered the approach through which companies structure executive pay, listed companies will have to ensure buy-in from the shareholders and make sure they are on board with the proposed method. All this will require the organization to prove that executive pay remains commensurate with the business’s performance. Fully listed companies will need to consider the guidance on executive pay issued by the various bodies representing institutional shareholders, including the influential Investment Association (IA), which recently stated implications of Covid-19.
For the longest time, there has been a common consensus among executives, boards, and shareholders that executive pay cannot be understood with ease (Al Binali, 2017). During the post-COVID 19 pivot, it is essential to ensure that the incentives framework is simplified and streamlined. The best place to begin would be to get back to the basics by translating the business strategy into the Target Operating Model (TOM) and deconstructing it into the building blocks (i.e. organizational model, financial model, human capital model, etc.) to truly understand value creation. Furthermore, the incentive plans’ primary goals should be revisited based on the stakeholders’ broader perspective going beyond the shareholders. A good starting point could embrace the stakeholder theory that accounts for multiple constituencies impacted by business entities like employees, suppliers, local communities, creditors, and others.
To ensure success in cascading objectives, it will be important that executives oversee compensation for employee performance from the participant’s context. This can be achieved by enhancing overall know-how among executives on topics in and around strategic rewards. On the other hand, ensuring that executive incentives are aligned with shareholder experience becomes crucial for the shareholders. If these goals might clash, incentives design will be a balancing act, where the structure and outcomes of the plan should strive to the expectations of both parties.
In summary, COVID-19 pandemic has compelled businesses to determine how they can increase agility. In other words, they must seriously consider the future of jobs and pay. This will be an excellent opportunity for forward-thinking organizations to set clear strategies for achieving long-term pay and performance facilitators. Besides, they need to make gradual changes aimed at boosting pay efficiency. In so doing, they will be able to meet their priorities and measure up to the demands of their industries. It is clear that strategic rewards will play a major role in offering a competitive edge in this dispensation. Businesses must consider moving their executive pay and strategic rewards as a whole further upstream closer to strategy development. Planting the executive pay decision-making process on the data derived out of the TOM elements such as organizational model, financial model, human capital model will only enhance the perspective and enable effective implementation of solutions based on the stakeholder theory.
Al Binali, S. (2017). Long-term incentives come in different sizes and flavors. The National News.
AON Hewitt Limited. (2016). Getting executive incentive pay right. AON Hewitt Limited
Davis, T. (2019). Simple Plan Design Tweaks to Improve Executive Pay Performance.
The One Brief. (2020). Evolving Pay Strategies in a New World of Work.