Companies are constantly faced with the challenge of designing executive compensation programs that are tailored to their business strategies and unique context, such as their life cycle, level of profitability and competition. At the same time, companies are faced with external pressures from regulators, proxy advisors, investors and others who have a view — often quite narrow or rigid — on what constitutes an “appropriate” executive compensation design. There’s also significant pressure for companies and directors to conform to so-called market norms.
To understand how top-performing companies address these challenges, Towers Watson recently completed an in-depth study of practices among what we’ve defined as enduring high-performing companies. We wanted to understand if they approach executive compensation differently from other companies. The short answer is that they do, and sometimes in surprising ways.
Enduring high-performing companies often take the road less traveled, designing their executive compensation programs in ways that vary from market norms. Their compensation designs are tailored based on their size and unique business needs, and are longer-term and more return-focused. While generally targeting the market median, these companies reward high performance through more leveraged incentive plan designs, including options, which actually translate to a high return on investment for shareholders.
Market norms remain an important reference point for all companies to consider in assessing and designing their compensation programs. At the same time, the results of our research on executive pay practices in high-performing companies reinforce the notion that companies should resist the pressure to conform to a one-size-fits-all design that may not be a best fit for each individual organization.
To view our new Executive Compensation Bulletin containing more details of our analysis, click on “Download PDF” above or below.
Melissa Costa is a senior executive compensation consultant in Towers Watson’s New York office and Todd Lippincott is a director in the New York office who leads the firm’s executive compensation consulting practice in the Americas. Email firstname.lastname@example.org, email@example.com or firstname.lastname@example.org.