Key Messages
Understanding Aligned Pay: Understanding What Makes A Fair Executive Compensation Package
The Fair Pay Fair Play book summary provides insight into how to find an equilibrium for executive pay.
One concept discussed is aligned pay, which describes the amount of compensation a company pays its executives.
It’s important to ensure that this amount is fair so your company can remain competitive.
Here are the key elements of this book summary that you should take note of: understanding when a generous compensation package does more harm than good;considering the factors when setting executive compensation; and lastly, why cash is just one element of a great position for successful executives.
Fair Pay Fair Play is all about finding the right balance between being generous with executive pay and not being too generous to the detriment of others in the organisation.
With this knowledge, companies can make sure they give their executives fair pay without over compensating them, thus leaving resources available to retain and attract other talented employees within their organisation.
Fair Pay For Executives: Fair Compensation Plans Should Consider Industry Standards And Ceo Performance
When it comes to executive compensation, performance is key.
Unfortunately, many executive compensation plans do not take into account CEO performance nor are they reflective of industry standards.
Take for example the case of John Chambers, former CEO of Cisco Systems, who reportedly earned an annual salary of $300,000, with stock options and a bonus totaling between $5 million to $6 million in addition.
Clearly this is far too much money for any one executive to be earning – no matter how well they perform.
However, that isn’t all that a fair compensation plan should consider – industry standards also should be taken into consideration.
This could help mitigate external factors affecting the performance of any given executive – such as an energy crisis impacting oil prices or changes in inventory levels within the IT supply chain.
In summary, it’s essential that executive compensation plans take into account both CEO performance and current industry standards in order to create a fair assessment when it comes to pay rates within each sector.
Don’T Let Random Decisions Upset Executive Compensation Schemes
If you want to ensure that your executive compensation scheme is fair, it’s important to stick with the pre-arranged agreements and focus on overall business strategy.
This means avoiding sudden, arbitrary changes in plans.
For example, if a CEO decides to retire, you should not just grant extra stock options out of whim!
Instead, refer back to the original plans that were decided upon beforehand.
On the other hand, adjusting compensation based on economic events without considering a company’s long-term business strategy can also lead to an unfair outcome.
In 2008, one company drastically reduced its executive pay package in response to the global financial crisis – even though this choice contradicted their overall business strategy.
Therefore, it’s important to consider how decisions made today may affect the future of your business plan and the fairness of your executive compensation scheme.
By sticking with pre-arranged agreements and focusing on an overall corporate strategy, you can ensure that everyone benefits from fair pay.
The Dangers Of Illusory Superiority: How Overcompensating Executives Led To Major Financial Losses
Executive compensation plans often protect CEOs from mistakes or short-term risks.
This is because of the psychological tendency called illusory superiority – where executives believe they are smarter and better than their subordinates and so end up getting paid a lot more than they deserve.
This can also be seen in how companies respond to difficult economic times.
Instead of company leadership being held accountable for any dip in performance, CEOs will be rewarded with bonuses even if the overall economy is doing well but their own company is not.
Furthermore, one-size-fits-all compensation methods for publicly traded and private firms can also diminsh accountability for mistakes that could seriously affect a company’s long-term longevity.
Publicly traded companies face unpredictable market forces, so executives should be compensated differently from managers at private equity firms who have an equity fraction that allows them to sell shares at whatever point they choose.
Money Can’T Buy Everything: Why Companies Should Avoid Overpaying Executives
Oftentimes, companies assume that money can solve any problem – especially when it comes to compensating executives.
This has caused many executive committees to overpay their high-NET-worth employees, resulting in economic chaos for the company.
For instance, during the 2008 financial crisis, some firms fearing executive flight chose to refrained from cutting salaries despite decreased company revenue.
Other organizations offered stock options even though such incentives would cause severe economic stress.
These decisions are not wise as the money should have been allocated more reasonably like on research and development activity.
It turns out that money is rarely as important of a motivator for top executives as companies think it is.
Compensation is just one component of making an individual satisfied with his/her job , and other matters such as growth opportunity and brand value also play a role in job satisfaction.
Most high-level hires join teams due to their belief in the organization’s mission, its vision or because they simply want to help establish the firm’s place in history – salary increase is not usually factor they consider while switching jobs.
Using An Alignment Report To Ensure Fairness In Executive Pay
When it comes to executive compensation, fairness is a key factor in determining whether or not your company is offering the right amount.
To ensure that the pay you’re offering executives is fair, there are a couple of tools out there that can help you.
First and foremost, an alignment report gives you insight on how much an executive should be paid based on their particular value to your company.
This report compares performance and industry to other companies in order to decide what would be fair compensation relative to your competition.
Additionally, through this report it reveals whether or not the given compensation design (including bonuses, stock grants or otherwise) is indeed fair.
As long as the CEO is generating similar amounts of value as others in the same industry, their pay should be comparable.
By using these tools, you can make sure that your executive compensation plan is both fair and equitable for everyone involved.
Wrap Up
The Fair Play Fair Pay book offers an essential look at executive pay.
It demonstrates how executive pay, if fair and relative to a similar position or company, can be beneficial not only to management but also to the organization in general.
Through this book, readers are presented with thoughtful solutions that focus on setting up compensation structures that follow clear performance metrics and achieve a peak balance of incentives.
Ultimately, this book serves as a reminder that fair and balanced approaches to executive pay are essential for long-term success within any organization.
If we want smart executives who are willing to put in the effort, then we must make sure their salary aligns with their work – Fair Play Fair Pay emphasizes the importance of this goal.
