Compensation Impacts Culture: Time to take stock of executive pay and perks programs.

• Author: Neel, Kathryn

Leadership and tone at the top are obvious corporate culture influences. What might be less obvious is how decisions on compensation structure shape, steer and promote corporate culture.

Compensation committees are increasingly discussing how the compensation program can be used as a tool to promote the desired corporate culture. These discussions are rarely simple since most program features can be assets or liabilities to the organizational culture.

It is possible, however, to analyze how pay program elements explicitly or implicitly affect culture. The following four aspects of compensation design shed light on how one impacts the other:

Individualized Payouts: Companies may incorporate individual performance in their annual incentive designs to provide the ability to differentiate payouts beyond corporate/business unit performance, thereby acknowledging stronger or weaker performance on an individual basis. While this approach may encourage a greater sense of individual accountability it may also lessen the emphasis on teamwork and collective responsibility. On the other hand, having no individualized component may leave high performers feeling as though they were not rewarded appropriately for their efforts and even frustrated that lower performing employees can free-ride on the work of others.

Benefits and Perks: Although executive benefits and perquisites have decreased substantially over the last decade as public demand for disclosure, and proxy adviser and investor scrutiny has increased, companies continue to offer certain perks with the rationale that they support productivity, wellness and/or safety. These perks can play an important role in making employees feel appreciated and promoting a sense of fairness within the company when they are generally provided to all employees. However, providing generous perquisites can also foster an attitude of entitlement among employees and, in extreme cases, create distraction that detracts from work productivity On the contrary, providing minimal or no perks may leave employees feeling undervalued and resentful particularly if other companies commonly provide more generous offerings.

Transparency: Transparency in the compensation scheme, encompassing everything from how base salary levels are determined to what target incentive levels are and how actual payouts are calculated, can be crucial to creating a culture of fairness. Transparency establishes an even playing field and develops...