As the imperative for business transformation grows, so grows the need for redesigning executive pay.
In one interesting case, a global industrial manufacturer faced both types of transformation in a single decade. At the start of the decade, it faced severe financial losses, significant debt and languishing share prices. The new CEO, an outsider, crafted a vision to streamline operations by reducing the number of unique products and platforms globally. His work was a textbook case of refocusing on core operations and competencies during a turnaround.
The board made sure the new pay plan focused on profit and cash flow, but it added nonfinancial metrics such as quality and a reduction in manufacturing costs that incentivized product and platform reduction around the world. Since the compensation plan paid on global results, it created an "all for one and one for all" mentality. This supported the CEO's goal of promoting collaboration where prior pay programs focused on individual accountability by line of business.
Revamping pay to bolster change is an imperative because maintaining a "business as usual" pay program poses two risks:
* Pay can be a distraction (or even a roadblock) to reinventing the business.
* Sending the wrong signals (internally and externally) about the company's new direction and changing priorities.
Pay should, of course, be structured to encourage sustainable shareholder value creation, and transformations are no different. But, traditional approaches may sometimes fall short. In this regard, business transformations --like turnarounds and strategic reinventions --often provide license to break the mold and explore unconventional designs that will better support key priorities and drivers of long-term value creation.
If thoughtfully tailored to the shifting strategy, pay can also serve to reassure insiders and outsiders that the board is committed to taking the necessary steps to transformation.
A turnaround is usually characterized by a strategic or operational reset to spur profitable growth. That means the plan should allow for heavy investment that may depress near-term results and/or a shrinking of the business to rid the company of underperforming assets. Focus first on stabilizing near-term earnings or cash flows and make sure your design has elements to retain talent (and attract it, as needed). It's critically important that the program (and underlying goals) align closely with the company's messaging to...