Formulate CEO Compensation to Drive ProductivityA good CEO compensation is one that is well balanced in terms of quantum, the scope of duties and responsibilities, leadership quality, and effectiveness in driving organizational performance to a higher level. Take due care when formulating your compensation system. Your organization cannot pay an unreasonably high salary and offer a string of benefits to the CEO. However, offering a "poor man's compensation package" is as bad. Aim for a balanced and equitable CEO compensation package. For example, there are instances of CEOs who continue being paid high salary although they are not doing a good job as corporate leaders. Clearly there is no contractual term specifying salary reduction for poor performance or in the worst case scenario, termination of service. CEOs are concerned about the quantum and the components of their pay, among many other matters. There are reports of CEOs continuing to earn high salaries because of the importance of their positions. But CEOs are not the only party concerned with this important but difficult and sensitive matter. Compensation is very high in the organization's agenda. The organization's Boards of Directors have the final say on this matter. It goes without saying that they cannot let their guard down. After all, they will have to answer to stakeholders. Are they making the right decision on CEO compensation? In order to get there, they need to ask the right questions. Reports of mismanagement of high-profile organizations come up from time to time. Vigilance and good governance are critical on the part of Boards. There are others who closely watch CEOs pay. Loop-sided CEO compensation usually cannot escape criticisms from compensation experts. Governments sometimes intervene indirectly to force organizations to put right poorly-designed CEOs pay package. Other stakeholders are also interested in matters of compensation. Stakeholders would include all employees, financiers, suppliers, and customers or clients. Criticisms alone will not resolve the issue. Organizations may decide that the criticisms are a nuisance and unimportant. However, right-minded organizations will take positive actions to put things right. Likewise, right-minded CEOs are well aware that the stakes are high. Their style of leadership may or may not ensure the organizations' continued existence.
CEOs are the highest paid employees playing the most important HR strategic business partner role. This is why their main responsibility is to increase organizations' shareholders' value as well as to look after the interests of other stakeholders. The high pay of CEOs is aimed at motivating them to perform to the highest possible level of the highest standard. They are there to make their organizations move forward during both good and bad times. This is a tall order. But this is required of their positions.
The stakeholders in public companies differ to those in private companies especially shareholders in the former case who exercise control over such companies. "Value" can refer to the value of shares or some other returns on the investments made by people in the organization. Individuals look forward to dividends on their investments. Banks expects to earn through the interests on the money they had loaned to businesses. Owners look to the appreciation in the overall value of their companies. Whether it is a company financed by equity financing, debts, or investment by private individuals, "increasing value" is an effective measure of CEOs' performance and whether they can retain their positions. To put it bluntly, failure to perform means heads must roll.
Among some of the interesting things reported regarding the connection of CEOs' pay to increasing shareholders' value include the following.
It was reported that in one CEO appointment, one of the termination benefits was that the company shall engage the CEO as a consultant. Arrangements like this and some of the items above, such as the continued use of the swimming pool, cannot escaped criticisms. If your organization binds itself to employ the ex-CEO as a consultant, you may end up having a consultant who had performed badly as a CEO. You may not easily get out of this situation if the CEO contract had not clearly stated the conditions under which your organization can terminate the CEO's appointment as a consultant.
There are other players but he plays the most important role, being the corporate leader. The board of directors need to adopt an effective compensation model for the CEO. Of course, they also need to determine the compensation package for the entire workforce. HR professionals can provide the necessary assistance in its design. An effective CEO compensation is tied to the financial performance of the organization.
In other cases, the main key performance indicator (KPI) is Return on Investment. This is a measure in cash, in monetary value. Satisfactory performance which can mean average performance will most probably not satisfy the criteria. CEOs need to demonstrate ability to generate revenue higher than the "break-even point." Anything lower should invite scrutiny that may involve the possibility of termination. The employment contract must clearly state these terms to prevent any form of misunderstanding or misinterpretation.
It is a good idea to review CEO compensation each year at the end of company's financial year. Have this stated in the employment contract. If you have any inquiry relating to compensation, please call 6088-717189 (Office) or 6019 - 5367989 (Mobile) or email: pascal.degs@live.com > Strategic Human Resource Definition Link to my eBookstore at Amazon.com Privacy Policy Disclaimer |
