SelectStock / iStock
Editor’s Note: Workspan Daily will be publishing a monthly executive compensation column from Willis Towers Watson for the benefit of our readers and to encourage further discourse on topics vital to compensation professionals. New to WorldatWork? Please feel free to join the discussion in our Online Community or send your thoughts to email@example.com.
Executive compensation is a challenging field that is fraught with moral dilemmas and requires boards and management to make an almost constant series of difficult decisions. Effective compensation programs, which involve allocating substantial amounts of money and stock to steer and direct entire corporations, must accomplish multiple objectives and provide balance — or dynamic tension — between important but competing goals over varying time frames.
These challenges make guiding principles important — and needed now more than ever. Other professions, like accounting, medicine, architecture, actuarial science and law, have long-established and ever-evolving principles that guide their practitioners, while executive compensation is a newer professional practice whose principles are beginning to coalesce.
For example, both the Aspen Institute’s Business & Society Program and the Business Roundtable have produced excellent documents articulating executive compensation principles. And, for the past 10 years or so, Willis Towers Watson’s executive compensation consulting practice has operated by an evolving set of guiding principles that have directed our thinking when formulating advice for our clients who grapple with challenging initiatives, assessment and decisions.
Willis Towers Watson’s Executive Compensation Guiding Principles include more than 75 operating principles starting with four overarching principles:
- Purpose: Calls for executive compensation programs to support the overall purpose, mission, strategy and objectives of the organization and its stakeholders
- Alignment: Calls for executive compensation to help foster a commonality of interest between management and stakeholders, as well as between various organizational levels, business units and geographies.
- Accountability: Reflects the role of executive compensation as one of the key accountability structures in most organizations — by which objectives are established and performance is measured, assessed and rewarded.
- Engagement: Refers to executive compensation’s key roles in attracting, motivating and retaining a company’s management team.
We believe that these overarching principles broadly capture most of the core challenges and decisions faced by executive compensation practitioners. However, as corporate governance evolves, additional principles like stewardship, responsibility, sustainability, affordability and others may be needed to capture the increasing complexity of what we are all trying to accomplish with executive pay.
The 75-plus operating principles and elements of executive compensation design are divided into six categories:
- Governing objective and executive compensation philosophy
- Pay level reference group selection and benchmarking
- Performance-based pay
- Other terms and conditions
- Special circumstances.
While we believe that most of these operating principles can be effectively applied in all types of organizations around the world, their development was an outgrowth of the complex and highly visible pay issues facing publicly owned nonfinancial services companies in North America and Western Europe. In particular, the principles regarding employment contracts and change-in-control benefits are largely driven by local regulations and are not fully applicable outside of the United States.
As our consultants and board members debated and came to a consensus on these principles, there were many times when practitioners cited valid exceptions to the general rules — practices that in many organizations appeared problematic while making perfect sense for others. It’s important to remember that no two organizations are alike and there will always be unique and highly successful outliers. As such, these principles are designed to be helpful rather than prescriptive, so we encourage organizations to apply them thoughtfully and flexibly rather than mechanically.
Additionally, these principles certainly will evolve and expand over time, just as they have in other professions. While we have not previously shared these principles publicly as an open resource, we felt they should be shared now in the interests of advancing our profession and coalescing our collective thinking in addressing the challenging and critical issues we all face as executive compensation practitioners, advisors and decision makers.