Clearing executive compensation haze

WorldatWork’s free online tool covers more than 200 critical issues
By Don Lindner
|Canadian HR Reporter|Last Updated: 12/10/2007

HR and compensation professionals have a new online tool to assist them on the executive compensation front.

The WorldatWork Executive Rewards Questionary helps compensation practitioners and their companies think through issues that might arise from a pay plan they are considering.

The tool was developed by senior compensation professionals at eight leading companies: Dell, H.J. Heinz Company, General Motors, Mercer Human Resource Consulting, Time Warner, Buck Consultants, HCA and Wachovia.

But the tool is not limited to practitioners. Corporate boards of directors (and specifically, compensation committee members), consultants, investors and regulators can all benefit by using this set of comprehensive questions as a reference document. Anyone involved in designing, assessing or approving executive compensation program elements — or who simply wants to learn more about this area — can benefit from this online resource.

Extensive and comprehensive collection of questions

The questions cover more than 200 critical issues to consider when planning or modifying an executive compensation plan. These issues might arise when aligning compensation with business strategy, regulations, socio-economic factors, disclosure and transparency rules, communication plans, labour and market pay trends and even community concerns.

The first section helps in conducting a thorough overview of business strategy to clarify how strategic drivers are measured, if they are consistent across divisions and, if not, how this will affect compensation plan design.

Next, short and long-term objectives are assessed. Consideration is given to identifying major milestones associated with these tactical and strategic objectives, as well as the major challenges of achieving the objectives and how expected performance relates to the current business outlook.

A compensation philosophy can’t be developed in a vacuum. It must be linked to specific company objectives, market orientation and target pay position. The online tool provides a template for reviewing performance leverage and perspective, and considers how the compensation philosophy aligns with corporate strategy, culture and resources.

Another important element in plan design is a review of the performance measurement systems needed to operate and administer the program. This includes effective auditing and financial accounting, reporting factors and identification of key stakeholders or influencers who need to be part of the program development process.

Sound compensation plan development always requires the involvement of professionals from legal, finance, accounting, investor relations and tax. The tool also covers financial constraints, including authorized share capital, current burn rate and cash-flow requirements that may affect program design.

Another section walks the user through important shareholder approval (if it applies), and compensation committee/board of director review processes. The tool will guide users in developing backup materials and other effective processes to support committee members in their decision-making.

Finally, in addition to all of the business and regulatory issues, credibility and effective administration are addressed by walking users through a well thought-out and executed communication strategy for all constituents. In many cases, an effective communication program can be as critical to plan success as the plan itself.

Web-based assessment device

The tool is a web-based assessment device that helps practitioners consider critical factors so they can focus their efforts on designing plans that support business strategy. It is currently available in the following formats:

• e-book (in PDF) — users can download and print;

• spreadsheet (Excel) — users can input answers, print out and show to management;

• text (Word) — users can insert answers, print out and show to management; and

• online tool — an instant reference.

Questions are organized into four main sections:

• internal environment (business strategy, human capital, organizational culture, organizational resources and parameters);

• stakeholders (shareholders, compensation committee/board of directors, management, plan participants, other employees, communication strategy);

• external environment (regulatory, economic/industry/labour market, community); and

• disclosure and transparency (public disclosure/transparency, regulatory findings, compensation committee).

Reward elements covered in the tool include:

• stock/equity-based plans;

• short- and long-term incentive plans;

• executive perquisites and benefits;

• deferred compensation plans; and

• employment agreements.

While the tool does not provide answers to the many issues it raises, it helps ensure compensation professionals will assess executive compensation plans from every conceivable angle, resulting in a well thought-out compensation design process with fewer surprises.

Sample questions include:

• To what degree does the compensation philosophy align with corporate strategy, corporate culture or organizational resources?

• Do you have a performance focus or entitlement orientation in your compensation programs?

• Has your accounting division reviewed this program design from an accounting treatment perspective?

• Does this program require approval by external regulatory bodies?

• How reliable and accurate is compensation market data for programs of this type?

• Are there special interest groups that will react to this plan design?

Originally designed for its members, WorldatWork has made the tool available to the business community at large. Currently available free of charge, the tool can be accessed at www.worldatwork.org/execcomptool.

Don Lindner is the executive compensation practice leader for WorldatWork, a Scottsdale, Ariz.-based international association that helps HR practitioners implement total rewards — compensation, benefits, work-life, performance and recognition, development and career opportunities. For more information visit www.worldatwork.org.

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