Compesation - Follow the Leader is Dangerous, but So is Being the Leader
As children, we play Follow the Leader with the goal of fitting in. In this game, kids will do whatever the person in front of them does. I have actually seen kids fall down, just because the person in front of them tripped and fell. As adults, we learn that to be a leader, you must worry less about fitting in and more about doing what is right for a given situation.
As compensation professionals, we are constantly asked to build a balance between two worlds: the world of homogenization and that of innovation. From one side, we are asked to build programs based on survey data and peer group analysis. On the other side, we are asked to create programs that mesh with our business goals and company culture. Far too often the survey data wins this battle, based not on “best fit”, but instead on a mythical “best practice.”
Often compensation survey data reports on a self-fulfilling prophecy. The data only reflects what people were told to do the prior year and that data reflected what the market data showed from the year before that. Imagine if you stood outside a hamburger shop at 2:00PM and asked people what they ate for lunch. Very few would say tacos, poppadum or chow mein. Most would reply with some form of hamburger, fries and soft drink. Compensation data can be quite similar to this.
As an example: When companies look at current survey data they see that nearly every company that is issuing RSUs offers them with a three-year vesting schedule. Some might believe that this is because three years has been shown to be the perfect timeframe for most companies. I would argue that this is simply because most prior plans have had a three-year vesting schedule and survey data works to perpetuate that trend. Of course, there is nothing inherently wrong with three years, but for many companies something shorter or much longer may make far more sense. Even if a compensation professional determines that a different vesting schedule would likely be more effective, they are likely to be faced with the incessant question of: “What does everyone else do?” As I mentioned, the survey data does not show what is best, it just shows what is being done.
This same problem is applied to nearly every compensation instrument or pay level. It leads to a lack of innovation and creativity in broad-based plans. It is also a main culprit behind the consistent growth in executive pay, regardless of outcry, proof of effectiveness or, in some cases, corporate or individual performance. On the bright side, Say on Pay has pushed new innovation in executive compensation. Perhaps this will lead to broad-based programs being allowed to break out of the “norms” and focus on best answers, instead of best practices.