Balance is the Key in Executive Compensation


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expert perspective telescopeExpert Perspective from Gahall

In 2007, The UNITED STATES HOUSE OF REPRESENTATIVES COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM issued a report, which concluded “Corporate consultants can have a financial conflict of interest if they provide both executive compensation advice and other services to the same company… [E]xperts have recommended that corporate boards should retain a compensation consultant that performs no other work for the company.”  It further stated: “The report finds that compensation consultant conflicts of interest are widespread.” It was a big problem then and in some cases remains a problem today, but it is not the only problem that companies have with compensation consultants and the advice they provide.  The public outcry over executive compensation excesses has in part resulted from compensation consultants who, rather than advise their clients, appease their clients by designing compensation structures where short-term results are rewarded for more than sustained performance. Many compensation consultants are now rethinking their strategies for clients and recognize that it’s time to rethink the assumptions that underlie executive compensation programs and to change focus toward a longer-term, sustainable performance.  Consultants who once embraced the status quo in executive pay structures that focused on short term results and excessive risk taking are now beginning now to condemn these practices.

Grahall is pleased that at long last our fellow consultants have come around to our way of thinking.  We are also pleased to say that we believe Grahall to be among a very small number of compensation consulting firms (actually we don’t of any others) who led the reform movement in executive compensation.  Well before the financial meltdown (in fact years before), and well before it because “fashionable” to do so, we consulted with clients around the need for a balance of short-term, medium-term, long-term and career-term incentives in executive pay.  And by long term we mean LONG TERM.  Not on average 2 years like most plans, but at least 5 years and perhaps 10 years for these long term invectives to be realized. 

Grahall’s Michael Graham outlined his thinking about executive compensation in his book, Effective Executive Compensation: Creating a Total Rewards Strategy for Executives which was published in March 2008.  The book addresses executive compensation design alternatives and addresses fundamental considerations around how put those pieces together so that the compensation is aligned with business goals and objectives. 

In the book, Graham also outlines their new wealth accumulation plan that links long-term wealth accumulation directly to performance. Called the Grahall Performance-Based Wealth Accumulation and Retention Plan—or gPB-WARP—this revolutionary plan, unlike traditional retirement or stock option plans, is designed so that a portion of the executive’s total reward program and ultimately their wealth accumulation rewards are based on company performance, stock performance, or a combination of both. These plans go beyond the “alignment of shareholders” and effectively combine career incentives and defined contribution retirement plans with deferred compensation awarded only when the corporation beats the competition. These plans ensure that exceptional retirement income is reserved for only those executives who perform exceedingly well and whose companies succeed as a result of their efforts.

And for those consultants who, now that it’s clear that the drumbeat of public outrage over excessive executive compensation will not be silenced, call for reform we say: “Better late than never” and we are glad to have you join us.  But we wonder: can those leopards really change their spots? Contact us for more information.

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