We expect that The Washington Post article by Brady Dennis and Tomoeh Murakami Tse, “Pay Czar Quietly Meets With Rescued Companies” presents a simplified version of the work that Pay Czar Kenneth R. Feinberg has undertaken to determine “…executive compensation at seven companies that received large government bailouts.” The article says: “For each company, [Feinberg] will have to assess the role individual employees play and their ability to generate revenue.”
There are far more dimensions to executive pay than just those two mentioned: role and revenue generation. We anticipate that Feinberg’s work will be characteristically thoughtful, addressing all the complex and interconnected areas of executive compensation. His work is not much different than the approach that executive compensation consultants should take when developing an Executive Total Rewards Strategy.
As Michael Graham states in his book “Effective Executive Compensation” the goal of an executive compensation strategy is really quite simple, “to reward both individual and organizational performance in such a way that a company is the absolute best that it can be.” They go on to say: “In order to develop an effective executive total rewards strategy, you must understand the business, the entire range of rewards components, and how to best motivate management to accomplish critical business strategies.”
This comprehensive approach is not easy work, but it is highly effective. Graham describes his approach in a process overview diagram that shows the intricacies and complexities of this process.
Understanding the company’s value chain is critical to understanding the role of each executive, and not every critical role is designed to directly deliver “revenue”. Rather many of these executive roles help an organization to create value. There are many points, or links if you will, along the chain where company resources are structured to expand and enhance value. Value begins with innovation, or R&D, and continues with production. Then there is the sales function, followed by customer service. Layered over this are the support groups such as Legal, HR, Finance and Treasury. For example, the Chief Counsel of an organization may not create revenue directly, but he or she most definitely represents an important link in the value chain.
Determining which positions are critical to the organization’s ability to carry out its business strategy – and the relative importance of those positions - is key to determining the appropriate executive compensation for individuals in those roles. Truly critical roles held by truly exceptional performers should receive truly exceptional pay. Unfortunately. most companies have not followed this comprehensive approach. And it may not be possible for Feinberg to deliver, even though it would clearly be best.
There is a general tendancy among Americans to feel that “if you are paid more than I am, you are overpaid”, a mentality fueled by the hot lights of media attention on executive compensation. Feinberg might have to “regress to the mean” or something close to that, providing high performers in key roles only slightly more money than average performers in less critical roles. It will be better than spreading compensation in the proverbial peanut butter fashion, but it won’t turn these troubled, government owned companies into the stellar performers that American taxpayers deserve.
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