The New CSI: Compensation Strategy Investigation


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Expert Perspective by Grahall’s OmniMedia Editorial Board

Eric Dash writes in his June 8, 2010 article for the New York Times: (Fed Finding Status Quo in Bank Pay)
“…many of the bonus and incentive programs that economists say contributed to the worst financial crisis since the Great Depression remain in place… In many cases, risk managers do not have full access to the compensation committee of the banks’ boards.

No question that these large banks are complex environments.  In fact that complexity may well have contributed to the “the worst financial crisis since the Great Depression” as Dash described it.   Where there are complex environments, it makes the most sense to bring all the specialists together to examine and analyze circumstances and determine where problems might exist or arise.

In our era of specialization though this is not as simple as it might seem.  The risk management specialists do not understand compensation and the compensation specialist may not fully grasp the risk considerations. 

In the absence of an environment of collaboration, commitment and transparency among HR, risk managers and the Compensation Committee of the Board, the only thing we can expect is more of the same as far as executive compensation is concerned and the outcome form that will be more regulation.

The only way that banks and possibly all publically traded companies can avoid additional regulation associated with executive compensation programs is to begin the work to align executive these programs with the highest and best interests of the company and its stakeholders.   That doesn’t necessarily mean the greatest profits today; it might better be described as the approach that ensures that the enterprise thrives and endures.

Michael Graham said in his book Effective Executive Compensation  the goal of executive compensation is “to reward both organizational and individual performance in such a way that the company is the absolute best it can be… the mutual benefit of all stakeholders, shareholders, employees, customers, and partners is a major consideration for the executive reward program.”

This is neither an easy nor a quick fix.  The commitment of time is significant, but he results can be well worth the effort. Creating effective compensation schemed necessitates bringing specialists together from various parts of the organization to examine and consider the external environment, business strategy, organizational capabilities, risk implications, and people strategies, and how these factors influence and are influenced by the executive reward strategies.

The executive reward strategy can make or break not just a company, but possibly even an economy.

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