Improving Pay and Performance Alignment
Good. Better. Best. How Farient designed a better approach to goal-setting
Since going public, this Fortune 1000 company had a pay program that was pretty straightforward consisting of base salary, a bonus opportunity contingent largely upon meeting corporate profit objectives, and stock options. Like so many other companies, this client stated in its proxy report that one of its compensation goals was to align the interests of executives with those of shareholders.
The Challenge
Although our client had applied its pay policies consistently over the years, it was paying relatively low amounts for the return provided to shareholders. What was causing the systematic shortfall in Performance Adjusted Compensation™ (PAC™) outcomes relative to Total Shareholder Return (TSR) performance?
Farient’s Approach
Farient needed to understand what was causing the pay shortfall. We used our proprietary Farient Alignment Report™ and discovered that although the company had a philosophy of paying competitively, the shortfall had been caused by three factors: (1) below market target bonuses, (2) below market upside opportunity, and (3) a history of setting aggressive bonus goals relative to peer performance, causing the company to pay lower bonuses for better performance.
In response, Farient recommended a goal-setting process that was contextualized externally, i.e., obtaining inputs from how peers had performed historically, what analysts expectations were for the company and its peers, and what shareholders were implicitly expecting from our client based on its stock price.
The Results
Our client recalibrated its bonus plan design, and by using our suggested approach to goal-setting, has been able to set credible goals, even in the most difficult goal-setting environments. The new bonus plan is now a highly credible component of compensation among shareholders, management, and employees. Specifically, it has helped the CEO focus management and employees on key financial and operational goals, while also helping to recruit key talent for important and highly visible roles.
Return to other Case Studies…
