Pay and Performance Alignment

 Like the legendary Blue Angels in flight, alignment and precision are key.

The Issue

We say that pay and performance are aligned when total compensation, after performance has been factored in, is both, sensitive to company performance over time; and reasonable relevant to the market for executive talent and for the performance delivered.  Usually it’s not the level of pay that’s at issue, it’s the lack of alignment, (i.e., the lack of linkage of pay to sustained Total Shareholder Return (TSR) over time.)  And contrary to popular belief, large dollops of equity grants do not assure alignment.

Farient’s Point of View

Farient believes that pay and performance should be aligned over time, but that a clearer definition of what this means and better guidance as to whether companies are achieving this is what is needed.  In particular, Farient defines alignment to be when total compensation, after performance has been factored in, is: (1) sensitive to TSR performance; and (2) is within an acceptable range compared to the relevant market over time. This is an important definition. Many people think that alignment is only when pay fluctuates in response to performance, or they mistake the definition of pay as target compensation, rather than compensation that has been adjusted for performance (i.e., Performance-Adjusted Compensation^TM (PAC^TM)). Finally, they make the mistake that alignment can be determined a year at a time.  But it’s really the pattern of PAC relative to TSR performance over time that tells the story.

How Farient Can Help

Farient can analyze the pay and performance alignment for your company by running our proprietary Farient Alignment Report^TM.  We can quantify and visually illustrate the degree to which your company’s compensation program has been and likely will be aligned with TSR over time.  This analysis helps us “drill down” to diagnose the cause of any problems that exist, and helps us to redesign your pay program and/or suggest a different approach to pay actions when warranted.  Finally, Farient can help you develop a credible and transparent story for investors, helping with both Say on Pay and the new disclosure requirements. 

Copyright 2011 - Farient Advisors, LLC

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