With Management Say on Pay (MSOP) rising on the horizon, we are all faced with properly implementing a new performance paradigm. Academic research in countries that have had MSOP for a while shows that its true impact is not changes to compensation levels or frequency. Its single biggest impact is the broad and increasingly deeper use of performance metrics to determine pay. This is especially true for long-term instruments such as equity awards and deferred compensation.
So, what is the perfect metric? The old adage of “stock price equals performance” will no longer fly. There is a lot of noise these days about Total Shareholder Return (TSR), both absolute and relative. TSR is the change in stock price factoring in dividends paid. This is usually expressed as a percentage.
Proponents argue that this is the true performance that shareholders seek and that comparing one company to a group of peers (a Relative TSR plan) provides the best optic of performance in a given market.
Opponents and tepid supporters argue that there is little direct line-of-sight for most individuals. In fact, compensation professionals at many companies who use this metric will tell you that even most senior managers are cloudy when asked how their daily or monthly work directly impacts TSR.
In a June 2010 HBR article Dan Ariely reiterated the old standard: “You Are What You Measure.” He argues that measuring performance based on stock price defines stock price as the purpose of the company. I tend to agree. The science seems simple. People will do what they are told is important. If we want them to change what they do, we need to redefine what is important.
Sometimes I think we sell our staff an ourselves short by trying to find a too-simple solution for a very complex issue. We aim for the common denominator rather than the uncommon differentiator. We communicate once instead of having an ongoing performance conversation.
Be prepared. As a compensation professional in this new decade you will be required to understand your business; how it performs and the risks and rewards of driving specific actions. Over the next 60 days take the time to schedule meetings with senior managers of each critical area at your company. Get the dialogue started. Drive the performance your company needs and you really want instead of what the trends and market data say you should pursue.
There is no silver bullet or perfect metric for all companies or all people. Now’s the time to start defining who your company is, who it wants to be and how you can use compensation to help get it there.