In Part 1 of this series, we discussed how discussions of executive compensation can “defer the issue,” expose gaps in assumptions, and drive important, deeper discussions that clarify strategy. In this article, we explore how compensation can expose talent gaps and cultural risks.
For example, a discussion about changes to the compensation plan may surface.
- Skills gaps needed to execute strategy
- A gap in differentiated recognition of top talent
- Cultural issues
By examining three case studies, we explore how compensation conversations can uncover potential talent gaps, spark necessary workforce planning activities, and lead to a shift in talent strategy for the next stage of a company's growth.
These moments provide an opportunity for boards to discuss the talent and culture strategy needed to drive the business forward.
Uncovering talent gaps through performance metrics
At one organization, to drive performance improvements, new growth metrics were introduced into the executive compensation plan that required entering new markets and channels to drive stock price growth again. The company's operational performance and productivity growth had been strong for many years, but the stock price remained stagnant.
Discussions with investors emphasized that revenue growth was key to regaining interest. Problems arose when the compensation committee approved this metric. The committee began to understand its difficulties and realized that some leaders lacked the skills necessary to drive growth and integrate acquisitions, which were essential to execution.
This realization led us to take a hard look at what we needed to achieve our goals and the talent we needed to do it. As a result, the board, working with management, made several key decisions around realigning and developing our talent, including creating a new channel development role targeted at external hires with proven experience.
What was intended as a simple performance measurement has become a critical tool for evaluating and optimizing executive effectiveness. In this case, performance metrics have revealed mismatches between executive capabilities and the skills needed to drive growth. Compensation plans can reveal skill gaps that regular performance reviews don't uncover.
Compensation analysis reveals seniority is valued more than performance
A company analyzed the main drivers of changes in executive compensation over time in preparation for year-end pay decisions. They expected that their best-performing and most promising executives would receive salary increases over multiple years that differed significantly from other executives. To their surprise, they found that the largest salary changes were related to executive tenure, with only minor differences due to performance. As a result, the committee worked with management to review the performance management and talent evaluation systems to ensure that their best-performing executives received differentiated compensation over time.
A quick pay analysis revealed unexpected results and shortcomings in our performance management system. The insights gained helped us make informed adjustments to both our performance management and future compensation strategies.
This case also highlights the importance of conducting trend and sensitivity testing analytics around compensation. By exploring different variables in greater depth, companies can gain broader insights and address/prevent unintended consequences.
Incentive program activities highlight the destruction of territory and culture
The CEO of another company wanted to hold his entire leadership team accountable. To support this objective, the company introduced an annual incentive, rewarding each region 70% for its sales and revenue performance and 30% for the company's overall performance. Throughout the year, Region 1 grew well and was able to receive additional raw materials and products from Region 2. However, Region 2 executives insisted that they had no additional resources to share because they didn't want to lower their own numbers. This resulted in tensions and angry outbursts at leadership meetings. All the while, the company was failing to meet its targets.
Ultimately, the compensation committee stepped in and expressed a willingness to make an exception if Region 2 “did the right thing” and shared the product with Region 1. However, from this experience, the committee realized there was a larger cultural challenge at play: each region was focused on optimizing its own performance rather than the common good. This culture also impacted to prevent the sharing of talent resources, even when it would be best for talent development. The CEO was so eager to drive accountability that he overlooked the damage it was doing to the organization.
From this experience, the committee worked with management to evaluate priorities and engage in an effort to rethink the company's purpose and mission. As the company went through this experience, it became clear that operating as one company would drive greater shareholder value. Of course, this cultural change didn't happen overnight; it required new messaging and tough choices about talent that could embrace new ways of working. As management learned to operate as one team, they developed new ways to share market information and evaluate trade-offs, and became more agile in allocating and investing resources to get the most valuable outcomes. With the company's purpose and mission at the forefront, the new corporate focus led to stronger, more trusted relationships and shared success.
Conclusion
The conversation about compensation often becomes a diagnostic tool, uncovering deeper issues such as skills gaps, incentive misalignments and cultural challenges. These case studies are just a few of the many examples where compensation “takes the lead” and brings critical leadership decisions and actions into focus. Leveraging the insights gained from these discussions, companies can make better-informed decisions about talent management, leadership development and cultural risks, ultimately strengthening their organizational effectiveness and better positioning them for future success.
In part three of this series, we’ll take a closer look at how compensation conversations, a key element of organizational change, impact the way work gets done.
