Development of an Effective Executive Compensation Plan

The Creation of an Effective Executive Compensation Plan

The creation of an effective executive compensation plan is a vital approach for companies to attract and retain best-skilled executive members for the organization. However, overpayments to the executive can also be detrimental to the organization based on the waste of the shareholder’s assets as well as the corrosive impact to the social fabrics and culture of the society (Tysiac, 2012). Therefore, the executive compensation plan should be tailored towards obtaining skills as well as the business needs and goals. The development of an effective executive compensation plan focuses on balancing the major competing goals such as motivation and retention against the company need for profitability and budgeting. It is essential to underline the critical factors and issues that are significant for the development and implementation of an effective executive compensation plan for the benefit of the company.

Factors Influencing the Development of Executive Compensation Plans

One of the primary factors influencing the development of executive compensation plans involves the motivation of the executive employees to ensure retention for achieving the organization’s success. Based on the competitive nature of organizations to attract the most skilled executives that will drive high-performance levels, motivation becomes an essential element for ensuring retention of skills in the organization. \u010ciarnien\u0117 and Viena\u017eindien\u0117 (2010) note that personalized compensation program for the executive members of an organization should be assessed, analyzed and updated frequently to ensure the executive employees focus on the same price as the organization’s shareholders. The bottom line is that most executive employees are drawn and motivated based on their salary, job security, and benefits in their mind.

Benchmarking the Compensation Program

Benchmarking the compensation program with the industry peers is essential for ensuring retention and establishing an effective plan for incentivizing the executive employees. Both internal and external benchmarking are influential in designing the appropriate incentives and benefits to the executive employees in a particular industry. The benchmarking should be based on similar skill sets as well as the organizations in a similar business and located in the same market. However, benchmarking should also be based on the issue of executive performance to ensure the employees gain the right compensation plans. Tysiac (2012) indicates that benchmarking provides an unnecessary retention strategy as it can lead to increased compensation of the executive employees against underperformance by the executives.

Achievement of Organizational Goal and Performance Objectives

The achievement of organizational goal and performance objectives is another significant factor to be considered in the creation of an effective executive compensation plan. The executive pay and compensation plan are tightly linked to the achievement of internal goals including stock prices, cash flow, earnings, profits and sustainability of the organization (Glassman, Glassman, Champagne, & Zugelder, 2010). Therefore, performances the creation of performance-based compensation ensure the creation of metrics for different executive positions in the organization based on their responsibilities.

Internal Pay Structure and Pay Equality

Additionally, the development of executive compensation is influenced by the internal pay structure applied by the organization. The executive pay structure should be provided as an extension of the whole organization’s payment structure to ensure and promote equity and consistency in the organization. Inequality in the payment of executives and the other employees can affect the performance of the organization due to large differences between the employees and the management. Therefore, pay equality an essential factor in developing an effective compensation strategy in the organization.

Communication and Transparency

Communication is an essential factor in the creation of an executive compensation program. Communication involves creating awareness of the compensation program in the organization as well as obtaining the employee input in the development of the executive compensation plan. Effective communication is vital for establishing a good compensation culture and philosophy based on transparency. Therefore, the incorporation of organizational culture into the compensation plan ensures that the company values and beliefs are taken into account. As a result, lack of communication of the compensation strategy is a significant issue as it can result in conflicts and increased resistance from the employees. Communication of the execution plan is not limited to the employees alone but should also be clearly outlined for the shareholders. Tysaic (2010) indicates that shareholder approval is critical in establishing a comprehensive compensation strategy for executive employees. Therefore, openness and transparency in the development of executive compensation plan are essential for success.

Conclusion

In conclusion, the establishment of an effective executive compensation plan is vital for the success of the organization based on ensuring the executive are appropriately compensated without causing harm to the organization. Executive overpay affects organizations by creating a loss channel for the organizations. However, taking factors such as motivation, employee retention, employee performance, internal pay structure, external and internal benchmarking, pay equality, and effective communication of the compensation plan is essential to achieve effectiveness. Furthermore, the creation process of the executive compensation plan must take into account the organization’s objectives and reflect the company values and beliefs to prevent conflicts and resistance in the organization. Hence, it is essential to understand these factors and issues to ensure the development of an effective total reward system for employees.

References

Čiarnienė, R., & Vienažindienė, M. (2010). Critical issues for compensation and incentives management: theoretical approach. Management Theory and Studies for Rural Business and Infrastructure Development, 24(5), 15-22.

Glassman, M., Glassman, A., Champagne, P. J., & Zugelder, M. T. (2010). Evaluating pay-for-performance systems: critical issues for implementation. Compensation & Benefits Review, 42(4), 231-238.

Tysiac, K. (2012). Four internal factors to consider when determining executive pay: Governance and risk, people and leadership skills. Fm-magazine.com. Retrieved from: https://www.fm-magazine.com/news/2012/sep/20126312.html