Top management needs an outstanding compensation plan. The executive management is responsible for the delivery of the business results to shareholders. They represent the company to the outside world. They handle the strategic initiatives. They are in a risky position. Their job contract can be cancelled within minutes. They want the protection. The executive compensation plan has a highly motivating component, and it guarantees the income protection in case of the job cancellation.
Executive Compensation Plan Principles
The shareholders buy the shares of the company to keep the value of money. They expect even more. They expect to earn the extra from the increased value of shares. The top management is paid for the constant increases in the valuation of the company. It is an absolute rule of the business.
The shareholders define the executive compensation plan. They usually cooperate with the CEO, who engages Human Resources in the process of designing the executive compensation. The shareholders define targets; shareholders expect the executive management to reach targets.
The executive managers are not paid for developing the warm and friendly environment in the organization. They are not paid for the sympathetic and people oriented corporate culture, when it does not bring benefits of increased profits for shareholders. The company exists to make profits, it does not exist to employ satisfied employees.
The principles of the executive compensation are:
- Clear focus on profits generation
- Long-term orientation of the compensation scheme
- Motivation of manager by high bonuses
- Non-cash focus of the compensation (stock options, shares, share phantom schemes)
- Risk Management
- Balanced Scorecard implemented into the Compensation Scheme
The executive compensation scheme has to support goals given by shareholders. The executives take risks of failing. They have to be over-compensated for meeting goals. They should receive an enormous extra bonus for exceeding the expectations (goals given by shareholders). The balance in the compensation has to be in favor of exceeding goals.
The HR Professionals have to support the CEO in setting the executive compensation scheme, which support the top management in pushing the organization. The top managers have to make tough decisions. They have to be compensated for overcoming the stress, the pressure of the line management and employees’ complaints about constant changes in the business operation.
Human Resources has to understand the main business goals. HR has to help in setting the executive compensation and alignment with the performance based compensation for the rest of the organization.