Synopsis

Welcome to this helpful PDF file on compensation packages that actually drive performance! In this
article, Boris Groysberg, Sarah Abbott, Michael R. Marino, and Metin Aksoy provide principles for
designing executive pay that can lead to better outcomes for both companies and their employees.

Automated Summary:

Decisions about executive pay can have a significant impact on a company, and when done well, it
can align people's behavior with the company's strategy and drive better performance. However,
designing executive compensation can be challenging as there is no one-size-fits-all approach.
Companies need to start with clear strategies and understand the basic elements of compensation
to link it to desired outcomes. This article explores how firms approach executive compensation and
provides insights from research and experiences. It also discusses the four dimensions of
compensation design: fixed versus variable, short-term versus long-term, cash versus equity, and
individual versus group.

Specified Summary:

The document discusses the principles and challenges of designing executive compensation
packages that drive performance. It emphasizes the importance of aligning compensation with a
company's strategic objectives and explores the four dimensions of compensation design: fixed
versus variable, short-term versus long-term, cash versus equity, and individual versus group. The
document provides examples of how companies have used compensation to achieve specific goals,
such as promoting profitable growth or fostering alignment with owners. It also highlights the need
for companies to consider factors like industry norms, company size, and individual circumstances
when designing compensation packages.

Customized Summary:

The document titled "Compensation Packages That Actually Drive Performance" published in the
Harvard Business Review outlines the principles for designing executive pay. The main topic of the
document is the importance of aligning compensation with company strategy and performance to
drive better results. The document emphasizes that effective compensation plans can align people's
behavior, attract and retain talent, and generate better performance. On the other hand, poorly
managed compensation can lead to negative outcomes such as loss of key talent, demotivation,
misaligned objectives, and poor shareholder returns. The document discusses how companies
approach executive compensation, including the use of benchmarking and the challenges
associated with it. It also delves into the four dimensions of compensation design, which are fixed
versus variable pay, short-term versus long-term incentives, cash versus equity compensation, and
individual versus group performance. Lastly, the document addresses the impact of the COVID-19
pandemic on compensation plans and suggests revisiting incentive programs to better align them
with stakeholder interests. Overall, the document provides insights and recommendations for
designing effective compensation packages that drive performance.
Main Points

1. What are some common mistakes companies make when designing

executive compensation packages?
According to the article, companies often make mistakes when designing executive
compensation packages, such as focusing too much on short-term financial metrics, failing
to align pay with long-term performance goals, and using a one-size-fits-all approach to
compensation. Other mistakes include not taking into account the company's culture and
values, not considering the potential unintended consequences of compensation plans, and
not being transparent about how pay decisions are made.

2. How can companies align executive pay with long-term performance

goals?
The article suggests that companies can align executive pay with long-term performance
goals by starting with a clear strategic objective and then considering several trade-offs as
they design compensation packages. Companies should also use a mix of financial and
non-financial incentives, such as equity-based compensation, deferred compensation, and
performance-based bonuses, to encourage executives to focus on long-term goals.
Additionally, companies should regularly review and adjust their compensation plans to
ensure that they remain aligned with the company's strategic objectives and changing
market conditions.

3. What role do non-financial incentives play in driving executive

performance?
The article emphasizes the importance of non-financial incentives in driving executive
performance. Non-financial incentives, such as opportunities for career development,
recognition, and meaningful work, can be just as important as financial incentives in
motivating executives to perform at their best. The authors argue that companies should use
a mix of financial and non-financial incentives to encourage executives to focus on long-term
goals and to align their behavior with the company's strategic objectives. By using a more
holistic approach to executive compensation, companies can create a culture of
performance that drives long-term success.
Specific Points

1. What is the impact of executive pay on a company?

The impact of executive pay on a company can be significant. When executive compensation is
managed effectively, it can align people's behavior with the company's strategy and drive better
performance. It serves as a tool to motivate and incentivize executives to achieve desired outcomes
and goals. On the other hand, if executive pay is managed poorly, it can lead to negative
consequences such as the loss of key talent, demotivation among employees, misaligned
objectives, and poor shareholder returns. Therefore, it is crucial for boards and management teams
to carefully consider and design executive compensation packages that align with the company's
strategic objectives.

2. What are the challenges in designing executive compensation?

The challenges in designing executive compensation include the lack of one-size-fits-all best
practices, the need for clear strategies and understanding of compensation elements, the existence
of industry, geographic, and company size variations in compensation norms, and the importance of
tailoring compensation solutions to company needs and strategies. Additionally, the recent pandemic
and economic crisis have added complexity to compensation design, requiring companies to
consider factors like employee health and safety, enterprise liquidity, and stakeholder interests.
Overall, the challenge lies in creating compensation packages that align with the company's strategic
objectives and effectively motivate and incentivize executives.

3. What are the four dimensions of compensation design?

The four dimensions of compensation design are:

​ Fixed versus variable: This dimension refers to the balance between fixed base salary and
variable incentives contingent upon achieving certain goals. It determines the proportion of
compensation that is at risk based on performance.
​ Short-term versus long-term: This dimension relates to the timing of incentive payouts.
Short-term compensation is paid out in the year it is awarded, while long-term compensation
is deferred and paid over a future period, often in the form of equity.
​ Cash versus equity: This dimension involves the composition of compensation in terms of
cash payments versus equity-based awards such as stock options or restricted stock. It
considers the mix of cash and equity that makes up an executive's compensation package.
 ​ Individual versus group: This dimension considers the extent to which compensation is tied
to individual performance versus group or organizational performance. It reflects the balance
between rewarding individual contributions and fostering collaboration and alignment within
the company.

These dimensions play a crucial role in designing executive compensation packages that align with
a company's strategic objectives and incentivize desired outcomes.

4. How do companies approach executive compensation?

Companies approach executive compensation by considering clear strategies and understanding the
basic elements of compensation. They aim to align compensation with the company's strategic
objectives and desired outcomes. This involves making decisions about the balance between fixed
and variable pay, short-term versus long-term incentives, cash versus equity, and individual versus
group performance. Companies often analyze data on executive pay, including disclosure
requirements, to inform their compensation decisions. They may also benchmark against industry
norms and consider factors like company size, geography, and individual circumstances. The recent
pandemic and economic crisis have prompted companies to reassess their compensation strategies
and consider adjustments to incentive plans. Overall, the goal is to design compensation packages
that motivate and incentivize executives while aligning with the company's goals and stakeholder
interests.

5. What are the basic elements of compensation?

The basic elements of compensation include fixed base salary, short-term incentives, and long-term
incentives. Fixed base salary is a predetermined amount paid in cash to executives. Short-term
incentives are variable elements of compensation that are contingent upon achieving specific
organizational or individual goals. Long-term incentives are also variable and are typically delivered
in the form of equity, such as stock options or restricted stock. These elements of compensation are
designed to motivate and incentivize executives to align their behavior with the company's strategic
objectives and drive better performance.