How do you align executive pay with long-term value creation?

A experiência começa com a definição clara de o que significa "valor a longo prazo" para a organização. Isso envolve o alinhamento entre a liderança executiva e o conselho de administração em torno de objetivos estratégicos que sustentam o crescimento e a estabilidade futura da empresa. Empresas bem-sucedidas nesse aspecto frequentemente utilizam workshops estratégicos e sessões de planejamento para identificar esses objetivos, que podem incluir crescimento de receita sustentável, inovação de produtos, expansão de mercado, e práticas de sustentabilidade e responsabilidade corporativa.

An entirely different perspective is to identify a significant percentage tied to every member of management’s annual performance; mandatory skill development and/or acquisition. Companies should invest in their most valued resource - people. If companies focused on key KSAs necessary for the growth and development of the company by either developing employee air acquiring the necessary KSAs, it could positively impact employee moral, make jobs pay more than the pay, and cause teamwork to become the order of the day. A win win for the company and the employees because promotions from within is a great motivator for loyalty and personal fulfillment.

Creating effective comp plans is key to aligning executive pay with long-term value creation. These plans should include bonuses tied to achieving goals, which motivate executives to drive the company toward its strategic objectives. Long-term incentives, such as stock options/equity grants, are great. They connect executives' interests with those of shareholders, encouraging a focus on long-term growth than short-term profits. Balancing risk & reward is also important. Companies should offer attractive incentives while being cautious about promoting short-term gains over sustainable success. To manage this, many companies use clawback provisions, allowing them to reclaim bonuses or rewards if errors/misconduct affect financial results.

Performance-Based Pay: Link executive compensation to long-term performance metrics. Equity Alignment: Offer stock-based incentives to align with shareholder interests. Vesting and Clawbacks: Use multi-year vesting and clawback provisions for accountability. Benchmarking and Oversight: Benchmark pay, use independent oversight committees. Stakeholder Engagement: Consider feedback from shareholders and employees. Transparency: Disclose rationale and alignment with long-term goals. Implementing these strategies ensures executive pay reflects and drives long-term value creation.

A principal premissa de qualquer programa de remuneração de longo prazo deveria ser a criação de valor de forma sustentável para os acionistas e para seus stakeholders ao longo do tempo. O órgão responsável por esta definição é o Conselho de Administração, que pode ser assessorado por comitês internos ou consultorias setoriais especializadas. Entre os indicadores típicos pode-se considerar Total Shareholder Return (TSR), Lucro por Ação (EPS), Return on Equity (ROE), Return on Invested Capital (ROIC) e Crescimento do EBITDA, da Receita ou Margem Operacional. Em alguns programas é possível encontrar outros indicadores como Foco em Sustentabilidade e ESG, além do Aumento da Satisfação dos Clientes e Adoção de Tecnologia e Analytics.

Após a definição de objetivos claros, a próxima etapa é identificar métricas de desempenho que se alinhem diretamente com a criação de valor a longo prazo. Essas métricas podem variar significativamente entre setores, mas exemplos comuns incluem retorno sobre o investimento (ROI), valor econômico agregado (EVA), crescimento da base de clientes, e indicadores de sustentabilidade e governança corporativa (ESG). A experiência mostra que a utilização de um mix balanceado de indicadores financeiros e não financeiros é crucial para avaliar o desempenho de maneira holística.

Think of executive pay as a performance lever, fine-tuned to reward not just any performance but that which aligns with the organization's long-term goals. This mechanism needs precision -too loose, and it may not motivate effectively; too tight, and it might encourage excessive risk-taking. It's about finding the right balance, much like a skilful musician finding the perfect tension on a guitar string to strike the desired note.

Depois de definido as formas, prazos e indicadores de criação de valor de forma sustentável para os acionistas e para seus stakeholders ao longo do tempo, o mais importante é que haja o alinhamento entre a visão do negócio dos acionistas com os interesses de longo prazo dos executivos, o reconhecimento aos participantes do programa pelos resultados de criação de valor e geração de riqueza para o negócio de forma sustentável e que seja um forte instrumento de retenção para pessoas chaves da organização. Nesta etapa as companhias podem implementar regras de clawback, vesting de longo prazo, remuneração baseada em diversos indicadores, entre outras, com o objetivo de incentivar um comportamento ético e minimizar o risco excessivo.

Well-defined realistic long-term performance metrics are obviously the most important step. It is important for leaders to know to what metrics their pay will be linked, and to what extent their pay is linked to those metrics. In other words, how much "skin in the game" they have to commit. Typically, the higher the money commitment, the higher the leaders' commitment to delivering high long-term performance. This the reason that many companies, multinationals in particular, provide a higher value of stock options to top leaders vs middle management.

Establish a pay structure that ties executive compensation directly to the achievement of key performance indicators (KPIs) aligned with long-term value creation. This could include metrics like revenue growth, profitability, market share gains, and successful product launches.

Empresas líderes em alinhar remuneração com a criação de valor a longo prazo desenvolvem planos de incentivo que recompensam os executivos não apenas pelos resultados de curto prazo, mas também pelo sucesso sustentável e pela realização de objetivos estratégicos de longo prazo. Isso pode incluir a concessão de ações, opções de ações, e planos de participação nos lucros que amadurecem ou vestem ao longo de vários anos, condicionados ao atingimento de metas específicas de desempenho de longo prazo.

Just as a book's spine holds it together, aligning executive pay with organisational culture and values can bind your workforce and strengthen your corporate identity. Pay practices should not only align with your desired culture but should serve to reinforce it, enhancing the 'tone at the top' and shaping behaviour throughout the organisation. The spine of your 'book' should be robust, upholding the weight of the narrative you want to tell.

Partindo da premissa de que a cultura existente é forte, tem poucas disfunções e está alinhada com o propósito da criação da organização, qualquer programa que esteja desalinhado com ela, não terá êxito. E com os programas de remuneração de longo prazo não é diferente. Não é por acaso que a frase cunhada por Peter Drucker é tão famosa: “A cultura come a estratégia no café da manhã!”. Dessa forma, todos os elementos da remuneração dos executivos, principalmente os incentivos de curto e longo prazos, devem estar intrinsicamente ligados com a estratégia da companhia e serem instrumentos de fomento, reforço e reconhecimento cultural.

Ensure that the structure and level of executive pay align with your company's values, mission, and culture. For example, if your organization values teamwork and collaboration, consider incorporating team-based incentives into executive compensation plans.

A experiência ensina que a comunicação clara e transparente com todas as partes interessadas, incluindo acionistas, funcionários e a comunidade em geral, é essencial para o sucesso do alinhamento da remuneração com a criação de valor a longo prazo. Relatórios anuais, declarações ao mercado e reuniões com investidores devem detalhar como os planos de remuneração estão projetados para promover objetivos de longo prazo e como o desempenho é avaliado e recompensado.

Transparency in executive pay is akin to a window into the heart of an organisation. Clear and consistent communication about pay philosophy and practices not only helps to build trust with internal and external stakeholders but can also preempt potential misunderstandings. Just like a well-cleaned window lets in more light, transparent pay practices can illuminate an organisation's commitment to fair compensation.

Um famoso apresentador brasileiro de programas de auditório da década 80 conhecido como Chacrinha tinha uma célebre frase que era repetida à exaustão: “Quem não se comunica, se trumbica”. Trumbicar é um neologismo popularizado por ele, que tem como significado "Se dar mal", "Se enrolar", "Se complicar", "Emaranhar-se em problemas". A comunicação desempenha um papel fundamental nos programas de remuneração ou incentivos de longo prazo, pois é através dela que os objetivos, benefícios, expectativas e regras desses programas são claramente transmitidos aos colaboradores e aos stakeholders, contribuindo para gerar confiança, credibilidade, engajamento, motivação e retenção dos participantes elegíveis a esse importante elemento de remuneração.

Transparent communication is crucial in ensuring executives understand how their pay is tied to performance and long-term value creation. Clearly communicate the rationale behind compensation decisions and how they align with the organization's goals.

Consider your executive pay strategy as a living organism - it needs to grow and adapt to changes in its environment to survive. Regularly reviewing and adjusting your pay practices ensures they remain relevant, fair, and competitive. This adaptability mirrors that of a well-tuned athlete, altering their training regimen based on their performance, feedback, and the evolving competitive landscape.

With organisational and external changes, it is necessary to review and update executive pay. This includes reassessing the performance metrics used for long-term incentives or bonuses. Such reviews can be driven by various factors such as social movements, regulations, and the company's commitments. For instance, the addition of ESG (Environmental, Social, and Governance) metrics in executive long-term incentives in recent years. It can also be driven by an analysis to determine if the existing executive pay elements are effectively serving their intended purpose. In such cases, updates may be needed to appropriately recognise and reward executive performance.

A expressão “A única constante é a mudança” (Heráclito de Éfeso, 540 a.C.- 470 a.C.) é perfeita para destacar a importância de revisar e adaptar os programas de forma constante. No livro Estratégia Adaptativa (2020), os autores Sandro Magaldi e José Salibi Neto reforçam que o negócio precisa se adaptar aos novos cenários, tecnologias, hábitos dos clientes e exigência dos stakeholders. A distribuição do mix de remuneração entre remuneração fixa, ICP e ILP precisará se adaptar a cada fase da organização. Uma startup tem foco no longo prazo e geração de caixa. Já as em crescimento precisam de equilíbrio entre curto e longo prazo. As maduras focam em governança e manutenção e as turnaround são centradas no curto prazo e retomada dos resultados.

Regularly review executive pay structures and performance metrics to ensure they remain aligned with evolving business priorities and market conditions. Be willing to make adjustments as needed to optimize alignment with long-term value creation.

Seeking expert advice from consultants can save organisations a lot of time and money in the long run, and also ensure compliance with regulations. Executive compensation consultants can help you select the best long-term incentive options for your unique situation. They can support you from the long-term incentive design phase to the actual implementation and operation of the plan. Consultants can be especially important when implementing long-term incentives across geographies for complex organizations, ensuring the plan is legally compliant and tax-effective. External consultants bring their years of experience in implementing complex plans and their network of experts in different geographies to the table, which can be invaluable.

Consider consulting with external experts or advisors to gain insights into best practices for aligning executive pay with long-term value creation. They can provide valuable perspectives and help refine your compensation strategies.

Em resumo, alinhar a remuneração dos executivos com a criação de valor a longo prazo requer um compromisso com objetivos estratégicos claros, métricas de desempenho relevantes, planos de incentivo bem estruturados, e um processo de revisão e comunicação contínua. A experiência mostra que essa abordagem não apenas promove o alinhamento estratégico, mas também reforça uma cultura de desempenho e responsabilidade que beneficia a organização como um todo.

In my experience, executive pay that is tied to both performance metrics and continuing education goals ensures that the leadership is performing and is not getting stale in their position. For companies to become and maintain cutting edge in their industries, leaders need to be continually challenged. Their performance metrics should be on the company level (revenue, employee engagement, EBITDA, turnover, customer satisfaction), on the department level, and have individual goals.

Link a significant portion of executive compensation to long-term performance metrics that reflect sustainable value creation. Implement deferred compensation structures, like stock options or restricted stock units, that vest over several years. Use a balanced scorecard approach, incorporating financial, operational, and strategic objectives to assess performance holistically. Consider input from shareholders and other stakeholders in determining pay structures. Ensure the compensation plan is clear, transparent, and aligned with the company's long-term strategy and goals. Regularly review and adjust compensation policies to ensure they continue to align with long-term value creation.

Executive pay comprises Salary, Bonus, Commission, Perquisites, Retirement benefits, and Long-Term Incentives. An executive is compensated in the following manner 1) Monthly Stage - Salary 2) Yearly Stage - Bonus + Commission + Perquisites 3) Retirement - Retirement Benefits All the above components lead to Value creation at every stage. When it comes to Long Term Value creation, which is built over the employee tenure, the Long-Term Incentive Component comes into play. Long Term Incentives are a means of profit that links the executive's financial success to shareholders. There is risk involved on either side. Some factors which align long-term value creation to pay are Performance-linked pay, scarcity of talent, and Equitable pay.

a) Integrate long-term incentive plans (LTIPs) like stock options, restricted stock units (RSUs), or performance shares, which vest over several years, encouraging executives to focus on sustained company health. b) Tie bonuses & incentives to performance metrics that reflect long-term value creation, such as return on invested capital (ROIC), economic value added (EVA), or multi-year compound annual growth rates (CAGR). c) Use balanced scorecards (mix of financial, operational, customer, and sustainability metrics) ensuring executives are driving comprehensive long-term success. d) Include clawback clauses that allow the company to reclaim bonuses in the event of misconduct or restatements of financials, promoting responsible behavior.