Executive Compensation: Maximizing Impact - NACD BoardVision
In this edition of NACD BoardVision, Aalap Shah, vice president at Pearl Meyer & Partners, discusses some new ideas in executive compensation with Christopher Y. Clark, publisher of NACD Directorship magazine.
>> Christopher Clark: Hi, I'm Christopher Clark, Publisher of NACD Directorship Magazine, and this is BoardVision. Our topic today, in general, is compensation, but we're going to talk about I think something relatively new. I'm joined today by Aalap Shah, Vice President of Pearl Meyer and Partners, he's actually based with me in New York. Welcome!
>> Aalap Shah: Thank you Chris.
>> Christopher Clark: Aalap, we've talked a lot, in general, about compensation and incentives, but our topic today is going to be something that really piques my interest, and I think it'll pique the interest of our director viewership. If incentives are meant to motivate behavior, I mean, truly motivate them, we have talked about, you have talked to me about matching that personality profile with the lifecycle of that particular business to creative effective incentives. It sounds a little audacious. Flex that out for me.
>> Aalap Shah: Well we've done over the past, since I've been in the business, is focus on the instrument of incentive compensation as well as the, the outcome of the incentive compensation. So, so the performance outcome, what has been largely ignored is the human element. So, what, if, if the idea is to attract motivate, and retain individuals, what we are having a problem doing is customizing the incentive programs to the particular individuals that they're expected to cover.
>> Christopher Clark: Aalap, define it further. When you talk about this alignment, personally, personality profile, what are you talking about? Are you talking about Meyers, Briggs? What are you talking about?
>> Aalap Shah: If you place managers within the Meyers Briggs profiles, at about 60 percent of all managers fall within one profile, to be extroverted, sensing, thinking, and judging. And that's, that was, in our research over the summer, that was an astonishing percentage, and because there are actually some limitations for that, an extroverted sensing, thinking, and, and judging individual is very uncomfortable with taking risk. So when you think about 60 percent of managers are individuals who have a potential to be uncomfortable with taking a risk, and you, and, and you put that up against the different business life cycles that a company goes through, a, a, an introductory phase, a growth phase, a mature phase, and a declining phase, an individual that is potentially uncomfortable taking risk in introductory and a growth phase, can be potentially quite problematic for, for, for the company. So the question is, how do you then motivate that individual to take that risk?
>> Christopher Clark: Well I don't want to throw you a curveball, but before our chat today I talked to two Fortune 500 corporate directors, and I gave them your premise, or, or what you're actually advocating, for all the right reasons, and they had very different reactions. One said, absolutely, to know about that elasticity and that alignment, spot on. The other one said, no, it's all about skills and performance.
>> Aalap Shah: The performance element I think is, is taken care of if you focus on this, this triangle relationship, which is the human element, the, the, the instrument, and the ability for the instrument to be good for the company, an instrument I mean stock options, restricted stock, performance shares, cash bonuses, long-term cash bonuses, and then the, the, then the, then the final point is the, the actual...sorry, I just lost my train of thought there. The, I think the, the performance question gets answered if you focus on the, the triangle, and the triangle is the human element, the instruments that you use, the incentive instruments that you use, whether they be cash bonus, long-term cash bonus, restricted stock, performance shares, and, and, and then, and then the final which is the, the actual performance outcome of what you want from the company, and what, and, and what performance is actually achievable in that given lifecycle. If you put those three elements together, then I think performance is almost guaranteed.
>> Christopher Clark: Recap for me, top line, the steps of your, this relatively new approach.
>> Aalap Shah: So, what I think you would do is you'd take your C-suite, the purview of the directors, if, if you will, and what you want to do is examine that C-suite, not necessarily from a performance aspect, so that's backward looking, but in, from an aspect of what is the potential of these individuals, and that takes into account their, their, their personality profile. So what, are they risk takers? Do I have a team of risk takers here? Do I have a, a team of entrepreneurs? Do, do I have a, a, a team, a team of number crunchers? What do I have here? And, and do I have multiple individuals, and, and multiple profiles within the C-suite? Once you have that base of data, now you can actually look at the compensation program in a more individualistic fashion?
>> Christopher Clark: So I'm, I'm sure in some ways, this is done informally, what you're really talking about is doing it in a much more strategic form of way?
>> Aalap Shah: I think, I think absolutely. I think it's something that you would want to be, want to put into your annual planning process, what are the things that motivate the individual? And, and are we doing the right things that, are we putting the right instruments in their hands to focus on the, again, on the performance of a company?
>> Christopher Clark: I really want to thank you this morning, really interesting new insights.
>> Aalap Shah: You're welcome. Thank you Chris, thank you very much for the time.
>> Christopher Clark: On behalf of NACD and Pearl Meyer and partners, I want to thank you for viewing this morning. I'm Chris Clark, and this is BoardVision.
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