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Incentives for a strong leadership culture

3 Mins read

Three key pay and performance metrics can help define and influence an organization’s values.

CEOs and leadership teams spend a lot of time and energy defining and discussing corporate values, but a company’s most powerful cultural signals aren’t communicated by talking points. They’re determined by who gets promoted and who receives outsized rewards. Yet compensation and bonus frameworks in most organizations are still based almost solely upon financial results. In an effort to rule out subjectivity, such plans emphasize — and often focus exclusively on — achieving numerical targets. This oversimplified focus on the what of results, without consideration of how the numbers were achieved, has triggered unintentionally lopsided cultures that promote short-term thinking and a tolerance for the proverbial high-performing jerks.

For boards, this is increasingly a problem. Waves of scandals (including #MeToo), falsified sales figures, and faked emissions reports have prompted a couple of recurring questions: Where was the board on culture? And what are they paying the CEO for? With pay ratios between CEOs and the average worker at record highs — 278:1 in the U.S. in 2018, compared to 42:1 in 1980 — the optics of compensation as it relates to culture also are in the spotlight.

Kevin Cox, the newly appointed chief human resources officer at General Electric, reflecting on the consequences of companies maintaining a purely numerical focus, says, “You can have a very strong MBO [management by objectives] culture, but once you run that playbook for a couple of years, what do you have for an encore? Are you building great leaders who can take the company to the next level?”

Board members often struggle with these questions, even as they are expected to assume greater responsibility to influence culture and corporate values. One of the most constructive yet underleveraged means by which boards can help management — particularly the CEO and chief human resources officer — engineer a desired culture is to focus on the most powerful signals in any organization: how performance is defined and incentivized, and who gets promoted and fired.

A small but growing number of businesses are innovating in this space, creating compensation plans that place more weight on how results are achieved while still incentivizing business performance. For much of corporate governance, culture is new territory — at the board level, in the C-suite, and in the design and execution of compensation plans. But increasingly that learning curve is viewed as worth climbing.

A rewarding culture

Broadly, the areas of evaluation for a compensation approach focused on the how fall into three categories. The first identifies ways to measure and reward managers for baseline performance — those numerical targets — but also to contextualize performance within the desired values of the company. A second broadens bonus assessment to include bigger teams or the entire company, which incentivizes helping colleagues succeed and puts a spotlight on collaboration across a matrix or outside one’s silo. The third category ties more closely to promotion and considerations of future potential, weighing demonstrated behaviors against the management and leadership skills deemed critical for delivering the next generation of the business strategy. “More and more, I think that subtle aspects of business — on how you manage people, diversity, and the more social-oriented aspects of jobs — will be incorporated into how individual performance factors get weighed,” says Helene Gayle, a director on the boards of Colgate-Palmolive and the Coca-Cola Company.

A small but growing number of businesses are creating compensation plans that place more weight on how results are achieved while still incentivizing business performance.

There is no simple template for creating a multidimensional compensation system, but there are examples of how to use short- and long-term incentives and promotions to focus management’s attention on the desired leadership behaviors linked to a desired corporate culture. The examples below illustrate different approaches that companies have taken to align their compensation and promotion practices to reflect their corporate values. In some cases, these approaches have meant creating new ways to measure and reward success beyond numerical targets. In others, they have meant rewarding employees more for their team performance than for their individual contributions. And although it is always difficult to separate correlation from causation, the companies that have instituted such policies can point to track records of success.

The 60:40 bonus rule…

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