2020 Executive Compensation Amid Market Uncertainty

by | Mar 30, 2020 | Executive Compensation, Market Trends

Effects of COVID-19 on Executive Compensation

With a global pandemic upon us, the world is a very different place, at least right now. However, just like there is no need to hoard cans of tuna and cases of toilet paper, we at GGA believe that it is not advisable at this juncture, to call off your organization’s executive compensation program plans for 2020. In fact, it is times like these that corporate governance, risk management, technology and innovation and board oversight are imperative to preserving shareholder value, while also and most importantly ensuring the health and safety of our employees. 

What we know from other market crises, is that corporate governance and executive retention are high on the list when navigating black-swan events.  If there ever was a black-swan event, COVID-19 may have now assumed the definition. 

We suggest that as long as the Board and/or the CEO maintains the ability to use their judgment on implementation timing, eligibility, etc., for example, then plans should proceed. There are obvious exceptions to this where an organization may not have the available cash flow due to this ‘black swan’ event (e.g. airlines, tourism companies, etc.).

In the interest of brevity, this piece is meant to cover only high level corporate governance and retaining key talent, but we understand that there are broader considerations when factoring in an organization’s complete workforce as many companies may have to layoff some of their staff due to decreased demand for their products/services and the corresponding decrease in cash flow for the business (as we write this a number of immediate family members and friends have already been impacted directly). While we cannot predict the future, we at GGA can share our observations within the marketplace and areas for consideration as boards make decisions over the next few months relating to corporate governance and executive compensation. So far, within the mining and broader commodity businesses, we have seen some proposed delays in work or a cautious movement forward, as planned. 

Areas for consideration during these difficult times include:

Board Oversight

Businesses are continuing to try to make the best of a bad situation and effective corporate governance needs to continue, within reason, in the same spirit, to ensure effective oversight of the organization. How easily is your board able to meet remotely as opposed to in-person? What decisions can be made via consent resolutions versus requiring a full meeting? Have you stress tested the impact of black swan events on your company’s operations? What plan do you have in place to deal with black swan events in a crisis and who is responsible for what?

Retention of Key Talent

Strategies for attraction and retention of executive talent are critical as even in immediately affected companies, the demands on executive teams are typically extremely high, more so than in normal market conditions, to chart out a path forward. If your board has observed a gap to market from a pay perspective, how are you going to let your executive team know that you recognize this gap, but also are taking into account the current market conditions? Some organizations will choose to “stay the course” and implement any compensation adjustments that were determined at the past meeting. Others may choose a more conservative route and announce salary freezes or even rollbacks, depending on the cash flow concerns of the business. A good middle ground might be to approve compensation adjustments in principle but hold off on formally enacting the adjustments for a few months until market conditions have stabilized and better financial projections can be made. In terms of Long-Term Incentive (LTIP) grants, previous grants may have been made at significantly higher share prices so you must also consider what value, if any, executives still have within their LTIP and what the prospects are for this value to rise over the next few months or even years. If you are only granting Stock Options, is there a chance for underwater options to get back in-the-money or is the probability low? If the probability is low, then executives are a flight risk as competitors will be able to offer them new LTIP grants at significantly lower exercise prices than if they stay with your organization. This may necessitate discussion on the need for new retention grants which can be made at a lower share price and increase the likelihood of long-term value to executives, thus acting as a retention device during this period.

Retention Strategy

While retention LTIP awards seem like a good idea in the current environment, these awards must be balanced with the equity dilution level of the organization under its existing equity compensation plans. At lower share prices, the level of equity dilution can increase dramatically and use up much needed room for LTIP grants in the future. In a time like this, stress testing of the impact on equity dilution levels of proposed grants is an important step that boards must conduct before approving regular or retention-based LTIP grants. If proposed grants are too dilutive then consideration of a fixed number of options or units to be granted, that will allow an organization to retain room for future grants, is something that should be considered in the interim until market conditions stabilize. For many organizations, dilution will also not support additional retention awards, so a board may need to consider a performance cash based award, that is granted outside of the shareholder approved equity plan. At all costs, while option surrender programs continue to be allowed by the regulator, categorically shareholder advisory firms consider this an option re-pricing problematic pay practice.

Performance Evaluation

If performance expectations under the Annual Balanced Scorecard have already been approved, the Board should evaluate the performance expectations set and determine whether those expectations are still reasonable in the ever-evolving environment. If expectations are now deemed to be unreasonable in the Board’s view, consideration of revised performance targets based on the new reality should be discussed to ensure executives are still motivated to achieve important objectives over the remainder of the year.

Remember that while retaining key talent is imperative and in shareholders long-term interests, the board must also give consideration to the shareholders who have potentially lost material amounts of their portfolio.  These executives are tasked with not only mitigating the financial blow in the downward market, but also to generate value when markets return.  Ensure your board is not making compensation decisions in a vacuum during these challenging times.  Seek the independent support necessary to give appropriate back testing and scenario analysis prior to making any potential retention decisions.
 

Contributing Authors:

Paul Gryglewicz, Senior Partner
Arden Dalik, Senior Partner
Peter Landers, Partner

ISS 2020 Policy Guidelines for the U.S.

by | Nov 25, 2019 | Executive Compensation, Governance, Regulations

Summary of 2020 Guidelines

On November 12, 2019 Institutional Shareholder Services (“ISS”) published their Americas Proxy Voting Guidelines Updates for 2020 for the Americas region, which includes the United States and Canada. While GGA has summarized updates directly affecting Canadian-listed companies in a separate blog post, we are summarizing the key updates affecting U.S.-listed companies as it relates to compensation and governance below. These updates will impact any shareholder meetings held on or after February 1, 2020. 

The updates are generally split into six separate categories:

  1. Voting on Director Nominees in Uncontested Elections (several updates)
  2. Independent Board Chair Proposals
  3. Share Repurchase Programs
  4. Equity-Based Compensation Plans – Evergreen Provision
  5. Diversity – Gender Pay Gap
  6. Pay-for-Performance Analysis

GGA’s summary of each change is provided below.

Voting on Director Nominees in Uncontested Elections

Exemptions for New Nominees

ISS clarified that they will now consider new director nominees on a case-by-case basis with a “new nominee” being a director who is being presented for election by shareholders for the first time. Vote recommendations for “new nominees” will generally depend on the timing of their appointment to the board and the problematic governance issue in question. This will include whether a director has been on the board long enough to be held responsible for a problematic governance issue at the company. On a related note, this “new nominee” exemption is being moved to the beginning of the Director Election section from Accountability, as it may be applied to other policies in the other ISS evaluation pillars of Independence, Responsiveness, and Composition.

Board Composition – Attendance

ISS also clarified its policy for director nominees who served only for part of the fiscal year. This includes nominees who may have been appointed to the board a few months prior to the first annual meeting that they are to be elected by shareholders at. In these cases, it is to be expected that a nominee would not have attended all meetings throughout the fiscal year and therefore ISS’ 75% attendance threshold should not apply.

Board Composition – Diversity (Russell 3000 or S&P 1500 Companies)

ISS has stated that they will generally vote “Against” or “Withhold” for the Nominating Committee Chair (or other directors on a case-by-case basis) at companies where there are no women on the company’s board. Mitigating factors that could lead to a For vote recommendation include:

  • Until Feb. 1, 2021, a firm commitment within the proxy statement to appoint at least one woman to the board within a year;
  • The presence of a woman on the board at the preceding annual meeting and a firm commitment to appoint at least one woman to the board within a year; or
  • Other relevant factors, as applicable.

The one-year transition period to appoint a female director provided by ISS has now passed, so even making a commitment to appoint at least one woman to the board within the next year will only act as a mitigating factor for 2020 for those companies who have had no women on their board previously.

In addition, for those companies that had at least one woman on their board in previous year, but not the current year, the company will clearly have to acknowledge the current lack of diversity on their board and provide a clear commitment to re-achieve a level of board gender diversity within the next year.

A “firm commitment” is defined by ISS as a plan, with measurable goals, outlining the way in which the board will achieve gender diversity.

Board Accountability – Problematic Governance Structure at Newly Public Companies

ISS has clarified its policy in two areas for newly public companies. One update states that ISS will generally vote “Against” or “Withhold” from directors individually, committee members or the entire board (except for new nominees who should be considered on a case-by-case basis), if prior to or in connection with a company’s public offering, the company or its board adopted the following by-law or charter provisions considered materially adverse to shareholder rights: 

  • Supermajority vote requirements to amend the by-laws or charter;
  • A classified board structure; or
  • Other egregious provisions.

ISS has noted that a reasonable sunset provision (7 or less years at the most) will be considered a mitigating factor when making their vote recommendation. In subsequent years, unless the adverse provision is reversed or removed, ISS will vote case-by-case on director nominees.

ISS’ second update states that for newly public companies, they will generally vote “Against” or “Withhold” for the entire board (except new nominees, who will be considered on a case-by-case basis) if, prior to or in connection with the company’s public offering, the company or its board:

  • Implemented a multi-class capital structure in which the classes have unequal voting rights without subjecting the multi-class capital structure to a reasonable time-based sunset.

They clarify that in assessing the reasonableness of a time-based sunset provision, consideration will be given to the company’s lifespan, its post-IPO ownership structure and the board’s disclosed rationale for the sunset period selected. A sunset period of more than seven years from the date of the IPO will not be considered reasonable.

In subsequent years, unless the problematic capital structure is reversed or removed, ISS will continue to recommend a vote “Against” or “Withhold” their vote from incumbent directors.

Board Accountability – Restrictions on Shareholders’ Rights 

ISS clarified its policy around restricting binding shareholder proposals to state that they will generally vote “Against” or “Withhold” its vote for Governance Committee members if the company’s governing documents impose undue restrictions on shareholders’ ability to amend by-laws. Undue restrictions include, but are not limited to:

  • Outright prohibition on the submission of binding shareholder proposals or share ownership requirements, subject matter restrictions or time holding requirements in excess of SEC Rule 14a-8.

If this restriction is not amended or removed, ISS will recommend an “Against” or “Withhold” vote on an ongoing basis.

ISS has also clarified that submission of management proposals to approve or ratify requirements in excess of SEC Rule 14a-8 for the submission of binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders’ rights. Therefore, ISS will continue to recommend a vote of  “Against” or “Withhold” for Governance Committee members on an ongoing basis until shareholders are provided with an unfettered ability to amend the by-laws or a proposal providing for such unfettered right is submitted for shareholder approval.

Independent Board Chair 

ISS has stated that they will generally vote For on shareholder proposals requiring that the Board Chair position be filled by an independent director when the scope and appropriate rationale for the proposal is provided, in addition to other considerations. They have also clarified that the following factors will increase the likelihood of a For recommendation on the proposal:

  • A majority non-independent board and/or the presence of non-independent directors on key board committees;
  • A weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role;
  • The presence of an executive or non-independent chair in addition to the CEO;
  • A recent recombination of the role of CEO and chair; and/or departure from a structure with an independent chair;
  • Evidence that the board has failed to oversee and address material risks facing the company;
  • A material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the board has materially diminished shareholder rights; or
  • Evidence that the board has failed to intervene when management’s interests are contrary to shareholders’ interests.

This view continues the evolution in North America thinking towards separating the Board Chair and CEO roles, which GGA has observed in recent years.

Share Repurchase Programs 

ISS has added new language relating to share repurchase programs stating that for U.S.-incorporated companies, and foreign-incorporated U.S. Domestic Issuers that are traded solely on U.S. exchanges, ISS will recommend shareholders vote “For” on management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms, or to grant the board authority to conduct open-market repurchases, in the absence of company-specific concerns regarding: 

  • Greenmail;
  • The use of buybacks to inappropriately manipulate incentive compensation metrics;
  • Threats to the company’s long-term viability; or
  • Other company-specific factors as warranted.

ISS will also vote case-by-case on proposals to repurchase shares directly from specified shareholders, balancing the stated rationale of the company against the possibility for the repurchasing authority to be misused, such as to repurchase shares from insiders at a premium to market price.

Equity-Based Compensation Plans – Evergreen Provision

ISS has updated its list of overriding factors that will apply under the Equity Plan Scorecard analysis to include plans that contain an evergreen (automatic share replenishment) feature. This means that for those U.S.-listed companies that have historically had an automatic share replenishment feature in their formal plan documents, if that feature is not removed then ISS will recommend a vote “Against” the equity plan proposal.

GGA notes that this could lead to a lot more “Against” vote recommendations from ISS than in the past as we have noted many U.S. companies that include these automatic share replenishment features within their plans, so is something for U.S. companies to be mindful of when putting their equity compensation plans up for a shareholder vote at the annual meeting.

Diversity – Gender Pay Gap 

ISS has stated that it will generally vote on a case-by-case basis on requests for reports on a company’s pay data by gender, race or ethnicity, or a report on a company’s policies and goals to reduce any gender, race or ethnicity pay gap. While gender was included in this policy before, race and ethnicity have been added for 2020 within the policy.

ISS has also included whether the company has been the subject of recent controversy, litigation, or regulatory actions related to race or ethnicity pay gap issues; and whether the company’s reporting regarding race or ethnicity pay gap policies or initiatives is lagging its peers. This is in addition to ISS’ historical inclusion of gender pay gap issues in its considerations as well.

Pay-for-Performance Analysis 

Use of EVA as New Executive Compensation Metric to Replace GAAP-Based Metrics

Starting in 2020, ISS plans on incorporating a new performance metric (EVA) into the financial performance assessment, replacing the GAAP-based metrics used in 2019. Accordingly, EVA performance will now affect the quantitative pay-for-performance analysis and Say on Pay recommendations for the 2020 proxy season. GAAP-based metrics will continue to displayed within ISS reports for information purposes.

As a reminder, EVA will be calculated as follows by ISS:

EVA = Net Operating Profit after Taxes – (Cost of Capital * Capital)

ISS will look at EVA in four different ways as part of its analysis:

1) EVA Margin – EVA as a Percentage of Sales
2) EVA Spread – EVA as a Percentage of Capital
3) EVA Momentum (Sales) – Annual change in EVA Margin
4) EVA Momentum (Capital) – Annual change in EVA Spread

These four measures will then be weighted and compared to the same overall performance of the selected peer group for an issuer.

Further clarification of these calculations are expected from ISS in the months ahead leading up to the adoption of these changes for issuers with meetings falling on or after February 1, 2020.

Changes to Quantitative Pay-for-Performance Thresholds 

ISS has also updated its pay-for-performance thresholds relating to their Relative Degree of Alignment (RDA) and Pay-TSR Alignment test as follows:

 

2019 vs. 2020 Quantitative Pay-for-Performance Thresholds: All U.S. Companies
Measure Policy Year Eligible for
FPA Adjustment		 Medium Concern High Concern
RDA 2019 -28 -40 -50
2020 -38 -50 -60
Pay-TSR Alignment 2019 -13% -20% -35%
2020 -22% -30% -45%

The Multiple of Median (MoM) thresholds will not change in 2020.

Addition of 3-Year Multiple of Median View of CEO Pay for Information Purposes

ISS has also indicated that their research reports will now feature a 3-year MoM view of CEO pay as a measure of long-term pay on a relative basis against an issuer’s ISS peer group. The 3-year MoM analysis will not be a part of the ISS quantitative screen methodology, but will be displayed in ISS reports for informational purposes only.

GGA continues to monitor the evolving proxy voting guidelines on a regular basis and will be reporting on any further developments as they are confirmed. Companies should be reviewing their compensation and governance practices against these updated guidelines to ensure that their current designs align to the updated guidelines as we move into the 2020 proxy season.

For more details on the ISS 2020 Proxy Voting Guideline Updates for the United States, please click on the following link:  https://www.issgovernance.com/file/policy/latest/updates/Americas-Policy-Updates.pdf

Further information on preliminary changes to ISS’ U.S. compensation policies for 2020 can also be found here: https://www.issgovernance.com/file/policy/latest/americas/US-Preliminary-Compensation-FAQ.pdf

Glass Lewis Releases 2020 Proxy Guidelines for the United States

by | Nov 18, 2019 | Glass Lewis, Proxy Guidelines, United States

Summary of Guideline Updates

On November 1, Glass Lewis released its 2020 Policy Guideline updates for the U.S. market. These changes are expected to be effective for shareholder meetings taking place on or after January 1, 2020. They have identified several updates in the areas of compensation and governance with several covering Say on Pay votes. 

Updates in Compensation and Governance

Post fiscal year-end changes

Glass Lewis clarified that in their review of Say on Pay proposals, they would include post fiscal year-end changes to executive compensation and one-time awards, “particularly where the changes touch upon issues that are material to Glass Lewis recommendations.” 

Company responsiveness to Low shareholder support

Glass Lewis added “insufficient response to low shareholder support” to their non-exhaustive list of issues that may cause them to recommend voting against a company’s Say on Pay proposal. In addition, Glass Lewis clarified what they consider to be an appropriate response to low shareholder support of a Say on Pay proposal (i.e. those proposals not receiving at least 80% support). Glass Lewis noted that the level of responsiveness should corresponding with the level of shareholder opposition both in a single year and over time. Lower levels if support should lead to a higher level of responsiveness by a company. Glass Lewis also indicated that engaging with a company’s large shareholders to identify concerns and implement changes (where reasonable) to address those concerns would be considered an appropriate response. From  a disclosure perspective, GGA would recommend outlining in a table a summary of what a company learned from its shareholder engagement in the prior year, what the board and management discussed and reviewed to address shareholder concerns, and finally what the board has ultimately decided that may address or not address the shareholder concern and a rationale for why they have done so as a best practice to address this concern. 

Short-term incentives

Glass Lewis noted that in cases where a company lowered goals mid-year or increased calculated short-term incentive payouts from the original formula result, they expect a robust discussion of why the Board made that decision within the Form DEF 14A. GGA advises any of its clients who have applied discretion to adjust formulaic results to provide an adequate level of explanation of why this discretion was applied and why it is in the best interests of the company.

Change in control

Glass Lewis reiterated its belief that “double trigger” change in control arrangements that require a change in control and subsequent termination of employment of an executive in order to be triggered as a best practice. They also addressed broad definitions of change in control scenarios as being problematic as they could lead to situations where executives are paid additional compensation, but have not witnessed a material change in their position or duties. 

Contractual arrangements and amended employment agreements

Glass Lewis provided an updated list of problematic practices that could lead to a negative Say on Pay vote recommendation. This includes: 

    • Excessively broad change in control triggers;
    • Inappropriate severance entitlements;
    • Inadequately explained or excessive sign-on arrangements;
    • Guaranteed bonuses (especially as a multiyear occurrence); and
    • Failure to address any concerning practices in amended employment agreements.
    • Glass Lewis made it clear that they view failures to address problematic pay practices within an amended employment agreement as a missed opportunity and that companies should seek to align to current best practices when amending employment contracts.

Additional key updates for the 2020 proxy season

Shareholder Proposals

Glass Lewis stated that they believe “companies should only omit shareholder proposals in instances where the SEC has explicitly concurred with a company’s argument that a proposal should be excluded.” Therefore, Glass Lewis will now consider recommending a vote against all members of the Governance Committee where SEC Division staff:

  • Decline to state a view on a shareholder proposal and the company does not include the shareholder proposal in its proxy statement; and
  • Orally concurs with a company’s no-action request but the Division staff does not provide any written record and/or the company does not provide any disclosure relating to the result of its no-action request. 

Standards for Assessing the Audit Committee

Glass Lewis will now consider recommending a vote against the Audit Committee Chair when fees paid to the company’s external auditor are not disclosed. If the company has a staggered board and the Audit Committee Chair is not up for re-election, then Glass Lewis will not recommend a vote against other Audit Committee members, but will note its concern regarding the Audit Committee Chair.

Compensation Committee Performance

Glass Lewis will now consider recommending a vote against all members of the Compensation Committee if the board adopts a frequency for Say on Pay votes that differs from the frequency that received the most votes from shareholders.

Nominating and Governance Committee Performance

Glass Lewis will now consider recommending a vote against the Governance Committee Chair when board and committee attendance is not disclosed in the Form DEF 14A or similar document. Glass Lewis will also consider recommending a vote against the Governance Committee Chair when a director’s attendance is less than 75% of the board and applicable committee meetings, but the disclosure is too vague to determine which director’s attendance was lacking.

Forum Selection Clauses

Glass Lewis will continue to consider recommending a vote against the Governance Committee Chair if the board adopted a forum selection clause without shareholder approval during the past year. They did clarify that they would “evaluate the circumstances surrounding the adoption,” and if the forum selection clause “is narrowly crafted to suit the particular circumstances facing the company and/or a reasonable sunset provision is included,” then it may make an exception to its voting policy.

Shareholder Proposals – Supermajority Vote Requirements

While Glass Lewis generally supports shareholder proposals seeking to eliminate supermajority voting provisions, they clarified that they may recommend that shareholders vote against proposals that seek to eliminate supermajority voting provisions at controlled companies, because these provisions may protect minority shareholders.

Shareholder Proposals – Gender Pay Equity

Glass Lewis will review on a case-by-case basis shareholder proposals requesting disclosure of a company’s median gender pay ratio. However, if a company has disclosed “sufficient information” about its diversity initiatives, including how it is “ensuring that women and men are paid equally for equal work,” then Glass Lewis will generally recommend a vote against these proposals.

GGA continues to monitor the evolving proxy voting guidelines on a regular basis and will be reporting on any finalized changes coming out of ISS in the coming weeks as they are confirmed. Companies should be reviewing their compensation and governance practices against these updated guidelines to ensure that their current designs align to the updated guidelines as we move into the 2020 proxy season. 

For access to the full Glass Lewis’ 2020 Proxy Voting Guidelines for the United States, please click on the following link: https://www.glasslewis.com/wp-content/uploads/2016/11/Guidelines_US.pdf

Effective Board Member Orientation Pays Off

by | Jan 7, 2019 | Board Dynamics, Governance, Leadership, Productivity

Effectively Preparing New Board Members

Boards spend an unbelievable amount of time, energy and financial resources trying to find the right nominees/candidates that can add value and enhance governance oversight, but for many boards, the momentum ends once the vacancy is filled or when the infamous “orientation binder” is sent to a newly elected board member. In practical terms, this is like an Olympic marathon runner training for years and then deciding to walk their race on the day of their Olympic event – ultimately, they are not utilizing or benefiting from the hard work they put in upfront.

By not following up with a strong orientation program, boards are not preparing their new members to become true board contributors from day one, which means that they will take roughly their first year to catch up and self-learn as much as they can. Alternatively, boards can be proactive and do their best to prepare new board members upfront and help ensure they hit the ground running and are contributing on day one.

Orientation Packages

As a bare minimum, your board should have an updated orientation package ready for new members the day they are elected. Ideally, this should be kept in an electronic format, updated regularly, and perpetually available to all members. Overall, this should include:

  • A short historical overview of the organization including its mission, vision and values;
  • A year-to-date list of organizational accomplishments;
  • Staff organizational chart;
  • Charter/articles of incorporation;
  • Bylaws and committee mandates;
  • Most recent financial statements (quarterly and audited annual);
  • Most recent strategic plan and approved budget;
  • Approved minutes from the last 3 to 6 meetings;
  • Current board member bios and photos;
  • A list of links to all overarching legislation;
  • All applicable governance policies including the board’s code of conduct;
  • A copy of the director’s & officers liability insurance policy;
  • Yearly calendar of all upcoming board meetings, committee meetings and important events.

Orientation Session

As well, a general orientation session should be offered as soon as possible to help review the high-level elements of the aforementioned documents and to review the board and management’s roles and responsibilities. Understandably, it is the chair and committee chairs that attend and present at this session, but it is also a best practice to make these sessions open to all board members that can attend because it will not only provide a great opportunity for the new members to get to know the board, but also provide a discrete refresher for any board members who may feel that they could benefit but are afraid to ask. Also, in attendance should be key executive staff members who can walk participants through their roles and specific area of responsibility. As an alternative, if a general session is impossible to establish, the second-best option is to set up a day or two of individual meetings with the board chair, each of the committee chairs, and key executives.

Timely Onboarding is Key

Ideally, all of this needs to happen well in advance of the new members’ first board meeting because, by doing so, there will be a higher probability of them participating and/or contributing at an impactful level right from the very beginning. They know that there was a lot of thought put into their election onto your board and that comes with an expectation that they are bringing value to your board. If you don’t help them build momentum from the very beginning, you diminish their potential and full capacity that your board has in effectively overseeing your organization.

Effective Performance Planning

by | Dec 3, 2018 | Board Dynamics, Executive Compensation, Governance, Leadership

All About Motivating the Right Behaviour

There’s been a lot of talk in the market place today about the value of performance plans. The naysayers claim that they are not driving performance in the way they were originally intended, and the supporters argue that all compensation should not be a guarantee. A point of intersection is the fact that everyone agrees that employees should be recognized for the contributions they make and the performance they deliver.

Open the Conversation

Organizations are notoriously bad at having “hard conversations” which are discussions on performance, behavior, or anything that can be interpreted as judgmental in any way. This is a problem because all organizations need to deal with negative activities when they arise and, more importantly, inspire the lion share of their employees to perform at their highest level. By doing so, they can maximize outcomes (sales, profits, etc.) and keep stakeholders happy. When it comes to compensation and governance, stakeholders are relatively quiet when organizations are successful and driving higher returns, but when things go south, board pressures increase because stakeholders tend to place more scrutiny on things such as compensation plans and demand changes to corporate governance.

Establish a Schedule

To properly drive performance, organizations need to first establish a schedule and stick to it! You’d be surprised how many boards get around to first discussing annual performance objectives half way through or at the end of the first quarter. This would be like betting on a horse race after the horses are out of the gates and sprinting toward the finish line. Two things happen here, staff feel that first quarter performance is not considered important and agreed targets are easier to hit. If you want employees to perform for the entire fiscal year, logically you need to agree on the performance objectives and targets before the fiscal year begins.

Implement SMARTER Objectives

A reasonable set of SMARTER objectives; Clarity and focus are other elements that help to set an organization up for success. Laundry lists of objectives do little to keep employees focus on essential outcomes and instead, have them struggle with prioritizing their time between multiple objectives that will have minimal impact on their overall incentive reward. Therefore, to help to keep employees focused and driven concise one-page scorecards are ideal and should clearly outline:

  1. Clear performance target expectations; and
  2. All rewards associated with each objective.

Once the performance cycle properly begins, hard discussions should be replaced with proactive coaching conversations focused around the scorecards where employees go into every meeting with absolute clarity on their performance and can engage in win-win conversations in overcoming barriers and/or achieving higher performance levels. Moving away from judgmental conversations and focusing discussions on performance improvement, helps engage employees on a higher level and affirms that everyone wants the same thing – higher performance.

Performance management plan naysayers most likely develop their opinion on experiences and aspects associated with poorly executed and unclear plans that do little to motivate employees. Implementing simple things such as a schedule, scorecards, and win-win coaching conversations go a long way and help ensure that performance remains a priority and that stakeholder expectations are being met.