We try to stay out of politics as much as possible. The closest we get is finding a candidate who knows how to navigate a changing political landscape for a client that’s affected by new rules and regulations. But every once in a while something in the news catches our eye and we can’t help but take notice. And no, we’re not talking about Wednesday’s debate between Republican candidates Romney, Cain and…shoot. The other guy.
No, we’re talking about executive bonuses. The issue has been popular since the bailout, but with the Occupy Wall Street movement capturing the media spotlight, executive bonuses have once again become a hot topic. However, we’re not here to argue over the size of executive bonuses –we’ll leave that to the politicians and the protesters. Rather, we would like to offer some advice to Boards on how best to utilize bonuses. Having the right incentives structure in place can be a huge key in keeping your leadership on task and your business running smoothly.
Industries are constantly evolving and changing, and so too are the needs and goals of each company. A successful business will have a dynamic leader, someone who can adapt to these changes and keep the company aimed towards shifting goals. As we’ve said before, companies take on the personality of their CEOs. The same too applies for CEOs and their Boards: how the Board treats the CEO greatly affects how the CEO runs the company. If you want a dynamic leader, you need to offer a dynamic incentives structure.
The problem most Boards face these days is that they treat bonuses as something that is static. Meet the metrics, get your bonus; year in and year out the process continues. Boards need to wake up and realize that this type of compensation is already included: it’s called salary. Bonuses are, or at least should be, something different. How successful was the CEO at meeting that difficult, but high priority goal? Have the needs of the organization changed? If yes, then so should the CEO’s bonus structure. Boards need to think about reviewing and changing bonus agreements on an annual basis. Pay a CEO based on how he or she adjusts to new goals, and the adjustments will happen. Pay a CEO based on how well he or she keeps on the same track, and your company will be stuck in neutral.
The CEO sets goals for the company, but the Board sets goals for the CEO. Don’t pay extra just because the CEO runs the business well –that’s his or her job. Use bonuses to incentive the CEO, and therefore the company, to take on new challenges and drive business forward.