Communicating Executive Compensation

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or the companies affected, this is one of the more challenging moments of the year. Compensation practices signal to the marketplace what companies do to reward and retain talent, as well as align financial incentives with corporate performance. However, in the media “executive compensation” is often equated with “greed,” so how does a company release this information and expect anything but bad publicity?

There are two key guideposts to keep in mind. The first surrounds the transparency of the process and the benchmarks used to set compensation. For the most part, corporate boards use painstaking care in setting executive compensation. However, when communicating these packages, boards need to put themselves in the shoes of the employee, the customer, the investor, and the regulator. If one of these people read the numbers would they make sense? How are you disclosing the process used to arrive at the numbers? How is it related to compensation policies for all employees? Were benchmarks used? What discretion does the board have if the executive over-achieves or under-achieves?

Being able to answer these questions succinctly, either as part of the executive compensation disclosure or in answer to questions addressed to management or the board, is critical.

The second surrounds how a company communicates throughout the year. Executive compensation disclosure is an important moment and says a lot about how a company operates, but it is just one of the occasions when a company communicates. From our research, much of what concerns key stakeholders is a lack of clarity about long-term corporate vision, business objectives and key milestones. Without this critical context, there is a significant risk that issues such as compensation are perceived as arbitrary or even irresponsible. Moreover, with the economic crisis only now beginning to fade, executive compensation remains a hot issue in the media and with policy makers. Management and the board must examine the ways in which they publicly lay out their long-term goals and objectives so they are understood by all stakeholders, and fit yearly compensation into that framework. Lastly, management must communicate regularly with its key stakeholders to ensure that messages are understood.

There is no easy way to satisfy every critic. But by articulating what goes into deciding corporate practices, the board and management can make the case for the investment in leadership.