The Brossard Group

The sorry state of market data

There was a time, not so long ago, when the news that so and so was having access to such and such survey results was making grown up men and women yellow with envy and lusting for a peek at it like they had not since their last tantrum for a pony or a red firetruck. Nowadays, you could stay all week on the parking lot of Target, giving away whole reports of brand new market data and you would not get any taker. And why is that ? Because the limits of the science and the boldness of the art that go in the making of market data do not fare well during the recession. At all.
First of all, some companies did cut their participation to some surveys (the old practice of "once every other year" , although a recipe for disaster, was too tempting in times of budget cuts deeper than the worry wrinkle on Bernanke's forehead). Second, the dynamics imposed by the lay-offs on the average salaries are very complex. For the companies in real trouble, the fire sale of talent has  impacted solid contributors with  oh-too-visible high salaries, bringing down the average of some jobs. For companies just worried about the future, the employees with non critical skills or performance were let go, changing for ever the composition of the workforce and reducing the salary growth expectations of the remaining top talent. Last but not least, the dramatic hiring freeze nation wide has deprived the market of a quasi automatic increase.Not only companies do not have to compete as strongly, but the dreaded "salary compression " issue will find itself way down on the list of concerns when the next salary review will come (whenever that is).
A quick review of the greatest and latest data in some surveys shows what , being so naive, I would have called "inconsistent data" just a year ago. The data itself is not necessarily that bad but we have to refrain from using market data the way we are used to. There is no need to analyze the data year over year because not only are the numbers all over the place for the reasons invoked above, but more importantly because there is no value in doing so : if your company is merely surviving, hoping to make it till the end of the recession, the engagement and commitment of your remaining talent should be achieved by ways that have nothing to do with salaries and if your company is doing better than average and can afford keeping its top talent motivated by giving increases, the market data is not going to be able to tell you how much. Not this year. Not next year. Who knows, it might help the thousands of compensation professionals who, each and every year, make an attempt to explain their management that there should be other considerations in deciding a salary increase budget than just "what the market is doing".

Risks and Opportunities...

These are tough times... And Compensation professionals are wondering what can be done to help the company maintain profitability while keeping the employees engaged. In some cases, it is a matter of keeping the employees employed. Clearly, coming up now with added compensation or benefits costs recommendations may not qualify you for an accelerated promotion path. However, Compensation professional can and must still demonstrate creativity as risks and opportunities are presenting themselves.
An area of many risks, of different sorts, is Executive Compensation. You should all read the F.W Cook essay on a recommended framework to avoid Executive Compensation practices leading to excessive and damageable risk taking by the CEO and other top executives.It reminds us that "pay at risk" does not necessarily equates to "pay for performance". You can read this article here . Executive Compensation presents of course an other risk, one brought upon us by the added scrutiny of both general public and shareholders on the pay packages. Beyond the inflamed reactions of the public to the use of private jets for the CEOs of the big 3, there will be more questions, more reviews and probably even more difficult discussions with the Compensation Committee. The way out this additional pressure, and this is not new as it should always have been the main concern on our mind, is to "bad-performance proof " your executive Compensation packages. The shift to Restricted Stocks, the all too natural tendency to pay "some" bonuses even in bad performance times for retention purposes has been hurting the linkage between pay and performance. The current situation reminds us that the link between pay and performance should not be a one way street...
Pay for performance is also the key word in the area where we can find opportunities to improve upon the compensation packages and practices during troubled times : Sales Compensation. Now is the time to assess the effectiveness of your Sales Compensation Plans. When you try to conduct such assessments in periods when the company is doing really well , you encounter a lot of difficulties : concerns of the sales force that you are just trying to cut their pay, lack of motivation from Sales and Finance management because, after all, why fix it if it is not broken. But there is more to the effectiveness of a Sales Compensation plan than changing the Target Salaries. Actually, improving the effectiveness of Sales Compensation Plans usually has nothing to do with cutting the On Target Earnings. It has to do with re-assessing the behaviors that the plans are trying to drive, re-directing the efforts of the sales population towards more critical, more profitable, more strategic products, identifying the areas of "lost productivity", reviewing the "side effects" of some programs , as well as the "interactions" of spiffs and other promotional programs on the total results.
This analysis has to be done, and now is the time.

Even more difficult than the 1 million dollar question, the “4%” question ….

4% as in the “default “ number picked by a majority of companies in the last few years when deciding upon the annual salary review budget. 4% as in: 3.5 merit and .5 promotion, or 3 merit and 1 promo and adjustment, or any variations thereof. The fact is, absent a major gap to market issue or exceptional economic duress, 4 % was as good as a number as anything else. With the controlled inflation of the last 10 years, this budget was enough (OK, almost) to help companies develop and strengthen their pay for performance policies and practices.

Then came the financial crisis, and the gas price hike and most recent relative fall, and the fear of recession, and suddenly, 4% does not look like the answer anymore, or does it ?

I hear a lot about companies pondering between 4% and 0%, only to opt for a difficult to explain- difficult to manage 2% budget. I hear compensation professional exhaling sighs of relief that their budget was approved before the crisis  and others, happy that they do not process anything before April, leaving them ample time, so they think, to see what the market is doing. And I also see the agony of the companies with a focal in December, or November, who have to make recommendations to their CEOs. The risks are burning cash and jeopardizing the future with a 4% budget if a recession is indeed confirmed, or losing all your talents to the competition if you go for 0 and the others still go for the magic number (4). The risk can even be greater: paralyzed by the fear of recession, you cut the budget, thus creating the condition of your own demise, by reducing the purchasing power of your employees and therefore fueling the recession…

As always, the resources for your answer are probably right there in your company: is your product more or less sensitive to short term market evolution? Do you have a strong sustained need for talent because of what is in your development pipeline? Is your company cash rich or poor? How difficult is it to recruit your talent? Who are you competing with? How is the state of your employee engagement?

One thing is sure “4%” is not the answer anymore, but “5 minus 2 plus 1 %” might be just what the doctor ordered….

The impact of the financial crisis on Executive Compensation.

The recovery act contains much publicized measures on Executive Compensation for companies in the financial industry but it is fair to say that the crisis itself is going to have an impact on how decisions are made for Executive Compensation.

There is some expectation that the crisis may five a boost to the “Say on Pay” provisions . The number of say-on-pay proposals have increased in each of the last 3 years and the number of proposals this year is already above the previous three years combined. The opponents of the Say-on-pay proposals argue that these provisions are unnecessary because the disclosure rules have already made the shareholders and the board more knowledgeable in the pay matters and less likely to be blindsided by executive pay decisions. In any case, the scrutiny  that shareholders and boards exercise on the levels of the pay packages, the linkage between pay for performance and the severance packages in only going to increase. It will be compounded by the fact that the crisis has reinforced the American public in the opinion that their CEOs are overpaid. The pressure from your Compensation Committee to provide more in-depth, totally independent advice on your Executive Pay Packages in not going away any time soon.

There will be more news and experiences to share as time passes and next year proxy season sure promises to be thrilling !

Tell us what you think, share your experience and your questions by posting a comment .
For more info on the specific measures of the Recovery Act on Executive Compensation, CLICK HERE