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Generational trends in executive compensation: a roadmap for success

Each generation has its own unique attitude towards work and the workplace. The Baby Boomer generation tends to focus on earning opportunities through hard work and ‘paying their dues,’ while Generation X tends to focus more on work/life balance and ‘working smarter, not longer.’ As executive leadership transitions from the Baby Boomer generation to Generation X, organizations will need to develop methods to properly reward and motivate the next generation of talent. Compensation strategies tailored to the needs of Generation X will be critical to attracting and retaining this talent.

While there is no generic, all-encompassing answer for companies grappling with executive compensation planning, the first step is to determine the current state of your executive compensation planning process. Then you’ll want to define your strengths, weaknesses, and gaps. The following roadmap outlines seven actions your compensation committee can take to help develop an executive compensation plan.

  1. Develop C-level succession plans. This is an important first step and should include a company-wide, planned transference of historical and institutional knowledge to the successors for each role. This knowledge is a vast, often undervalued, silent asset that can give companies a competitive edge. Companies can take this knowledge transfer for granted as it does not show up on the balance sheet. But with the significantly reduced size of Generation X following the Baby Boomer generation, unpredictable changes can happen quickly and leave a company with little time to exchange this knowledge.
  2. Prepare a succession plan for tiers beyond the C-level. If you already have C-level succession plans in place, you need to address your approach for the tiers beyond top leadership.1 These plans do not need to be communicated in detail, however a company will benefit from communicating that the plan exists. These communications may calm next generation leaders and help protect the company from unwanted turnover at this level.
  3. Set challenging and aggressive targets for company performance. Management should work in lock-step with the board of directors and the compensation committee to determine long- and short-term targets and senior management’s ability to deliver on these targets. It is important to come to a clear definition of what will be rewarded in a particular position and how the company will assure that it is “getting what it is paying for.”4 These targets and their planned outcomes will have a direct effect on calculating and managing executive compensation.5 In 2009, the Hay Group found that only 20 percent of CEO pay was tied to metrics such as income, profit, and cash flow. As of fourth quarter 2013, 31 percent of CEO pay is now tied to these measurements.2,6,8
  4. Build a foundation of integrity and transparency. Companies are wise to form a strong relationship between senior leaders, board members, and external consultants on matters of executive compensation. This is more important than ever in light of the Dodd Frank Act.3 Due to the shifting financial regulatory environment, publicly-held companies will need to put more effort into executive summaries of their Compensation Discussion & Analysis. They will need to clearly explain to their shareholders and other interested parties executive performance and the manner in which they are compensating executives.5 This transparency may also serve to assist with retention efforts geared toward Generation X leaders. Generation X wants to be informed and have a sense of the bigger picture.
  5. Communicate effectively to executive level employees. It is important to show executive employees of all generations all compensation elements, benefits, and perquisites as well as any other helpful information. Additional information could include an analysis of what an employee would lose if they leave the company, what they would receive with the next promotion, and even specific information about how close they are to achieving their personal retirement goals.5 Open communication is a tool that satisfies all generations’ data needs and protects your company from losing top talent.
  6. Educate Generation X executives on the trend toward long-term compensation. As Generation X employees move to executive level positions in an organization, it is important that they clearly understand why their compensation will become weighted more toward long-term company performance goals versus short-term, personal performance goals. The year 2013 marked the first time that long-term incentives were the largest component in C-level pay packages. Long-term incentive rewards like stock options now compose of about 60 percent of total direct compensation according to the Hay Group.4 Providing Generation X with a clear understanding of how their compensation ties to the corporate long-term goals not only motivates appropriate behavior, but sets in motion the generation’s strength: working smartly to achieve goals quickly.
  7. Develop a well-researched policy on perquisites. Certainly the recent recession has led many companies to cut back on lavish executive perquisites, especially items that raise shareholders’ and analysts’ frustration including spousal travel, expensive cars, and tax gross-ups on golden parachutes.3 Companies need to redefine how they will use perquisites as rewards. For instance, the executive physical exam and executive health club memberships may serve a dual purpose by encouraging wellness and lowering insurance premiums. Home office expenses, work from home, or virtual work arrangements can allow companies to recruit and retain the best talent. Premium airline memberships, company cars, or car allowances can communicate to Generation X employees that the company understands their desire to ‘work smarter, not longer’ which can also aid with retention.

As a result of the Dodd-Frank Act, companies, both publicly-held and privately-held, will be taking a look at their executive compensation plans.3 The lens of satisfying proxy advisors’ criteria for earning a ‘yes’ Say-on-Pay vote by closely following industry trends and best practices1 is valid and safe. However, it is recommended that companies also recognize the complexities of the business and generational trends to support real, long-term shareholder value creation. This approach will offer the additional benefit of providing a blueprint for the company to navigate the transition in demographics that is on the horizon. It will also provide meaningful reward systems that encourage talent acquisition efforts and long-term retention of the best talent.

For more information on this topic, or to learn how Baker Tilly executive search consultants can help, contact our team.

1Jennifer Wagner Shenker, Greg Passin. 2013, September/October. Minding the Executive Compensation Gap. NACD Directorship Boardroom Intelligence. Mercer.

2Cliff Oswick, Fahad Kamal, Alice Hohler. 2012. Cass Business School, City University London. After the Baby Boomers: The Next Generation of Leadership. Ogders Berndtson.

3Investor Bulletin: Say-on-Pay and Golden Parachute Votes. 2011, March. Office of Investor Education and Advocacy. Securities Exchange Commission.

4Tamara Lytle. 2013, September 1. Say on pay prompts changes to compensation practices. Agenda: Compensation. Linking Executive Pay to Performance. Volume 58, Number 9.

5Randy Keuch, CECP. 2011, April. Compensation Focus. Trust and Transparency are Keys in Managing Executive Compensation Plans. World at Work.

6Dow Scott, Ph.D., Tom McMullen. 2013, fourth quarter. Rewards Next Practices: 2013 and Beyond, Journal. World at Work.

7New Hay Group study finds more than half of companies plan to increase focus on employee engagement in reward programs. 2009, May. Hay Group.

8The Wall Street Journal/Hay Group CEO Compensation Study 2010. 2010. Hay Group.

9Jason Adwin. 2012, January. Redefining Executive Pay and Performance. Workspan. World at Work.