How future-focused companies are writing the rules on executive rewards, pay, and performance.
How future-focused companies are rewriting the rules on rewards
If the past few years have been a drumbeat for change, then 2020 turned the volume up to eleven. Here’s how organizations are seizing the moment and re-inventing total rewards in the service of purpose, value, and sustainability.
We’re in the middle of an inflection point. Can you feel it?
The way we think about what we value has been undergoing a slow but seismic shift. Over the past few years, companies had already been grappling with sustainability, talent, and corporate responsibility. But then came 2020, which put that all into hyper-drive.
Fortunately, most companies were already buckled in for the ride and are more than ready to make the shift to a more purpose-based system of talent management and total rewards strategy.
This article is an overview of how (and why) future focused companies are re-inventing total rewards and aligning pay with performance. It will cover why this is the right moment for change, how priorities are shifting, what a new model could look like, and ideas on how to jump-start your own transition.
What is driving this change?
The last few years have been a pressure cooker for change in the US and beyond.
Among other things, we have been grappling with our response to systemic racism, income inequality, gender parity, a generational call for social responsibility, and growing pressure on corporations from shareholders, customers, investors, and regulatory bodies to drive positive social outcomes.
Add to this the 2020 coronavirus pandemic and its economic volatility— and it’s easy to see why change has become existential for many companies.
A perfect storm for reinvention
In the early days of the COVID pandemic, Mercer developed a framework for three stages of response: Respond, Return and Re-invent. In many ways, we are still responding to and returning from the pandemic, but this is also the right time for reinvention.
Disruption brings opportunity—to reflect, reset, and reinvigorate. We must take this disruptive moment to reexamine business models, adopt more sustainable practices, and adapt to new ways of working.
The rise of stakeholder capitalism and purpose-driven business
For more than 50 years, organizations rallied around the idea that a company’s purpose is to maximize profits. This sole focus on maximizing shareholder returns has led to issues with fairness and sustainability for our planet and its people.
The world is starting to wake up, and the result has been a shift to “Stakeholder Capitalism”—the idea that a company’s purpose should be to deliver value not just to shareholders, but to all stakeholders—including customers, employees, vendors, investors, communities, and the environment.
The intersection of total rewards, purpose, and business performance
Why is aligning rewards to extended purpose so important? Consider these statistics from Mercer’s 2020-2021 Global Talent Trends Survey:
The figure below outlines how to begin thinking through a balanced, purpose-driven total rewards strategy. Companies that are committed to turning the vision of stakeholder-led business practices into reality will think holistically about all aspects of total rewards—creating access, opportunity, and transparency for all employees.
This serves the most critical wants and needs of people at work: to grow, develop, be protected, be part of a community, and have the ability to affect something greater than themselves.
How are companies aligning performance to purpose?
To foster a stakeholder-mindset, the definition of performance will also need to evolve. We can begin by looking at how we expect performance to be defined and measured in the future.
In 2020, as organizations struggled to set goals—and as cross-functional teams worked in more agile ways to support the business—we saw a shift to more non-financial and collective success measurements. This was true for the entire workforce, as companies recognized the extraordinary efforts and financial challenges of 2020.
While we’re unlikely to abandon individual performance measurement, a new attention to collective results has been spurred by this growing stakeholder-mindset, and is becoming an equally important gauge of performance.
For executives, a new definition of performance should reflect:
Exploring New Ground
Performance and incentives are inextricably entwined in modern business. To align executives to company purpose and foster a stakeholder mindset, we must rethink three critical areas of incentive compensation: How to pay? When to pay? And what to pay for?
The traditional approach to executive incentives rewarded executives for being financially successful for short—typically three-year—periods. Very few organizations had plans around greater purpose or values, which by definition are longer-term goals.
Leading companies are now focusing their attention on three interlinked areas: environmental sustainability, people sustainability, and corporate social responsibility. Being a responsible organization also extends beyond metrics and measurement to focus on purpose, progress, and pay.
Incentives have been slow to evolve to include these ESG and DEI goals—but we are now seeing real movement. We expect them to take up a much more significant portion of pay decisions in the future. In fact, Mercer’s 2020 North American Executive Rewards Year-end Survey revealed that while only 6% of companies surveyed included a DEI metric in their bonus plan, 36% are considering using them in the future—and we are starting to see them in 2021 plan disclosures.
In one recent example, Starbucks amended their 2021 bonus plan to increase the individual performance factor from 30% to 50% of the overall payout calculation, to hold senior leaders individually accountable to drive inclusion and sustainability, among meeting other goals.
Starbucks underlined this connection by holding senior leaders collectively accountable for meeting 3-year representation targets in their long-term incentive plan. This representation target focuses on improving Black, Indigenous, and Latin X representation—at the manager level and above—more than 5% by 2023— and uses a payout modifier (+/-5%).
Apple Inc. has likewise announced that their 2021 bonus will include an environmental, social, and governance modifier (+/-10%). Apple made this change to motivate their executive team to meet exceptionally high standards of values-driven leadership, in addition to delivering strong financial results.
A New Model – Purpose-Based Pay
How does purpose-based pay look in action?
Mercer client Hyatt Hotels Corporation was hit especially hard by the pandemic and traditional financial goals for their 2020 performance stock unit plans(PSUs) would not have been meaningful. Consistent with their commitment to diversity, Hyatt made the bold decision to rewrite the rules of its PSU plan to align it with their “Change Starts Here’ DEI commitment.
This one-time plan—built in partnership with Mercer—replaced the normal PSU cycle in 2020. It focuses executives on strategic objectives pertaining to improving diversity representation for people of color (Black, Latin X, Asian/ Pacific Islander, Native American, and multi-racial employees) in the US, and non-males globally in various management positions over 5 years.
To further ensure that payouts align with shareholder interests, the plan has a relative total shareholder return modifier, measured to the end of the performance period, December 2025.
Such a purpose-based initiative drives real accountability and commitment to ‘purpose’ at Hyatt—both through the transparency of their journey and placing real financial rewards at stake.
Representation of people of color, women, and other marginalized groups in senior roles reflects broad differences in earning opportunities, so it is critical to address gaps. However, the task will not be easy or quick. Diversity of candidate slates in hiring, equity in advancement opportunities, and retention efforts all need to be examined. Because only so much hiring and promotion are possible in a year, a 5-year plan was required to support perseverance for this longer-term challenge.
How to Effectively Seize the Moment
As with any new compensation vehicle, we expect the purpose-based pay plan to evolve to better reflect each company’s circumstances. It takes a bold, brave company to take a risk on something new—especially when it comes to controversial areas such as executive pay. But brave companies that take this risk will be better served in the long-term.
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