Employers asked to justify pay and performance

Senior leaders and boards of directors are being asked more than ever before to justify the biggest line item on their budgets: executive payroll and compensation.

Pay-for-performance was top of mind for both organizations and executives in a recent Aon Hewitt poll. The consulting firm surveyed almost 300 U.S. organizations and uncovered that alignment of executive compensation with company performance, governance issues such as shareholder say on pay and compliance with policies and regulations are the top three priorities for companies this year.

“It’s really a testing, a sort of return-on-compensation calculation,” says Dave Hofrichter, partner and leader of executive compensation at Aon Hewitt, of the focus on aligning executive compensation with company performance. Companies are looking at “is this a good investment for everybody? Is this a good investment for shareholders? Is this a good investment for employees? Is this a good investment for managers?” he says.

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A separate analysis released by Mercer found the use of performance awards is on the rise. According to its study of compensation and benefits for CEOs at 240 companies in the S&P 500, top executives earned a median total compensation package of $9.6 million, with two-thirds receiving long-term incentive grants. Meanwhile, about 51% of companies surveyed used performance shares in 2013 – an uptick from 2011.

Josh Wilson, Mercer’s partner and talent business leader in the south market, says that performance pay can help executives with things they can control – such as operational metrics. “There’s more fate in the hands of the executives,” Wilson explains to EBN.

“I think if you have the senior executives focused on what’s driving the company, and what’s driving its success – directly tied to their performance and you’re making sure everything is aligned – that’s definitely in the best interests of all employees,” says Wilson.

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On average, CEOs were offered a combination of stock options, restricted stock or performance shares or performance cash. On average, however, 42% of CEOs opt for performance awards, Mercer finds.