Page 29 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 1. Executive Compensation Framework 15

Sales
$

Sales

Net
Income

+

–
Threshold Growth Maturity Decline
Figure 1-6. Sales and net income by market stage

By aggregating the products for a company particular to an industry, one can come up
with a similar analysis. Contrast a company in the growth phase but in a declining industry
with one in a maturity phase in a growth market. The first will quickly find itself in maturi-
ty or even decline unless it grows faster than the market declines. The other company finds
that its revenues are increasing simply by retaining market share in a dramatically increased
market. However, mergers, acquisitions, and divestitures can significantly alter where the
organization is positioned on the market lifecycle, as will be reviewed later in this chapter.
Given the difference between company and industry in terms of stage in market cycle,
more emphasis should be placed on industry. Thus, if the company is in the maturity phase
while the industry is in the growth stage, the latter should be the primary reference since the
company should be able to realize new crests (due to established market position) as the indus-
try reaches maturity. Conversely, if the company is in the growth stage and the industry in the
maturity phase, it will be more difficult for the company to improve its current level of success.
An organization often consists of strategic business units (SBUs) in different stages of the
market lifecycle. Thus, while the company may be categorized as the composite of its SBUs,
it is important to remember each has different characteristics and needs and should not be
smothered by an overarching corporate pay plan not in sync with different market stages.
This argues for both corporate and SBU pay plans. Each needs to be reviewed annually
and quickly adjusted as necessary. Ongoing review is likely to result in minor modification,
reducing the likelihood of radical changes necessitated by ignoring the plan for too long.
Let’s examine the characteristics of each stage in the market cycle and what they suggest
regarding programs.