Page 47 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 1. Executive Compensation Framework 33

a few. Internally (H), the organization has to determine what it needs to meet these require-
ments and prescribe a code of conduct. Laws and regulations can have a high impact on each
of the pay elements.

Culture. An external look (I) examines the type of society present. Depending on the
country, it ranges from autocratic to democratic to socialistic. The type of government and
its stability is a key consideration in determining whether or not to enter that market and, if
so, at what pace. What are the mores and values of the society in question? How do they
relate to the organization’s products and services? An internal review (J) should focus on the
company’s culture.
What is company culture? The organization’s culture is the composite of values and
beliefs that it considers core to its existence. It is the way it does business. It is the way it treats
people. Companies operating in different countries must be careful not to export a country-
of-origin culture. While it is important to hold on to core values, it is also important to adapt
to the local culture within a universal code of conduct. As shown in Table 1-15, these values
can be expressed in both hard and soft terms, internally and externally. It is obviously more
difficult to measure the qualitative (soft) than the quantitative (hard).

Measurements
Where Found Hard Soft
Internal Operating income Talent depth
Net income Talent ability
Revenue Employee satisfaction
External Stock price Talent availability
Market share Customer satisfaction
Peer performance
Table 1-15. Measurements of the organization

To ensure conformance, company culture rewards compliance and penalizes
shortfalls. Thus, it is not simply results, but also the process and behaviors that are
important. The compensation system is one of the most powerful vehicles for reinforcing
desired values.
To illustrate, assume customer satisfaction is considered to be a key desired value. First,
we need to identify who the customers are and what they want. Following this the focus might
be on continuous improvement, while the drivers of change might be price, quality, service,
and timely delivery. It would be difficult to be successful with a pay program emphasizing
salary and benefits. Rather, an annual incentive plan focused on decreasing costs, response
time, and returns, or a long-term incentive plan based on increasing market share, would be
more logical.
Culture clash is a major reason why acquisitions and mergers that appear so logical
nonetheless fail. Imagine reconciling the differences between a culture that considers its
employees to be assets, spending considerable time and expense to optimize their growth