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Article | Executive Pay Matters

“Guiding Principles” ties executive compensation to purpose, mission and strategy

Governance Advisory Services |Executive Compensation
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By Don Delves | March 21, 2018

Purpose seems so elemental, but permeates an organization’s every aspect. Put simply, it’s why a company exists. But it really is more subtly complex, capturing the role its products, services and people play in the world, how it adds value and, quite literally, makes a difference in the world — usually in a positive way that others are willing to pay for and invest in.

In Willis Towers Watson’s Guiding Principles, purpose embodies mission, vision, and strategy, which capture respectively what a company does or aspires to do, where it is going and how it plans to get there. Strategy should be readily articulated, even if a clear and compelling purpose or mission is sometimes elusive. It should be measured and built into executive compensation programs.

Purpose says a lot about a company. In the case of the Kellogg Company and CVS Health, for instance, their stated purposes are to help people. Kellogg’s says its goal is “Nourishing families so they can flourish and thrive,” while CVS Health’s aim is “Helping people on their path to better health.” Purpose will be reflected in a company’s selection of products, services and markets, its desired growth rate, its margins, product pricing, desired risk level, reinvestment rate, targeted rates of return and acquisition strategy — in essence, how it makes money, grows and creates value.

Compensation keeps executives focused on purpose

Executive compensation is one of the most powerful tools a company and its board have for making sure that management is focused on achieving its purpose, mission, vision and strategy. Executive incentive plans, and other performance management and executive development programs should reflect, reinforce and reward actions that advance purpose. Unfortunately, we find that executives are often motivated and rewarded for achieving goals that are at odds with or not fully supportive of their organization’s purpose. We also often find that boards and senior managements can be overly focused on other companies’ pay practices or on regulatory compliance. This can come at the expense of tailoring plans to an organization’s purpose and strategy. If, for example, a company’s purpose includes producing cutting edge, innovative products, and the incentive program rewards cutting the R&D budget, there is a discontinuity with purpose that should be questioned and discussed.

As executive compensation professionals, it is our job to engage with senior management, board members and owners, and learn how purpose is reflected in company strategy and objectives. We then determine how to best measure, quantify and scale strategic achievement, and build those measures into effective incentive programs.

To learn more about how purpose is both the fundamental, starting and ending point for executive compensation, view the video of Claudia Poster, director of executive compensation at Willis Towers Watson, as she discusses this connection.

Over the coming months, we will provide a number of examples, in various industries and business situations, of how purpose and other principles are used in effective design and oversight of executive compensation.

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