As seasoned pilots know, a downward spiral often starts gradually, almost imperceptibly, unless you heed the early warning signs. If those signs are missed or ignored, trouble compounds. It’s often tough to know whether you’re really in a spiral until it starts to tighten, and at some point – sometimes seemingly suddenly – breaking free may no longer be possible.
So, you’re thinking, what does that have to do with the design and administration of executive compensation programs? Although the nexus is perhaps not immediately obvious, the hard lessons from the sky have something to teach us.
Unfortunately, unlike pilots with instruments tailored to reveal an incipient spiral, those responsible for making decisions about executive compensation programs don’t have specialized tools that can reliably identify external factors that could cause the program to misfire and fail to achieve its intended purpose. Most commonly those external factors relate to the broader macroeconomic climate – for instance, the 2008 financial crisis or, more recently, the COVID-19 pandemic. The volatility caused by financial or geopolitical shocks can easily disrupt compensation programs, leading them to a spiral toward dysfunction – for example, because of unanticipated swings in equity value or the depletion of cash reserves.
So is a spiral for compensation programs tightening? No one knows of course. The only thing that’s certain is that something will happen, even if that something is simply not much of anything. That realization will cause its own reckoning.
The lesson for executive compensation programs is to be prepared for the uncertainty and whatever may (or may not) come out of it. The playbook for that preparation is becoming well-worn, but it’s worth reviewing, particularly with the incentive award season in full swing.
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