Businesses today remain focused on the tricky balancing act between short-term risks and longer-term gains — a challenge that has caused many organizations to take a second look at how they approach executive compensation, including incentive and other award pay.
According to a recent survey of human resource executives and leaders by consulting firm Korn Ferry, approximately half of respondents (46%) have initiated internal conversations to adjust annual incentive awards due to economic uncertainty. Others are still mulling the potential impact of tariffs on executive compensation, with 55% stating they are adopting a “wait-and-see” approach on determining how tariffs may influence their incentive award plans, the Global Total Rewards Pulse Survey found.
As companies mull their incentive and award strategies in the current murky economic environment, it’s critical for those making such decisions to “understand the [relationships between] roles on the leadership team” — an area where finance chiefs can help to provide key insights, said Ron Seifert, North America workforce reward & benefits leader at Korn Ferry.
When it comes to analyzing incentive plans and strategies, those responsible for creating such plans need to consider how to measure company performance before “honestly assessing whether those [measures] are aligned with the interests and the longer-term strategy,” Seifert said in an interview. In examining incentives, while one doesn’t want CFOs representing their own self-interests, they “have a unique perspective about many of these things, and they can lend insight to both CEO and the board in many ways,” Seifert said in an interview.
Asking new questions
As companies navigate economic challenges — including continued shifts to tariff policy, interest rates and labor markets — they are focusing more on improving their compensation strategies and increasing pressure on CFOs to come up with answers.
Ongoing uncertainty “presents challenges in organizations’ planning and allocating of financial resource,” Korn Ferry’s survey found. “As such, planning and budgeting processes are likely to become more dynamic than typical.”
Despite that uncertainty, most respondents to Korn Ferry’s study, which surveyed 3,880 participants across 132 countries, expect their reward prospects to remain somewhat stable for the near-term. However, the survey results show “there's more interest in the relationship between the executive pay and the cost of leadership to the organization,” Seifert said.
“I think boards are asking different questions, so there's a little bit more interest in … ‘do we have all these jobs benchmarked?’” he said. “‘Are we paying the people relative to the standard and the strategy and the expectations of those individuals?’”
Forty-four percent of survey respondents said they would “maybe” consider changing their approaches to CEO benchmarking measures, the survey found. When it comes to setting pay levels, 53% said there is “somewhat significant” alignment between CEO salary levels and their performance feedback, while 27% said there is “significant” alignment there.
Evolving pay for evolving roles
As a spotlight continues to shine on the relationship between performance and incentives, businesses also need to consider how that relationship might shift as executive roles themselves continue to evolve. CFOs today, for example, have increasingly absorbed a widening set of responsibilities, with companies including Salesforce and PayPal announcing combined roles which merge that of a traditional finance chief with that of a chief operating officer.
Such combined roles are “fundamentally bigger” than just one or the other, and “the question is, how does one accommodate that in the pay levels and pay design for that incumbent?” Seifert said. “That's one underlying question the boards need to ask themselves.”
Organizations also tend to structure or design executive roles to “accommodate longer-term succession planning and development,” making it all the more critical for businesses to hit upon the right compensation mix to ensure that newly-trained and developed executive isn’t poached by the competition, he said.
