Why You Need a Holistic View of Pay and Performance: by Steve Kline and Todd Lippincott for Towers Watson. An article detailing types of compensation and how to tie them to performance practices.

Preview:

Pay for Performance

Regardless of the pay and performance definitions used by companies in their own pay-for-performance assessments, it’s important to understand the range of stakeholder views and why these perspectives may result in different views of the degree of pay-for-performance alignment.

Proxy advisers continue to define performance either exclusively as TSR or heavily weighted on TSR outcomes. Wall Street analysts and the boards of directors also tend to focus on other measures of operating and financial results and how those translate into earned pay. A comprehensive approach to assessing pay and performance provides insights into whether and how the different perspectives are in agreement.

As companies prepare for the coming proxy season amid chal- lenging economic conditions and ongoing market uncertainty, they should evaluate several alternative definitions of pay and performance that capture multiple stakeholder perspectives. Once they have a general idea of how pay and performance outcomes align, companies should look to see whether the various pay-for-performance perspectives corroborate a common story.

The benefits of a comprehensive assessment of pay for performance are twofold. First, such an assessment provides insights that may prove useful in formulating effective pay disclosures to garner support for the company’s upcoming say-on-pay vote. Second, even for companies whose pay and performance appear to be on track for a successful say-on-pay vote in 2013, a comprehensive approach may identify operating and financial weaknesses that, left unchecked, may escalate into future challenges.

Ultimately, companies should conduct robust, multidimensional pay-for-performance analyses and use the findings to assess the soundness of their long-term executive compensation strategies — e.g., determine if current pay plans are appropriately supporting a high-performance culture, and if not, consider what improvements could be made.