What are the best ways to align executive compensation with short-term goals?

1 Pay for performance

The most common and intuitive way to align executive compensation with short-term goals is to pay for performance, or link a portion of the executive's pay to specific metrics or targets that reflect the organization's priorities and strategy. For example, an executive might receive a bonus based on the revenue growth, profitability, customer satisfaction, or innovation of their business unit or division. Pay for performance can motivate executives to focus on the desired outcomes, reward them for achieving them, and align their interests with those of the shareholders and other stakeholders.

However, pay for performance also has some drawbacks and limitations. First, it can be difficult to measure and quantify performance, especially for complex and multidimensional goals that involve qualitative aspects or long-term impacts. Second, it can create perverse incentives or unintended consequences, such as encouraging short-termism, risk-taking, manipulation, or gaming of the system. Third, it can reduce intrinsic motivation or creativity, as executives may become too focused on the extrinsic rewards or penalties, and neglect other aspects of their work that are not directly rewarded or measured.

3 Stakeholder engagement

A third way to align executive compensation with short-term goals is to engage the stakeholders, or the parties that have an interest or influence on the organization's performance and decisions, such as shareholders, employees, customers, regulators, and society at large. Stakeholder engagement can help HR professionals to understand and incorporate the expectations and feedback of the stakeholders, and to align them with the executive's compensation plan. For example, an executive might receive a portion of their pay based on the satisfaction or loyalty of the customers, the engagement or retention of the employees, the compliance or reputation of the regulators, or the impact or contribution of the society.

Stakeholder engagement can have some benefits and opportunities. First, it can enhance the legitimacy and credibility of the executive's compensation plan, as it demonstrates transparency and accountability, and builds trust and confidence among the stakeholders. Second, it can improve the quality and relevance of the performance measures, as it reflects the actual needs and preferences of the stakeholders, and the value that they perceive and receive from the organization. Third, it can foster a culture of collaboration and innovation, as executives are encouraged to interact and cooperate with the stakeholders, and to seek and implement new ideas and solutions.

However, stakeholder engagement also has some difficulties and trade-offs. First, it can be time-consuming and resource-intensive, as it requires a systematic and ongoing process of identification, communication, consultation, and involvement of the stakeholders. Second, it can be challenging and contentious, as different stakeholders may have different or conflicting interests, perspectives, or demands, and may not agree or support the executive's compensation plan. Third, it can limit the flexibility and autonomy of the executives, as they may have to compromise or conform to the expectations or pressures of the stakeholders, and may not be able to pursue their own vision or goals.

4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?