10 Questions About Executive Compensation That Every Company Should Know How to Answer

What are the implications of our business strategy and our approach to value creation for our executive compensation system? What behaviors are we trying to motivate? Does the system support our strategy? Does it encourage our executives to act like owners?
Is the overall pay package appropriately balanced? Between fixed pay and variable pay? Between short-term-variable and long-term-variable pay? For each level of the management ranks?
Do we have the right mix of payout vehicles? Are the terms of payout appropriate for the kind of behavior we are trying to motivate?
Is variable pay truly conditional on performance? Do our criteria for awarding stock options or other equity vehicles include more than just industry benchmarks, an executive’s level, or years of service?
Do we have the right time frames? Do they match the risk window of our strategy and our investments?
Are we measuring performance relative to peers? Are we confident that we have the appropriate peer set? Do we understand the operational and financial factors that drive relative valuation multiples in our peer group?
Are individual executives rewarded for performance that they can actually influence? Are performance metrics customized to the role of individual business units in our strategy? Is our compensation system insulated from the effects of industry cycles or broad stock-market trends, over which executives have no control?
Do our performance metrics reward value creation rather than just earnings? Do they take into account how effectively executives are using the capital provided them?
Is there a genuine tradeoff between risk and reward? To what degree is executives’ compensation at risk? Does the system have both an upside and a downside?
Is the system transparent? Is it simple enough for employees to understand? Do our investors understand our approach to compensation? And is that approach aligned with their expectations and priorities?