Rewards and how to design them are a hot topic in the cable TV industry. Why? Because, the stock market right now is highly volatile and we're living in uncertain economic times.
This year, companies need to take a close look at how they pay and reward their workforce. Creativity is going to count in the next few years more than it has in the last five or 10 years.
Talent is scarce in every company — the cable industry is no exception — but most companies haven't been known for using total rewards effectively. Rewards are designed to provide people with a compelling future, positive workplace, individual growth and total pay.
If you look at how the pay and reward solution of most cable companies is built, you will find that they rely strongly on total pay — base salary, incentives (including options and other equity devices), benefits, recognition and celebration.
We believe the time is ripe to set a new baseline for rewards, to get more from what you have available — rather than spend more. People work for more than pay and with more sluggish business times possible ahead, companies need to pull out the stops and emphasize rewards to keep the talent they need to make their enterprise grow and prosper.
Executive compensation in the cable industry continues to climb. Our review of a sample of cable companies showed that in 1998 and 1999 the price of stock rose about 15 percent per year. In each of those years earnings in the companies rose about 3 percent, but executive pay increased by nearly 39 percent (including exercised stock options).
Does this disparity really matter since executive compensation is a minor cost for most cable companies? It does because of its symbolic importance.
During 1998 and 1999, our review showed that wages and benefits for the general workforce in these same companies increased by about 3.7 percent per year. The pay gap between cable executives and the workforce in these companies continued to widen; CEOs were commonly paid more than 400 times the average wage. While the final numbers for 2000 are not yet in, it looks like the pay gap between executives and the workforce may have narrowed due to lackluster stock performance in many companies.
However, while options comprise a smaller portion of the total pay of people below the executive level, broad-based options and equity solutions are common. We have no crystal ball, but believe that executive pay will be about 250 times that of the general workforce in 2000. Still a significant problem and occurring when alignment from top to bottom is essential.
But the link between pay and performance is becoming stronger for some industry executives in the study as well. Some cable TV companies are starting to base executive compensation strictly upon performance. We predict this will become increasingly common during times of possible business challenge, increasing consolidation and less predictable stock market performance for the industry.
Our review of cable company rewards showed that some positive changes to executive pay are occurring in the cable industry. It is our suggestion that challenges during 2001 will begin a major move to reward changes — not just at the top, but from top to bottom. These are some of the changes we believe more companies will make in 2001:
Executive alignment. Closely align executive rewards with actual measures of company performance in addition to just the price of common stock, with greater pay variation based on performance. We now know from our experience in 2000 that measures of success in addition to stock price are essential to sustained growth. Asset performance, for instance, is proving to be a major metric to grow value in a TV cable company.
Evaluate the top executive.
Formally evaluate chief executive performance by the board in relation to established goals in addition to financial measures.
Change pay mix. Provide a total pay mix of less fixed (base) pay and more variable pay (cash and equity) based on performance. This year will be a good time to change to a pay mix that emphasizes more than just stock performance. Short-term incentives based on measures of turn-around performance better fit the reward formula than does more fixed base pay. The essential issue is getting the company going in both the short and longer-term.
Mix-and-match incentives. Balance short- and long-term variable pay. Make it necessary to sustain growth and profitability over the long term. When stock value lags, companies normally drift to providing more cash incentives based on measures of business growth. This change will no doubt occur in 2001, but wise companies will keep the balance between stock, base pay and cash incentives without regard for the market performance of company stock.
Increase long-term stock ownership.
Stress executive stock ownership to build confidence in the investment community that leaders are stakeholders in the company's future. If the reloading and repricing of options must be used to keep critical talent below the executive level, avoid inclusion of executives who have a primary opportunity to influence stock price performance. Executives are the people most responsible for stock performance. It is essential for companies to require that senior executives hold stock for the long term as an indication of confidence in the enterprise's future.
Roadmap for Rewards
Companies that follow this roadmap find that executive pay serves as a model for paying the rest of the workforce. We believe this is the most
powerful reason for paying executives based on performance. This provides the opportunity to align everybody's pay more closely to key business goals. Everyone can be paid according to the same principles; it becomes part of the culture and builds trust and commitment to "we are all in this together."
Executives and senior managers are expected to champion and lead pay changes in support of needed business change, but they must do it by example. Whatever key strategic measures are considered for executive compensation should "cascade" to the workforce.
As executive rewards become more focused on business goals, attention will turn to where it belongs — to the total pay of the entire workforce. Great companies are dramatically changing how they reward people below the executive level, so pay more powerfully serves the enterprise as a tool for communicating business directions and goals.
Despite notorious and exaggerated examples of unreasonable executive compensation, many premier companies have been changing total pay design for their entire workforce to encourage all people to become stakeholders in the business.
In some cable companies, executives and senior managers are expected to champion and lead pay and reward changes in support of needed business change, but they must do it by example. Whatever measures are considered for executives should also be passed on to the workforce.
The changes are likely to accelerate in 2001 in response to changing business fortunes and a changing equity market and provide broader-based competitive advantage to enterprises that realize the importance of rewards to their formula for success. Not only in the cable industry, but also throughout industry in general. And, after all, cable TV companies must compete with general industry for the best people.
Patricia K. Zingheim and Jay R. Schuster are partners in Schuster-Zingheim & Associates.
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