11: Designing Performance Pay Plans

As we study the multiple concepts that go into the development of a company’s compensation strategy, we do not often have an opportunity to delve into the complexities of how executive level compensation is determined.

A recent announcement by the shareholders of Canadian Pacific Railway Limited (CP)provides us with an opportunity to dig a little deeper into how executive compensation is either curtailed or increased.

Click here to read the article.

A number of compensation-related questions arise from the reading of this announcement. Who determines the executive levels of compensation? How are the levels determined in a pay-for-performance strategy? How does the shareholder influence executive compensation? Why is there a need to focus on safety as part of a pay-for-performance strategy?

Some of the answers to these questions may be found in CP’s public documents, such as the April 2016 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT. This document is available in the public domain. It provides us with an opportunity to explore, just a little bit, the role of governance structures and shareholder decision making linked to the determination of changing executive-level pay metrics.

Click here to read CP’s shareholder document.

CP also posts executive-related metrics as part of its fiduciary responsibilities as a publicly traded company.

For the 2016 Executive Compensation metrics linked to stock valuations, click here.

As the shareholder document was issued prior to the decision to curtail the levels of executive compensation, it provides us with clear expectations of the pay-for-performance philosophy, which was identified as part of the organization’s governance structures and metrics. Further, this public report offers insight into the levels of compensation structures for both internal executives and shareholders benefiting from the ongoing profitability of the company. Profitability came from effective operations, according to the 2016 report. The posted pay metrics were linked to stock values. These documents confirm that pay-for-performance was directly linked to profit levels and both executives and shareholders benefited accordingly.

We can only surmise that, as a result of the information provided in these documents, along with other internal sources, shareholders made the decision to re-shape the performance drivers by introducing ‘safety and operating income’ as metrics for determining compensation levels and rewards.

This appears to reflect a shift in focus. One wonders if the compensation and performance levels will shift accordingly. The results from the next set of public documents will tell that tale.

Discussion Questions:

After reading the CP shareholder document, identify the compensation strategies that link pay for performance.
What benefits do shareholders who serve as directors for CP receive?
From a compensation analyst perspective, how could the decision to cut executive-level perks influence compensation planning for the rest of the organization?
As a consumer, what do you think about the changes to executive-level compensation for CP?

Three different size of jars with coins - Financial Concept — masuti/Shutterstock

Think about the last time you went for dinner at a restaurant. At the end of your meal, you paid for the food and, probably, you added a little extra in the form of a gratuity for the server. This ‘little extra’, the tip, was supposed to reward the person who served you well. If they did not provide good service to you, perhaps the tip was a bit smaller, based on your determination of the level of service and what you could afford.

While this is an accepted practice, the concept of rewarding only one person for your full dining experience seems to be missing the mark from a performance pay design perspective. The server is not the only person involved in making sure that you have a good meal. There is usually a large group of people behind the server, ensuring that your food is prepared, the plates are clean, and the ambiance is welcoming. Why then should only one person receive an extra reward, if the service is based on the collective efforts of the restaurant staff?

A recent article explores the changing concepts of tipping in the Canadian food service industry. In an industry that usually pays low hourly or minimum wages, there is a movement to shift from the single reward receiver to group reward recognition based on the principles of profit sharing.

Click here to read the article.

As noted in the article, rather than having individual servers receiving tips, the Earls chain has implemented a percentage surcharge on the final bill. This ‘hospitality’ fee of 16% is then shared between all of the restaurant’s employees and helps to equalize the monetary incentives for everyone.

When considering group pay choices, a simple sharing of the rewards may be the answer to the need for increased performance and increased pay.

Discussion Questions:

Would you tip differently if you knew that the amount of gratuity was shared between all of the employees in a restaurant?
How would you design a group performance pay plan for a restaurant?
What impact would a group profit sharing plan in a restaurant have on an individual server’s performance?