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A survey by compensation consultants Pearl Meyer & Partners found that while most outside directors said the level of internal communication regarding executive compensation was "just right" (88 percent), only about half of management felt the same way (56.7 percent).
According to the survey, “internal” executive compensation communication is information that companies provide to their employees who are eligible for, or participate in, pay programs that include incentive plans. Communication is typically developed by members of company management and may be distributed to employees in various ways, like in print, face-to-face or online, according to the survey.
“Effective communication to executives about the design and rationale of their pay programs is critical to the long-term success of organizations,” said David N. Swinford, President and CEO, Pearl Meyer in a statement. “It’s important to establish a clear link between business goals, what’s required of executives to drive those results for the company, and how their actions will impact their compensation.”
The survey added the gap between management and directors was even wider when discussing the level of detail in compensation communications, with 42.7 percent of management saying there wasn’t enough detail while only 8 percent of of outside directors agreed more details need to be provided.
How executive compensation is communicated is critical to many companies, since any gaps can create even greater tension between board, management and many internal stakeholders.
“It’s essential to simultaneously align pay plan communication strategy to pay plan design, although according to our survey, that doesn’t happen half of the time,” said Sharon Podstupka, vice president at Pearl Meyer and author of the survey in a statement. “To create the right engagement, companies should ensure they expend the same time and energy planning for communication as they spend on pay plan design.”
There was some agreement between both sides in the executive compensation table, with nearly all survey respondents agreeing it’s more important for executives to understand the aspects of executive pay than for shareholders.