Designing Compensation Plans to Manage Today’s Risk Environment

Abstract

In light of the oil-drilling disaster in the Gulf of Mexico as well as the series of recalls in the auto industry, this article looks at how best to manage risk in the design of incentive compensation plans. This includes a look at the myriad risk issues and how boards can properly evaluate those risks and build in safeguards in company pay plans to mitigate these concerns. The key risk areas evaluated are strategic, cultural, performance measure and reputational risk. Finally, the authors suggest examining whether the plans in place align with business goals and ensure the company’s business reputation is preserved and is not tarnished. Without effective mitigation, compensation risk can damage the future of the company and its leaders.