White Paper on Compensation Strategy and Economic Crises

Compensation Strategy and Economic Crises: Time for a Radical Rethink [Apr 2009]

Executive Summary

Part 1: Where We Have Been
Compensation strategy has evolved as a technical discipline. It has signally lacked a behavioral focus. This explains many of the excesses in compensation that helped cause the current economic crisis. Compensation strategy and approaches are stuck in a prebehavioral age. In order to restore relevance, compensation specialists must move forward to become strategic rather than technical in their outlook.

Part 2: The Age of Behavioral Finance
Behavioral finance has changed the name of the game. But the compensation profession has not caught up with it yet. If they don't, sooner or later they will become irrelevant. A new model of financial behavior allows us to identify and measure financial behaviors and link them directly to financial and valuation outcomes. This is the missing link that compensation people need to make the move to a behavioral focus.

Part 3: Moving Forward
The new model makes most sense with high-impact players. The rationale is to achieve very high-performance with safety. This will require the compensation profession to retrain and regroup. The most impactful and innovative move is to integrate performance management with talent development. Many companies will balk, but this is the way we avoid future economic crises at the firm and at the global level.