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SUMMARY
Total Compensation
Compensation programs for business leaders are a combination of base pay, incentive pay, and equity awards. Given the importance of business leaders, their high visibility, and their easy movement to other organizations, it is usual to pay above the market average. All organizations have a keen interest in the rewards earned by similar individuals in similar positions. Salary surveys are often used to find this information.
Incentives & Stock Option, Equity Awards
Business leaders' incentives programs are divided into short- and long-term plans. Short-term incentives are typically lump sum cash rewards for a one-year or less performance period. They may use a measure of overall organizational performance or job-related goals.
Long-term incentives are intended to retain the organization’s business leaders, keeping them loyal and motivating them to perform. These plans may pay in cash or equity. They are a variation of a stock award or option award plan and are given to the executive over a 2- to 5-year period.
Perquisites
Business leaders are also granted a variety of perquisites that may not be available to other employee groups. These perquisites and short- and long-term incentive plans are golden handcuffs designed to tie business leaders to the organization. Golden parachutes are also used to attract and retain executive talent to provide security in the event of change of control resulting from a merger, acquisition, or a hostile takeover.
Conclusion
Business leaders represent a small percentage of workers, yet they represent a major portion of the cost of compensation. It is vital to develop a compensation program for this group that both obtains the most from these employees and keeps the within reason.
Shareholder groups are indicating that companies receiving less than 70 percent approval in say-on-pay votes will need to make meaningful changes to their pay practices. Corporate boards are more vigilant in measuring incentive results over a one- to five-year time horizon.
Business leaders' compensation is designed to engender the success of the organization. They are responsible for the operation of the organization, so it makes sense to relate pay to how well the organization does. Since good business leaders are in short supply and they have knowledge of the market, it is usually necessary to pay above average market rates. Salary structures for business leaders typically have very wide ranges, reflecting the variations in performance and responsibilities that are possible in managerial jobs.
- Short-term incentives are typically annual bonuses payable upon attainment of individual and organizational performance goals.
- Long-term incentives are associated with long-term organizational performance measured over 2 to 5 years. These incentives may be paid in equity, which is the most common, or cash.
While base pay may be reduced in bad economic times, top managers are still offered lucrative equity packages. This trend in the top management pay levels only changes when shareholders and the Board of Directors hold business leaders responsible for specific performance targets and evaluate the business leadership's performance based upon these targets. Incentives should be long-term and should not be paid unless the company and the top management meet target goals.
We expect to see business leadership pay continue to be in the spotlight. We end with the observation that a competitive and legal compensation package for a strong management team with high standards of performance will drive a high-performance culture influencing top business results and shareholder returns.