Executive rewards – are they up to the job?
The retention of key executives is vital to ongoing business success and in the current climate companies are competing globally for the elite in talent. The departure of an executive can be a serious setback for business continuity so companies are increasingly prepared to invest heavily in keeping executives on board through attractive and tailored packages that suit most agendas.
What is a healthy balance between the needs of the business and the needs of the executive? It is worth mentioning that no `one size fits all` and to compare the reward models of companies collectively would be wrong. Putting to one side the obvious topic of annual revenue you have to look at their sectors, growth opportunity, is it a young or mature business, track record and balance sheet liabilities such as how much debt a company is carrying. So taking all these factors into consideration let’s look at what today is widely considered a typical benefits structure, that would complement the annual salary;
Share incentive plans
Share incentive plans allow executives to become shareholders in their business, so encouraging them to add value while at the same time providing a retention hook through the vesting and holding of shares. They have been a popular means of reward since the 1980s. There are many types of share incentive plans in operation, most common are:
• Share option plans. Under a typical share option plan, an executive is granted an option to acquire shares at a price fixed at the date of grant. The option becomes exercisable after a specified period, so the executive benefits from any increase in share price between the date of grant and date of exercise.
• Long-term incentive plans (LTIPs). LTIPs can be designed in many different ways. They are commonly “performance share plans” under which an executive is granted a right to acquire shares after a specified period. Once again the executive benefits from any increase in share price.
• Short- term incentive plans (STIPs) Short-term incentives are intended to compensate executives for achieving the company’s short-term business strategy based on achievement of goals set by the board or owner. The nature of these goals varies greatly depending on the type and maturity of the business.
• Deferred bonus plans. An executive is permitted to allocate a proportion of bonus to buy shares. After a specified period, the executive receives the outstanding proportion of bonus in shares.
• Share matching plans. An executive is permitted to use their own money to buy shares. After retaining these shares for a set period the executive is gifted additional “matching” shares.
Cash bonuses are used to incentivise executives generally on an annual basis. Bonuses may be a short-term solution to retention needs. The potential for large cash bonuses poses the risk for a company that the executive will wait until payment date and then resign. However, bonus plans are commonly now structured to encourage retention through the mandatory holding of a portion of bonus payment.
Pension provision encourages retention as it enables an executive to build post-retirement savings based on years of service. There is no link to performance, only the requirement that an executive remains in employment to be a member.
Benefits likely to encourage retention include company cars or allowances, health insurance, life insurance, medical insurance, long service awards and private school fees.
In the larger business salaries are determined by the mapping of roles and job descriptions against similar organisations through a compensation and benchmarking service. A typical job is broken down into its responsibilities, seniority, how critical it is and its complexity. Based on these factors, the range for a job is then determined. In the more flexible and dynamic companies there is greater room for manoeuvre and senior salaries can vary considerably depending on the maturity of their markets and makeup. An example would be a VC or PE funded start up. Although yet to make a profit and planned to be in cash burn for a further 3 years, this business would need to appoint a seasoned and respected leader who possesses all the attributes to succeed. He or she may well be energised by the LTIP`s in place but frankly this is jam tomorrow. We all need to live and thrive via regular income and a high basic salary may be needed at offer stage. There is of course a risk to the company here as no cast iron guarantee of performance can be given. With annual profitability, the balance of reward can then swing more to LTIP`s and other medium term objectives.
We must also recognise that we develop strong personal loyalties with our work peers. Positive relations with your leadership team is a powerful retention factor. We have all witnessed examples of underfunded start-ups or companies experiencing a slide in fortunes who still retain their teams due to the sense of comradery and sheer determination to see the job through. We are at heart social animals that value group relationships. But on a material basis, does the above well tried and tested formula still work for both parties or should we look to introduce new schemes that modern usage of technology could allow?
As we age salary structures alter in their attraction. An early career high flyer may not care for a generous pension scheme but could be enticed by performance led cash plans whilst a more mature executive may have an eye on the LTIP`s that would pay the mortgage off early or buy that long planned investment property. Should though “reward” be built around monetary values alone? Would paid leave to undertake pro-bono projects work for some or could the crypto currency play its part in time?
My personal thinking is that today’s executive pay and reward schemes remain fit for purpose and they allow for a high degree of flexibility for both the employer and the executive. I do forecast however that highly creative plans are coming, driven in part by our changing business habits that sit closely to our lifestyle and personal agendas… let’s see. What do you think? We would very much value your views so please feel free to have your say, thank you.