If any issue has gained greater public attention in recent months, it is that of executive compensation. Stories in the media abound about high-level executives transitioning from their companies with sizable bonuses and generous perks even as companies they led performed poorly.
|Hedley Lawson, Jr.|
Some of these scandals have been attributed to those irresponsibly associated with Compensation Committees and Boards of Directors who oversee the development and approval of executive compensation plans. Many of these executive compensation plans were ill-aligned with what an executive compensation plan should do: make executives successful only when their companies are successful.
It is important to periodically review the central purpose and essential steps associated with building a competitive and ‘best practice’ executive compensation plan. According to Fundamentals of Executive Compensation, written by Hartford, Conn.-based employment law attorney Mitchell Fishberg, and BLR editors Susan E. Prince and Catherine L. Moreton, they suggest the following steps for compensation plans:
Decide who is covered by the plan. Will it be only senior management or will it also include department or functional managers?
Align your compensation strategy with company goals. This element should build appropriate rewards into the plan that align with short-and long-term objectives.
Benchmark against compensation plans of similar companies. Today’s reality is that you are in a highly competitive environment to acquire and retain your best talent. As such, your compensation plan must be competitive.
Set a base pay, usually through industry surveys or by calibrating into the data percentage above the most recent salary data to take into consideration any changes that may have occurred since the reporting of the salary data.
Use cash incentives to achieve short-term goals. Cash is customarily used to reward an executive for completion of a specific project or for achieving a specified financial goal within a given time frame of up to a year. Some experts suggest that such short-term incentives make up 15 percent to 40 percent of total pay.
Use long-term incentives to achieve larger goals. When the goal is more than a year forward, many companies reward top performers with either equity (stock options, restricted stock units, phantom stock) or other long-term incentives that encourage remaining with the firm.
Add supplemental benefits, including health, life and disability insurance.
Provide deferred compensation options. These usually pay out at retirement. They increase in value over time, due to compounding interest, without you having to add more cash.
Additional perks. A company car, upgraded air travel, and health or golf club memberships tell executives they are special, without greatly increasing the size of the complete package.
Evaluate the program. Once a program has been implemented, schedule and perform a review and analysis annually. Make sure the executives fully understand the plan and make sure that it is achieving the central objective of building success for the company, not just for the participants.