Executive compensation plan: a strategic tool
Companies use competitive compensation plans to attract high-potential candidates and retain their current executives. Salary aside, companies can offer a variety of benefits to drive performance, promote retention and engagement, and ensure a return on investment. What components make up a compensation strategy and how do I know which ones are most effective at using executive compensation to drive performance?
When determining executive compensation, companies need to know what options are available to them. There is a big difference between the compensation offered to executives and to employees. This makes sense given the key role executives play in achieving company objectives.
A base salary is the pay that an executive receives annually. This money is risk free, regardless of how the executive or company performed that year. Executives are always entitled to their base salary.
This type of incentive compensation is designed to generate results quickly. Short-term incentives can be advantageous during a major transformation as a way to spur rapid change or encourage the adoption of certain internal practices.
These incentives are often paid in cash, whereas long-term incentives are paid in the form of options, shares or equity in the company.
A long-term incentive program is focused primarily on value creation. It is based on seniority or achieving long-term objectives. If executives meet the requirements of the agreement, they will receive options or equity in the company. This form of performance-based compensation is dictated by the company’s vision and helps to ensure that senior management works in this direction.
These types of financial incentives promote retention, as they often have a clause stating that the options are forfeited upon termination of employment.
Long-term incentives can make executives a lot of money while at the same time delivering results for the company. For example, let’s say that as chair of the board you promise 10,000 shares to your new CEO, if the company’s digital transformation is successful. At the time of the agreement, the stock is worth $5 a share. Three years later, it is worth $15 thanks to the CEO’s good work. The CEO has just become $100,000 richer ($15 per share - $5 per share x 10,000 shares) and your company has tripled in value.
This component involves total compensation, that is, all employee benefits offered during the hiring process.
Company heads may also be entitled to certain substantial benefits included in the hiring package, such as a car allowance, paid parking space, company-provided telephone and concierge service.
While often marginally important in a compensation program, all of these benefits can help to recruit and retain executives.
A compensation plan has many components. There is no winning formula, but there are many internal and external factors to consider.
When devising a compensation strategy for a CEO position, it is often recommended that 70% to 80% of a CEO’s pay be at risk. This helps ensure that he or she will be committed to achieving the organization’s objectives. The company thereby minimizes its risk through performance-based compensation that makes the CEO accountable for the results of his or her performance. If the targets are met, it is a win-win, with both the executive and company benefitting.
– François Piché-Roy, President and Senior Consultant, PIXCELL
The compensation plan should be top of mind when hiring, and mature companies should also take the time to review their compensation management for executives. To foster growth, a company must continue to offer competitive pay that is directly aligned with its position and objectives.
Whether you focus on offering a competitive salary, short-term incentives, long-term incentives or attractive employee benefits, they key is that your compensation plan reflects your company’s vision. A carefully crafted compensation strategy will allow you not only to achieve defined goals but also to retain your current executives.
If you are unsure about what sort of compensation package to offer in your company’s next recruitment phase, a headhunter can make everything clear. Using their knowledge of the market and your industry, headhunters will advise you on hiring and retaining your next executive through effective compensation management.
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