What CEOs need to know about executive compensation
Compensation isn’t just about making sure people are paid enough to stick around. Compensation, especially at the executive level, is a strategic tool. If your firm does not consider executive compensation as a driver of your strategic initiatives, you’re probably thinking about executive compensation in the wrong way. According to our research, most private companies are not optimizing compensation as a strategic incentive for their CEOs and senior executive teams.
There are many components of executive compensation that a CEO should consider when planning internally. Below is a list of questions a CEO should ask as you consider your firm’s executive compensation strategy.
- What are the goals of your company’s executive compensation plan?
- How will you measure the success of your plan versus its goals?
- How much of our resources (time and money, especially) are we willing to invest in our executive compensation plans?
- How will you share long-term value with your executives?
- How can your company distribute short-term incentives?
The goals of an executive compensation plan can, and should, vary. Your compensation plan can provide incentives for executives to hit key operational benchmarks. Properly crafted, it can also improve your firm’s executive retention rate and your ability to recruit top talent. Whatever the goals, be sure to clearly understand them and ensure your team understands.
Without proper tracking and measurement, your plan will not be held accountable for accomplishing it goals. Often, executive compensation plans need to be tweaked as the company grows and changes. Make sure to evaluate your plan regularly based on agreed-upon metrics and analysis.
Like any strategy you employ to improve your business, a well-crafted executive compensation plan requires both a lot of attention and discipline to maintain. Be sure you know how much you’re willing to invest before jumping in to an analysis and revamp of your strategy.
When it comes to long-term incentives, most companies initially think of some sort of equity-linked incentive. Distributing equity grants can be complicated, and in many occasions a phantom equity plan or an alternative long-term vehicle are more appropriate. Be sure to understand both the implications of how you share long-term value with your executives. Benefits programs can supplement or replace incentives that are linked strictly to the company’s equity, but there are legal and tax implications that must be considered as well.
Some short term incentive plans put undue pressure on the cash flow of businesses. For example, a business that pays executives a percentage of annual revenue may unexpectedly be cash-flow negative at the end of a given year when bonuses come due. Make sure to understand your company’s cash position and how you structure short-term incentives.