Executive Compensation: To Compete, You Need to Update Your Incentive Program Annually

This is the second in a series on executive compensation, based on findings from our exclusive 2018-19 CEO & Senior Executive Compensation Report for Private Companies, which gathers data from over 1,600 private companies. It is the most authoritative resource in the U.S. for private company executive pay. Part 1 is here.

When it comes to valuing, updating and communicating the benefits of executive compensation programs, there is a huge gap in best practices among American companies, largely based on size, and in an economy with plenty of options for talented executives in almost every industry, this can represent a significant—and preventable—risk that CEOs should not overlook.

That’s one of the key findings of our most recent CEO & Senior Executive Compensation Report for Private Companies. Chief Executive Research surveyed 1,631 companies in April through June of 2018 about their 2017 fiscal year compensation levels and practices. We found that 93% of companies with a $1 billion+ in revenue had a formal long-term incentive plan with equity, updated annually. But among smaller companies, with revenue in the $10 million to $24.9 million range, only 54.67% had formal incentive plans in place.

When you break it down by ownership type, there is another sharp divide: 85.71% of private-equity owned companies, for instance, have a formal, annual incentive program vs. only 57.58% of family businesses. The more profitable, faster-growing companies offer both short-term and long-term incentives.

It’s a clear disadvantage for smaller companies competing for talent. Even in small private companies that do have some kind of long-term incentive program in place, far too often our research finds that they are informal and don’t get updated annually. This deprives the CEO of a powerful opportunity to rival the comp programs offered at public companies and bigger private companies as well.

The problem can be compounded when CEOs don’t communicate the value and progress of the program, leading executives to discount their value—making them potential flight risks or headhunting targets.

If you’re a family business or someone who can’t offer long-term equity, what can you do? There are few ways to offer incentives without offering equity. Here are a few suggestions:

• Be more generous on salaries and long-term bonuses.

• Come up with long-term incentive program alternatives to equity, such as synthetic equity. In this case, you can approximate stock, a stock plan or an option plan.

• Mix in short and long-term bonuses plans based on performance.

The most important rule: Whatever you do, make sure your plan aligns with the long-term goals of the company. And make sure you’re loud and clear in communicating the value—whatever it is—to your team.