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Dear Workforce Which Executive Compensation Options Help Balance Productivity With Long-Term Interests

Dear Balancing:

An effective executive compensation program causes the executive to “think like a shareholder,” because a shareholder wants both short-term rewards (dividends) and long- term results (substantial appreciation). A program that addresses just one of these issues, such as an annual bonus program based on company profitability, can cause the executive to lose focus on long-term goals by taking actions designed only to cause short-term results.

A successful executive compensation program has both short-term and long-term incentives. Payments under a successful program occur only after the executive satisfies clearly stated goals that are discussed with the executive in advance. At least some of the goals should be within the executive’s control and all should be easily quantifiable. Typical programs include a short-term incentive based on productivity/profits, with the payments being made over a one- to three-year period (this acts as a retention device), and a long-term incentive program (payouts over no less than a 5- to 10-year time frame) that is tied to a number of specific goals, such as increase in stock price, creation of a new division or product, and levels of profitability.

Short-term incentives are typically paid in cash. The long-term portion of the executive compensation program often uses company stock or stock options as the funding medium, because that continues to encourage the executive to think like a shareholder; some plans use “Rabbi trusts,” life insurance, or unsecured promises to pay as the funding medium.

SOURCE: Ted Ginsburg, principal, Buck Consultants, Cleveland, Ohio, June 19, 2002.

LEARN MORE: Read: CEO and Top-Executive Compensation, which includes charts on salaries, bonuses and total compensation for CEOs, top HR executives, and others.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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