Executive Compensation Planning

Posted by Dick Daniels on January 26th , 2012 in executive compensation planning, leadership development

Seven Questions Before You Get to the Dollars 

1.  Who's included?  Where do you draw the line and why?  What are the perceptions by those below that line?

2.  What are your compensation objectives?  Are you trying to attract talent, retain talent, or incentivize long-term performance?

3.  Do you understand the "sandbox" you are playing in?  What benchmarks have been identified from the primary competition in your industry?  What geographical adjustments do you need to consider for cost of living variations?

4.  Have you reviewed the tax consequences for executives and for the company?  What is the timing of the income?  What is the company's deductibility from various compensation instruments being considered?

5.  Have you considered the additional administrative complexity for your staff in light of the compensation instruments chosen?  Does your existing administrative support team have the capacity to effectively manage the suite of compensation options?

6.  Are you aligning compensation incentives with the organizational mission, culture, and strategic goals?  Compensation planning is done within the context of company success not just to reward individuals.  Tie the bonuses and incentives to profitability and growth with built-in safeguards for economic or revenue downturns.  Identify relevant goals for each executive and connect those to corporate strategic outcomes.

7.  Measure and manage performance in a quantifiable way.  This offers greater objectivity in executive reviews and compensation considerations.

The Creative Options in Compensation Planning

Option #1 Base Salary - reflecting the difficulty of an executive's performance objectives relative to peers and industry comparables.

Option #2 Cash Bonuses - discretionary ways to reward short-term goal achievement.

Option #3 Deferred Compensation - long-term incentives to reward the achievement of larger goals including:  stock options, 401K contribution level, and other financial vehicles that pay out at retirement while compounding interest and adding value over time.

Option #4 Supplemental Benefits - health, life, disability, etc.

Option #5 Perks - car allowance, upgraded air travel, health club membership, etc.

Option #6 Sign-on and Retention Bonuses - tied to high potential talent and performance.

Two Final Reminders

First - Prepare a strategic framework for negotiating the employment terms, employment contract, and a severance agreement.

Second - Review, compare, and evaluate your compensation plan on an annual basis.  Do this within the first quarter of your fiscal year so you are ready for the next round...next year.