What Business Thinks™ About Executive Compensation

Only 17 percent of the companies with a long-term incentive plan actually made a grant in the past 12 months. “Either performance measures were not reached or the company does not make annual grants,” Williams explains. “With long-term rewards, companies tend to be a bit more selective and offer them less frequently than annual incentives.”

Owners of private companies may be relieved to know that none of the companies in the survey has offered an equity stake to lure high-level executives. “What we found is that, rather than give real equity, companies are using long-term cash plans to deliver stock-type plans without giving people actual ownership,” Williams says.

Ironically, that trend is becoming more prevalent at public companies as well, he adds. “Long-term incentive plans have been a very hot issue at public companies. With stock-option expensing, new SEC [Securities and Exchange Commission] disclosure rules, and pressure from institutional shareholders to reduce dilution levels . . . public companies have started to move away from stock options to more restricted stock and greater use of long-term cash plans.”

Private companies typically don’t offer actual equity for three reasons. First, equity isn’t liquid. There’s no publicly traded market for it, so it’s difficult for participants to convert the equity to cash or receive any value unless there’s a change in control of the company; many private companies have no desire to go public or be sold. Second, it can be difficult to come up with a company valuation formula that all parties can agree on. Third, there are potentially significant estate and tax planning issues to consider in granting equity.

Define “Performance”

Planned base-pay increases for executives at surveyed companies this year generally range from 3.5 percent to 4.5 percent, matching national trends. The higher a person ranks, however, the more likely that there’s also an offer of incentive or bonus pay.

“As you move up in an organization, a greater proportion of your pay is going to come from variable or at-risk pay,” Williams says. “That is, if you don’t do your job well, you won’t get that extra pay, and if you do do your job well, you will.”

On the surface, the terms of such an arrangement may seem obvious. But he notes that the plan needs to go “one level deeper than that.”

“What does pay for performance mean?” Williams asks. “Performance from what aspect? What types of things are measured? Generally speaking, incentive awards have a strong link to company performance, which the survey participants measure as profit [net income, operating income] and revenue.”