Executive Compensation Counsel

Experts suggest keeping compensation packages simple. “I typically recommend that a company not have any more than three or four key metrics [tied to executive pay], otherwise it gets too confusing,” says Mark Sheffert, CEO of Manchester Companies, a management advisory services firm in Minneapolis. “I’ve seen executive compensation plans that have had as many as 32 metrics in them. I didn’t even understand the plan!” A complicated compensation plan is not attractive to CEOs and makes it difficult to track progress.

“If you make compensation so complicated, and you tie so many bells and whistles and restrictions on it, what you’ve really done is failed to . . . incentivize management to go out there and grow the business,” says Amy Seidel, partner in the corporate practice area at Faegre & Benson, a law firm in Minneapolis.

Sheffert says that compensation plans should have concrete, objective goals—such as achieving 1 or 2 percent more market share each year for three years—instead of subjective goals, such as developing managers. Measuring profit, revenues, and earnings before interest, taxes, depreciation, and amortization (EBITDA), are other ways companies are defining their executive’s performance.

Stock options are changing in the face of a potentially volatile market. “If you’re granting stock options, traditionally companies will do that once per year,” says Ryan Urness, general counsel for Navarre Corporation, a publisher and distributor of home entertainment software based in New Hope. “That’s the one day to set the base price of the option. [Some companies are now] moving away from one-time to a quarterly or monthly plan.” Having multiple points at which an option’s base price can be set provides a kind of cost averaging of the price of the stock, taking some of the volatility out of the stock options. Urness says this helps companies attract executive talent even when their stock price is up and down.

The Short and Long of It

New compensation strategies are encouraging executives to take a longer view. “The longer-term incentives tend to be more equity type forms of compensation—either stock options or stock grants,” Sheffert says. “So basically what they’re trying to do is make sure the chief executives’ interests are well aligned with the shareholders. For the short-term bonus part of it, [some firms will] use cash, or it will be a split between cash and stock.”

Stock ownership guidelines are also promoting long-term company goals. “What some companies are looking at, and what a lot of institutional investors like to see, is some kind of a requirement to hold some of those shares for a longer period of time,” Seidel says. “In some cases, that can be when they retire from the company or after they retire from the company.”