Key Elements Of An Executive Compensation Plan

Key Elements Of An Executive Compensation Plan

These days, with the pandemic having business models all messed up, it is more important than ever to get executive compensation right. After all, if an exec isn’t incentivized to raise profits as well as your share price, that can cost shareholders money. Shareholders frown on that. You also stand a good chance of losing said executive to the competition. That’s also not good. But what exactly are the key elements of an executive compensation plan? Let’s look at that – and more.

What Is Executive Compensation?

Executive compensation is comprised of pay and other non-financial benefits received by an executive from their employer in exchange for their service. Executive comp plans are for an organization’s senior management and executive level employees.

Why Is Executive Compensation Important?

We’ve gone over this a bit, but really, since top managers and exec-level employees are the ones deciding strategies and making key decisions, it’s crucial that they’re satisfied and motivated, especially in this current, unstable business environment.

What Are The Key Elements Of An Executive Compensation Plan?

While such plans are typically negotiable — since your priorities may not match the candidate’s — here are the main elements of any proper executive compensation package:

Base pay

If you’re unsure in this executive compensation area, it’s best to get a consultant such as Mercer to help you. The last thing you want to do is come in under what your rivals are offering, but you don’t want to give away the bank, either. You should also be certain to garner your candidate’s thoughts on the matter.

Benefits

These should be customized according to the person’s needs and applicability. For instance, a single or younger person may not be as interested in a generous health/life insurance plan as they would be extra vacation time or a flexible health savings account. So, it’s best to be flexible here. Again, talk to your candidate.

Long-term incentive compensation

For most execs, this is what’s most important. They want to know that if they work their tail off for you, they’ll ultimately be rewarded big time. This kind of incentive is typically in the form of stock options or a shot at gaining an ownership role.

Short-term incentive compensation

These are contingent upon the person reaching a key short-term corporate aim or objective that can be achieved in around a year and is usually in the form of cash or stock options. Be certain, however, that such objectives are within reason and well defined. You don’t want a snafu over goal achievement. 

Executive perquisites

This category is a little bit sticky since companies, especially large ones, can get caught up in deal sweeteners to the point where it’s a bit, well, too much. Having said that, for some execs, such niceties can seal the deal. And you do have leeway to be creative. What about the use of a corporate flat in London, or a primo country club membership? This is where you really need to feel out the person to see what might flatter him or her the most.

Now that you know the key elements of an executive compensation plan, you can go about putting one in place that both aligns with your organization’s business goals and allows you to recruit and retain your top talent. Now, if you don’t have the time or expertise to put a plan in place, no worries, you can always get help from the HR consultant Mercer, which we’ve found has the knowledge and expertise you need.