Page 116 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

102 The Complete Guide to Executive Compensation

Impact on Individual Executive
Compensation Elements Attract Retain Motivate

Salary High High Moderate
Employee benefits Low Moderate Low

Perquisites Low Moderate Low
Short-term incentives High Moderate High

Long-term incentives Moderate High Moderate

Table 4-1. Impact of five compensation elements on executives

Salary is very important in attracting and retaining executives, but it is of little value in
motivating them since salary adjustments are usually modest, even for top performers. The
salary associated with a promotion, however, is believed to be a positive factor. Thus, while
the promotional pay increase may be motivational, it is doubtful that the normal merit
pay policy serves as an inspiration. Hiring bonuses are similar to a lump-sum salary payment
inasmuch as they are not factored into ongoing salary. Intended to offset what may be lost
from a current employer, they are sometimes referred to as the golden hook. Salary has little
retention ability, unless some portion has been deferred and subject to forfeiture if leaving
prior to receipt. Similarly, a hiring bonus has little retention value, unless subject to repay-
ment if leaving before being earned out. For more on deferred vs. current payments, see
Chapter 3.
By contrast, a good employee benefit and perquisite program usually will have little impact
on attracting and motivating the executive (although poor programs may make it more
difficult to interest wanted executives), but may have at least a moderate retention effect.
Some factors, such as a final-pay pension plan, may have a considerable holding impact if the
executive has not attained a 100 percent vested level.
Short-term incentives can be very attractive and motivational to a top performer, especial-
ly if the payout is based on individual rather than group achievement. However, for incentive
plans to work, the executive must have a positive attitude toward them and must believe that
differences in performance will result in comparable differences in reward. In addition, the
required level of performance must be considered not only attainable but also cost effective
(i.e., what is received must be deemed worth the time expended).
Long-term incentives, on the other hand, do have some positive aspects in attracting and
motivating, but their main strength is usually in retaining the executive, due to the multiyear
performance period definition. Long-term incentives are typically based on group, not indi-
vidual, performance and therefore are not as motivating as short-term incentives. Multiyear
plans stipulate “vesting,” or earn-out dates, when the recipient is eligible to receive all or a
portion of the award. The longer the vesting period, the greater is the retention feature.
Often such long-term earn-outs are called “golden handcuffs”: golden because of their
extrinsic compensation nature; handcuffs because of their retention feature.
Even if the pay packages do not attract, retain, and motivate as desired, their form and
level of reward do serve as reinforcement vehicles to attract and retain a particular type of