Page 118 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

104 The Complete Guide to Executive Compensation

is used to buy out, at least in part if not in full, forfeited benefits and deferred pay at the
former company. Thus, it becomes necessary to project a reasonable payout level under the
former company plan and then discount to present cash value equivalency. Some also take
into account future equity-based awards and their value. Amounts are paid either in a lump
sum or installments, with a repayment required should the executive voluntarily leave
within a prescribed time period. Also of interest is the pay contract going beyond the normal
two- to five-year employment agreement. This longer-term agreement stipulates a minimum
pay level until retirement.
It is important for the company to do a thorough background check and not simply rely
on the executive search firm results. The more important the position, the more critical it is
that the background investigation be thorough. In addition to past employer comments, the
individual’s history should be checked for bankruptcy filings, credit reports, criminal records,
litigation, SEC filings and tax returns. It is also important to review the resume carefully for
exaggeration of accomplishments, misrepresentation of educational attainment, and omission
of important data.
Management should recognize that its pay philosophy in large part determines the type
of talent it will attract and keep. For example, a company that says its salary-plus-bonus is
competitive with salary-plus-bonus of other companies is more likely to attract a risk taker
than a salary-only company that says its salary is competitive with salary-plus-bonus of other
companies. In the first instance, if the company cuts back bonuses for ineffective perform-
ance while giving very handsome awards for top performance, it is likely to get more than its
share of results-oriented individuals. Conversely, if the company rarely reduces bonuses or
gives significant salary increases, then it is more likely to attract and retain the steady but
unspectacular performer. Multimillion-dollar packages are often extended as lures only to
those who perceive a small increase in power and responsibility and/or a significantly greater
risk of failure (and loss of job).

Retaining Executives
Once executives are inside the organization, the next objective is to keep the better performers.
Executives not only expect to be properly paid for their performance and to receive promotions
when they have demonstrated ability to assume greater responsibilities, they also expect formal
recognition. While pay is a form of recognition, many individuals also need oral and written
communication officially recognizing the level of accomplishments. To the extent this is com-
municated to the individual’s peer group, it may disrupt needed teamwork. Nonetheless, such
recognition is extremely important to some individuals. If it is not given, the person may be
unhappy although very well paid. Lavishing praise for a job well done is a lot less expensive to
the company than increasing the compensation. While few would accept official recognition
in lieu of a pay change, for many, the amount of the pay changes could be reduced if propor-
tionately offset by an increase in recognition.
Many executives reach a level in the organization where they are comfortable with their
responsibility and reward. They have little interest in competing for greater responsibility
because for them, the effort and stress are not worth the compensation. For them, the
recognition is very important. This may be accomplished in part with a few perquisites
(e.g., larger office, more impressive title, and access to the executive health spa). However,
further recognition may also be needed, ranging from the simple “Nice job, Brett” to a story
in the company magazine.