Page 119 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 4. The Stakeholders 105

Another important factor many companies overlook is ensuring that the executive who
is likely to figure in a future promotion understands the situation. Many individuals leave
because they do not know what the company has planned. A number of companies either
believe executives are mind readers or expect them to “trust” the organization. Thus, com-
panies sometimes lose top executives for modest compensation increases simply because
someone else provides a well-laid-out plan for career advancement. For talented executives,
the golden handcuffs of long-term incentive plans and/or deferred compensation have less
retention value than open communication about advancement opportunities. Level of pay,
while important, is secondary to relative rate of movement upward through the executive
pyramid illustrated in Figure 4-2. An estimated two-thirds or more of executives’ pay comes
from promotional adjustments, with the remainder from merit increases.
Remember too that incentive compensation is a two-edged sword. It should reward
executives handsomely during very successful years and thereby increase the likelihood of
retention, but in bad years, it may make a company vulnerable to loss of top executive talent
by significantly reducing total pay. This is especially true when incentive pay comprises a
large portion of total compensation.
While a company could prune off some deadwood during poor years, it probably has a
greater need than ever to ensure it loses no top-caliber executives—for these individuals may
be the ones who will help the company again rise to the ranks of the successful.
Reportedly, some companies, in an attempt to minimize being raided, employ executive
search firms on a regular basis, since ethical conduct prohibits search firms from raiding
clients (at least in the area of the search). In this way, the company purchases additional
insurance against losing key executives—insurance that can be very important as more and
more companies use search firms to seek out underutilized and underrewarded executives.
These restrictions on candidates are typically called blockage. Conversely, after a merger,
some executives are given the green light to start looking for a job, either because their job
will disappear or an executive from the other company will take it.
Although it is often difficult for a shareholder to evaluate the worth of an executive while
with the company, the stock market sometimes reacts to the loss of a chief executive or CEO-
apparent with a sell off of the stock. When an individual leaves and the stock drops $2 a share,
with 500 million shares outstanding, one could argue that that person’s present value is one
billion dollars. Pity the person whose departure is announced, and the stock rises $2 a share.
Clearly, the organization wishes to retain effective executives. But these often are not
simply those who meet their objectives. Evidence suggests individuals are exited from
organizations oftentimes based on how they perform, not simply on what they accomplish.
This is consistent with reinforcing desired organizational values. Individuals who are arro-
gant, insensitive, and disloyal are as likely to get the boot as the dishonest and incompetent.
Motivating Executives

The basic motivational model indicates that effort times ability leads to outcome, or performance.
Thus, a shortfall in one factor can be offset by a higher value in the other. Many individuals
compensate for average ability with a very high level of effort. The amount of energy the
individual will expend in a given area is a function of the desirability of the expected outcome
versus alternative outcomes from efforts directed toward other areas. In any event, most
analysts would agree that there is not a constant relationship between level of effort and
performance. Above a certain level of effort, there is a decreasing rate of return. Pareto’s law