Page 43 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 1. Executive Compensation Framework 29

With the intent of giving executives an opportunity to participate in stock price appre-
ciation from date of IPO, stock would be a key component of the pay program. This stock
is typically described as founder’s stock and, as such, may be narrowly defined as that award-
ed/granted to the entrepreneurs who founded the company or more broadly defined as any
pre-IPO stock. A stock award perhaps equal to one times salary with a five-year cliff vest
along with a mega stock option grant equivalent to three to five years of normal grants
would address the objective of retention, tying the executive to the organization for five
years. This might be supplemented with an employment contract protecting both the
executive and the company.
Growth
During the growth stage, capital investment needs are still strong, but the company is in a
good position to improve salaries and benefits (especially profit sharing) and set up some type
of annual incentive plan. Long-term incentive plans, however, still have the major emphasis,
as there is a strong interest in capital income programs tied to company growth. The period
is identifiable as one during which pay plans become more structured and complex. During
this phase, annual cash incentives tied to financial targets are becoming popular while stock
options continue to be dominant for long-term incentives. However, various types of three-
to five-year performance plans are emerging. Perquisites are becoming more popular.
Maturity
By the time the company shifts into the maturity stage, the time ranges for investment
opportunities typically become shorter than in the growth phase. Emphasis on cost contain-
ment as a major way to improve earnings becomes important. This is reflected in more
emphasis on short-term than on long-term incentive plans. Return on investment becomes
more important than product innovation. Budgets and internal financial measurements take
on more importance than stock price and shareholder return, making performance-share
and performance-unit plans more attractive than stock options. Long-term incentives start
to shift from stock market to nonmarket valuation techniques as price earnings multiples
start to slide. Perquisites start to increase in importance as psychic income becomes a
partial trade-off for a decline in real income from incentive plans. There is increased
emphasis on salaries, leading to increased importance of wider structural ranges because
promotional opportunities (and their big pay increases) are less likely. Executives remain in
job grades longer.

Decline
During the decline phase, the company must move aggressively to reduce expenses, not only
shrinking the employee population, but also reducing salaries and perquisites while introduc-
ing short-term incentives that will reward cost efficiencies. Assuming the company hopes to
turn around, it will replace performance-share and performance-unit plans with stock
options, or it may concentrate solely on internal financial measurements for the long-term
plan since book value probably exceeds market value. Either method may be supplemented
with restricted stock to ensure retention of key executives.

STRATEGIC THINKING
In this rapidly changing world where technological advances are coming faster than some can
absorb and customer needs are ever changing, it is difficult to believe that strategic planning