Page 548 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

534 The Complete Guide to Executive Compensation

A more detailed statement of compensation philosophy is shown in Table 9-11. It is from
a publicly traded company in the growth stage wishing to ensure it pays for individual, group,
and corporate performance (with a high-risk/high-reward profile) as well as maximize the
probability of attracting, motivating, and retaining top performers.

1. Total compensation will be at the 60th percentile of the defined competition. Salary, employee
benefits, and perquisites will be at the 40th percentile, and both short- and long-term incentives
will be at the 75th percentile.
2. Although annual compensation (salary plus short-term incentives) is set at the 50th percentile,
stretch targets are set at the 60th percentile, with the increase being solely in the short-term
incentive plan.
Up-front bonuses will be paid to offset unvested losses of outstanding talent for leaving their
current employer to join us. Such awards will contain a clawback feature (return of the amount to
the company if the individual voluntarily leaves within five years of joining us).
3. In response to identification with shareholder interests, annual nonstatutory stock option grants
(with five-year cliff vests) are given to the top 5% of the employee population (the executives).
Gains of exercises received within one year of departure are forfeited to the company unless
waived by company action.
4. The top 1% of the population are annually put into a five-year performance-unit plan with payment
based on performance relative to our 10 company peer groups over the five-year period in terms of
earnings per share and total shareholder value.
5. Annual incentives are based on corporate, group, and individual performance. Corporate
performance is based on an economic profit formula, group performance is based on EBITDA for the
unit, and individual performance is based on at least 5 (but no more than 10) measurable objectives.
• The mix will be 80% corporate/20% individual for the CEO (chief executive officer), CFO
(chief financial officer), CHRO (chief human resource officer), and CLO (chief legal officer).
• The mix will be one-third each for corporate, group, and individual for all other executives.
6. The company will review the structure of the pay program at least semiannually to determine what
changes, if any, are needed, bringing them in the way of proposals to the board of directors.
Table 9-11. Sample compensation philosophy

INCENTIVE PAY CONSIDERATIONS
As pointed out earlier, it is very difficult to structure incentive pay plans in not-for-profits.
However, even companies without the legal limitations should examine the issue carefully.
Whether incentive pay is included in the package should be a function of objectives and
ability, not availability. When incentives are included, they play a major role in the executive
pay package.

Do You Really Want Incentives?

Designing short- and long-term incentive plans takes a lot of time and effort. A company
must not only be willing to put in the time and effort but also believe performance can be
expressed quantitatively. This is easy for financial data. For qualitative goals (such as design-
ing and implementing a new executive compensation plan), it is more difficult. It is fairly easy
to determine if timetables are set and deadlines met. It is more difficult to assess how well it