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Developing Your Executive Compensation Plan

How you answer the one question in which every human being has a vested interest will almost always determine the degree of co-operation you get.

 “What’s in it for me?”

Keeping this factor in mind when developing your executive compensation plan will help attract the best talent you can afford. Even better, there are multiple ways to tie the overall package to said talent’s performance, thus minimizing the risk of your commitment.

Compensation Plan Components

Fundamentally speaking, executive compensation packages can be split into a pair of constituent parts. These are the income you’ll guarantee and at-risk earnings.

Or, simply put, the basic pay and the incentive compensation.

These, in turn, are usually comprised of four elements:

    • Base salary

    • Short-term bonuses

    • Long-term incentives

    • Your benefits package

Proportionally, base pay will typically comprise 30 percent of the package, annual incentives will account for 20 percent, and benefits will make up 10 percent, while long-term incentives will comprise the lion’s share of the offer at 40 percent. This ensures that the dollars spent will result in performance. Many companies also include perks and severance pay to sweeten the offer.

Structuring Base Pay

The primary factors you’ll need to consider when computing your base salary range are the norms for your line of business, where your candidate will work and the level of experience you’re looking to garner.

According to executive compensation consulting experts at HR companies like Mercer, signing bonuses are becoming more common as well. However, rather than paying these all at once, stretching them out over the first year allows you to make a higher offer. Another strategy you can take in this regard is to offer stock options, if your company is public — or your plan to go public soon.

Defining Incentives

The whole idea of attracting top talent is to increase your potential for growth. Rewarding hires for their accomplishments in that regard makes them more likely to achieve your goals. This aspect of the package can be tied to meeting both short-term and long-term key performance indicators.

These should include:

    • Generating more income for the company

    • Broadening the firm’s profit margin

    * Innovation resulting in improved outcomes

    • Improving the product line

    • Opening new markets

    • An accomplishment critical to the success of the organization

Awarding long-term incentives in the form of company stock gives candidates a vested interest in the endeavor’s success. This also minimizes the impact on your operational budget.

The Basics of Benefits

In most cases, your benefits package will be universal across all employee tiers. However, while it accounts for the smallest percentage of your executive compensation package, it plays a strong psychological role.

At minimum, you should offer:

    • A competitive vacation package

    • Annual sick days

    • Life insurance coverage

    • Medical insurance coverage

    • Short- and long-term disability assistance

    • Retirement plans such as a 401(k) or a pension

Keep in mind though, that’s baseline. To be competitive, you’ll also need to consider childcare, maternal/paternal leave, overall wellness incentives and employee assistance.

Perks Packages

Company executives are often afforded niceties beyond those available to rank and file employees. These can be of tremendous benefit if you’re in an especially competitive hiring environment.

Typical perks (depending upon the nature of your industry) include:

    • Travel

    • Security

    • Estate planning

    • Company vehicle

    • A personal residence

One of the key advantages of perks is that they can make a smaller base salary seem more appealing when the package is especially enticing.

Severance Compensation

Luring top talent away from competitors can be also made easier when you guarantee that the candidate will get paid a certain amount should some misfortune befall the company triggering an involuntary termination. Including severance pay when developing your executive compensation plan lessens the degree of risk that person takes by joining your organization. If you are smaller business, you may have to offer an SARSEP.