Retaining the services of a talented and experienced executive is, obviously, crucial to the long-term success of any business. After all, replacing the “average” employee can take months and cost tens of thousands of dollars. Replacing a high-quality business leader with specialized knowledge or unique contacts can be exponentially more costly and difficult. As such, it’s important for growing organizations to prioritize executive retention. One of the best ways to do this is by revamping your executive compensation packages. Here, we’ll take a look at several different types of executive compensation and explain the pros and cons associated with different executive compensation strategies.
The first and most straightforward way that businesses can compensate executives is through a traditional base salary. However, it’s worth noting that salary does not always form the majority of an executive’s income stream. (It may represent a plurality, though.) Keep in mind that not every business will have extra cash on hand to simply give an executive a raise in the form of a direct salary increase.
Performance-based incentives have become an increasingly popular form of executive compensation over the years. Since most performance bonuses are tied directly to company performance, it’s easy to see why. These bonuses act to motivate executives to meet certain goals, and when the company succeeds, the executive is rewarded accordingly. It’s a classic win-win scenario. Note, some bonuses work on an annual basis, while others may be tied to long-term objectives over the course of several years.
Stock Options (Equity)
The most common alternative to strictly cash-based forms of executive compensation are stock options. Stock options are appealing to businesses because they allow organizations to maintain capital flexibility while also satisfying talented executives. Also, stock options may prove more valuable to an executive in the long run than a straight cash bonus would. Some companies also connect stock options to incentive packages as well.
Insurance & Retirement Coverage
A business looking to tie down an executive for a long period of time may decide to offer insurance coverage plans to them and their family. In the past, companies have offered to cover life, health, and disability insurance packages to keep their top executives happy. Additionally, some businesses set aside retirement packages just for their executives, which often include some form of insurance coverage as well.
It’s important not to overlook the unique perquisites (perks) certain businesses may be able to offer their executives. Remember, not all professionals are motivated solely by money. So businesses may have to get creative in order to retain their services. Examples of executive perks include access to private drivers, private air travel accommodations, company-owned villas/temporary housing, and, in some instances, security details. Executive perks can stretch beyond this list though, so it’s important for companies to engage in a constructive dialogue with their executives to see what they value most.
Getting the Balance Right
The truth is that most executive pay packages include several different forms of compensation listed above. Some are primarily based on a regular salary. Others may include sizable bonuses payable only for reaching certain professional milestones. Still others may contain significant amounts of stock options, insurance coverage, and unique perks. The key to creating an effective executive compensation package comes down to making good use of the resources available to your business that will keep executives happy and motivated.
At Helm Financial, we’re experts in the field of executive compensation, and we can help your team create executive compensation packages that fit within your budget and your larger business continuity strategy. We can help you protect your business today and plan with confidence for the future. Contact us today to learn more!