Why Is Executive Compensation Important?

Why Is Executive Compensation Important?

Sep 14, 2020 10:15:00 AM / by Zach Taylor

handshake on executive compensationIt’s not an exaggeration to suggest that how a business chooses to organize its executive compensation packages could affect its viability for years into the future. In many instances, businesses rely on top executives to attract new clientele, spearhead new initiatives, and ensure profitability. As such, it’s crucial for business leaders to create executive compensation packages that appeal to their most important team members. Why is executive compensation important? The short answer is that it ensures business continuity and executive retention. We’ll explain further here: 

Executive Retention

Replacing any employee is a process that can cost a business tens of thousands of dollars and take months to complete. Trying to replace a very talented executive who possess specialized knowledge or unique contacts, on the other hand, may require hundreds of thousands of dollars and many months of recruiting, interviewing, and training. Simply put, executive retention saves businesses huge amounts of time and money. Plus, executive retention also allows businesses to implement long-term plans much more efficiently. 

It’s also worth noting that executive compensation can play a large role in a business’s larger continuity strategy. Many succession plans depend on the retention of top executives to guarantee the smooth transition of power from one individual (or group of individuals) to another. 

Executive Performance

While executive compensation is key to retaining the services of top personnel, it also contributes (in some way) to their performance. Keep in mind that base salary accounts for only a small portion of most executives’ overall compensation. Instead, executives typically derive the majority of their income through equity (stock options) or time or incentive-based bonuses. Obviously, merit-based compensation and stocks should –– theoretically –– motivate an executive to go the extra mile for their organization. For reference, studies have linked bonuses to increased productivity in the past. So it’s not surprising that companies have consistently pushed these forms of compensation when negotiating with executives. It should also go without saying that happy executives can influence overall team morale –– making their compensation all the more vital. 

Company Direction

Executive compensation can affect a business’s bottom line, its ability to attract new clientele, its team morale, and its available resources. In addition to all of that, executive compensation can also have a big impact on the entire direction of a company. Or rather, the best leaders ensure their executive compensation packages reflect the priorities and principles of their business. For example, most executive compensation packages include merit-based bonuses that are tied to figures like company cash flow, revenue, and sales figures. However, many companies are now including other metrics within their incentive-based programs for executives. Progressive companies may now incentivize executives to increase company sustainability, lower emissions, increase employee satisfaction, and other factors not directly tied to financial performance. So if a company wants to improve its image and act in a more environmentally-conscious manner, its executive compensation packages should align with those objectives. 

Contact Us

At Helm Financial, we have years of experience working with businesses to craft executive compensation packages that satisfy all parties involved. We know how to deliver positive outcomes and protect our clients’ long-term business goals. Contact us here to learn more about our unique services or to schedule a consultation today. 

Topics: Executive Compensation

Zach Taylor

Written by Zach Taylor

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