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Leveraging Pay Programs in the Fierce Competition for Executive Talent

Solid business strategy and strong company culture are primary elements in attracting and retaining high performing executives, but with increased demand and competition for talent, companies should look for a competitive advantage by re-examining their reward and retention practices.

“Golden handcuffs” have traditionally been the go-to for companies to retain talent at the top. But, with the rise of executive attrition, new hire packages for management commonly include a buy-out of unvested equity with the goal of ensuring the candidate is not forfeiting any unvested value. Buy-outs are typically awarded with make-whole payments or grants upon hire with the same vesting schedules as the original award. This practice greatly reduces the “stickiness” of unvested equity because executives will likely see the value whether they stay or leave.

A new Meridian piece warns that companies should review their executive pay strategies to ensure organizations can attract talent externally as well as promote from within. While recognizing that pay is only one piece of the puzzle, they provide some surprisingly aggressive suggestions:

  • Review strategy for both new hires and internal promotions. Often, offers to external hires are above market while internal promotions are under market.

    1. For outside candidates, consider internal equity as you set pay and mix. Buyouts of forfeited compensation should be focused on making them whole – no better or worse if they left the company. And, one-time awards should be used only as necessary to secure the deal – as you emphasize your full employee value proposition.

    2. For internal promotions, set incentive targets at or close to median, leaving some room for growth in salary. Normally, the promoted executive would be at median overall within 2-3 years.

  • Evaluate long-term incentive structure to reward outperformance. Recent trends show executives leaving established companies for the upside of startups and IPOs as they see more potential than risk. If your long-term incentives are designed to regularly pay out at target, consider a higher payout opportunity (Meridian suggests even above the typical 200% of target) for outperformance of financial metrics with a steeper curve for underperformance. Companies can also consider setting high-risk goals for TSR metrics to shift the valuation from GAAP to the Monte Carlo model, which provides for lower grant value per share, ultimately leading to more shares awarded.

  • Differentiate high performing individuals and business units by potentially rewarding outstanding individual performance up to 250% of target (within the funded pool), raising maximum salary ranges for high performers who will not be promoted in the near future, or providing special or increased long-term grants.

Other hints: use special awards selectively and sparingly (avoid proxy officers), refine peer groups to include growth and recent IPO companies where you compete for talent, and ensure restrictive covenants include all the key provisions that protect the company.

Published on: July 15, 2022

Authors: Megan Wolf

Topics: Corporate Governance, Executive Pay Plan Design

Megan Wolf

Director, Practice, HR Policy Association and Center On Executive Compensation

Detailed Bio

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