26 Jul The Case for Interactive Executive Compensation Models
One of the most important compensation-related activities a company will undertake is creating effective communication plans that explain incentive pay structures. Especially important is helping executives – those most vital to the ongoing success of the company – understand their long-term compensation packages, which are significantly more complicated than plans designed for employees-at-large.
When you consider the effort that goes into hiring executive talent and the intellectual capital that walks out the door when they leave, the benefit of the investment in helping executives understand long-term incentives and earning scenarios becomes obvious. Even more critical is communication of executive compensation plans leading up to and during times of rapid change – whether that’s reorganization or a change in strategic direction – when executive continuity is of extreme importance.
We advocate use of personalized compensation models, built in Excel or using an existing technology platform, which allow executives to visualize how their compensation changes by varying performance and market-related factors. For example, a complex executive long-term incentive plan with several vehicles such as performance shares, stock options, restricted stock units (RSUs), and long-term cash is relatively abstract without the application of context. Executives may understand how their plan works in theory. By using a model that allows them to plug in different stock prices and performance scenarios, executives can understand the current and projected value of their long-term incentive plan. This approach allows executives to think in terms of the potential value of the plans and what it means to them as individuals. It also allows them to grasp quickly the aggregate value of all of the outstanding grants they have received to date.
Vivient Consulting recently worked with a Fortune 500 company to implement an interactive long-term compensation model. The company engaged us as they were planning the roll-out of a new compensation plan and wanted to ensure executives understood the impact of the changes to their pay. In addition to constructing a model for this client, we created an online recording on how to use it and met with executives one-on-one to explain the new compensation program and walk them through their individual models and potential payout scenarios.
Because our client was going through a pivotal period in its evolution and executive retention was a top priority, reception to this “high-touch and high-tech” communication approach was extremely positive. In the past, executives knew about their long-term incentives packages in concept, but it wasn’t until they used the model to input real-real world scenarios (a 20% increase in stock price, for example), that they truly perceived the full value of those incentive plans. Their enhanced understanding contributed to ongoing executive engagement during a challenging time.
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If you have any questions about our approach, feel free to get in touch.