Five Key Components That Build An Executive Compensation Package – Podcast | S1:E2

by Versique

Talent Attraction in today’s candidate-driven environment continues to challenge organizations. In this episode we’ll discuss five key components to build an executive compensation package that is appealing to candidates but also motivates your executives to attain your company’s short, mid, and long-term goals.

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Podcast Transcription – S1:E2

 

Speaker_1: 00:03 Get ready for your weekly dose of talent strategies and tactics from industry leaders to help you attract, select and retain your top talent. You are listening to Versique’s Inside Executive Search with Steve Yakesh and Scott Peterson. Hello and welcome to the Inside Executive Search podcast.
Speaker_2: 00:30 My name is Steve Yakesh and this show is for business owners, board members and executives, exploring strategies and tactics to attract, select and retain top executive talent, so if you’re challenged and not feeling 100% confident that you have a plan to recruit the very best for your key roles, keep listening this podcast will help get you there. So last week we covered how to gain alignment in the position profile and a development of a compelling story to attract these top candidates. Today’s episode is focused on another element that needs to be in place and that’s executive compensation had said, I’d like to bring Scott Peterson in from Versique.
Speaker_3: 01:10 Hi Steve. It’s great to be back again this week to talk about one of those additional strategies and tactics to help companies find their top talent.
Speaker_2: 01:20 Awesome. Well Hey, for our first-time listeners, Scott’s a 20 year veteran in the Executive Search industry and leads Versique’s Executive Leadership Practice. So Scott, we talked there are five basic aspects to executive compensation. We have base salary, annual bonus, long term incentive, benefits and executive perks. So let’s tackle them one at a time and let’s, let’s start with base salary. The easy one.
Speaker_3: 01:44 Yeah, that sounds great, and base salary is dependent on a lot of things. It’s dependent on size of organization, whether the company is private or public, geographic location in the country. Certainly New York City pays a lot more than a Sioux Falls, South Dakota, so you have to take all those things into consideration, do your market research, understand your competition, and work with firms like us to help understand what we’ve been seeing lately in the marketplace as well.
Speaker_2: 02:14 So if you are going to do it on your own, really the best case scenario would be find competitors in your industry, same size, and then adjust based on geographic location. That’s probably the easiest and most simplistic.
Speaker_3: 02:27 There’s a lot of tools that are available out there that you can do that with and certainly we are always happy to help our clients with some of that individual market research with current searches that we’re doing or have completed. Perfect.
Speaker_2: 02:41 All right. We’ll move on to annual bonuses. Like it says in the title of paid out annually, once a year. Right? Right. And these bonuses are typically to drive certain behaviors and incentives just like any other bonus within the organization. How do companies handle it at an executive level?
Speaker_3: 02:57 Typically these are going to be cash bonuses and again paid out on an annual basis. These are meant to incent the right behavior of the executive, meaning they’re trying to drive performance at the company in the area that either the CEO is looking for or the board of directors is looking for performance, so it’s really tied to paid for performance and that is a really huge deal for companies to really align that way.
Speaker_2: 03:28 Sure. Probably the two main criteria, either Ebitda growth and or top line growth. Those are the main ones. Yeah those are
Speaker_3: 03:36 typically the common ones and there’s obviously many more beyond that depending on where you’re at in the company.
Speaker_2: 03:43 So how do companies handle it if they’re in a little bit more of a turnaround situation and they’re not quite ready for that growth or to drive high top line revenue growth how to, how do you handle that?
Speaker_3: 03:56 Typically those companies got some what they call objectives or management objectives over the next six to twelve months and there might be three to five of those. It could be we need to restructure our debt for the company, we need to divest in an underperforming division. Those things can be still paid out in terms of bonuses because I’ve met those objectives and so as you’re going through in a turnaround situation, those are the types of things
Speaker_2: 04:26 we’ve seen. And then those typically will convert once the company has been stabilized and now in a position to grow because they divested a division or they restructured their debt. Now that’s probably MBOs are going away in a typical top line or Ebitda annual performance. Yeah that is typically what you see. Perfect. All right, so probably the most complicated one. Long-term incentives. Let’s start with maybe the easiest of one. If you’re trying to structure compensation for a publicly traded company, right. Those mechanisms are generally in place, but give the listeners a little bit of an idea of how they’re structured.
Speaker_3: 05:05 The public companies typically have a few extra tools in the toolbox to incent executives and that those are stock options, restricted stock, grants, anything around the stock of their company. So, typically you start seeing those as vesting over a three to five year period. So they’re earned for longevity and performance, which is mutually beneficial to the executive as well as the company.
Speaker_2: 05:36 Sure, and what’s typical vesting periods that you’re seeing? Is it probably three, four?
Speaker_3: 05:40 Yes, anywhere from that three or four or five years depending on the company.
Speaker_2: 05:47 And just so the listeners know, the options come fully vested yet, you might be getting some dividends like any other shareholder, but it’s really the biggest gain is in the growth of the stock price, correct.? Correct. That’s where you’re going to gain the most. All right, so let’s look at, if it’s a privately held company, don’t have those mechanisms in stock options available. How are our company’s handling that?
Speaker_3: 06:09 The really cool thing that we’ve seen is private companies not necessarily having those same tools to use, but they’re getting creative and what they’re trying to do is how do we create an equity like model in a private company without giving up ownership? So they’re creating programs that, that act like equity. Sometimes you call them phantom shares, ghost shares if you will and it incense someone from a growth perspective and value creation of that company. Sometimes a company might do a evaluation and, and have that as the base point and over the next three to five years they do continual evaluations on an annual basis and that participation in that value increase over those years is paid out to their executive. Perfect.
Speaker_2: 06:58 It’s still typically out of vesting period, even though that’s privately held. Yeah, that’s correct. Yep. Still vested usually. So that also acts as a retention mechanism as well. Correct. In the business. That’s the golden handcuffs, right? Yeah. Okay. All right. Well let’s maybe move on to benefits. I know executives are typically highly compensated from a cash standpoint, but benefits are still important. So walk us through what are you hearing from a benefit standpoint? Yeah, certainly
Speaker_3: 07:26 I think that you don’t want to ignore in the process because everyone is still concerned about having great health insurance and other benefits that come with the company. Some of the areas that executives might be interested in is, what is the flexibility that this company creates from working from home or working remotely? We’re starting to see executive that live in a different city than they actually work so how has the company seeing those today? And there’s this tremendous amount of more flexibility in that came along with the technology increase, right? The ability to be remoted and still being able to be effective.
Speaker_2: 08:06 I can only assume if as executives coming into grow a company, he or she is going to want to know the other people, I’m going to try to attract on my team, do they get that same flexibility so it becomes doubly important?
Speaker_3: 08:19 Yeah, that’s correct. I mean especially today with flexibility, I think millennials get a bad rap in this world right now because they like flexibility, they like to have that and they still perform at a very high level even though there might be working remotely.
Speaker_2: 08:37 Perfect. All right, well let’s move on to the last one. Executive perks and know they’re not quite as prevalent as they were in the past, but I know they’re still out there. So what are some of the typical ones you are seeing?
Speaker_3: 08:48 Maybe we’ll kind of step back and say what did they get in the past. Those were country club memberships, health club memberships, those kinds of things. And those are still out there from company to company. One of the big ones that we see is access to an executive health program like the one at Mayo Clinic here in Minnesota. And so paying for that annual visit to Mayo is a big benefit, not only to that executive, but to the company, because if there was a catastrophic event with that executive it does hurt the organization as well. So, it’s a win win benefit for the company as well as the executive.
Speaker_2: 09:30 Perfect. So, I’m going to throw one last topic in here and then we’ll wrap it up. We haven’t talked about severance packages and these are typically what we see all the time at the executive level, so what would, what should companies offer up from a severance and why is that important?
Speaker_3: 09:47 Right. And I think most executive employment agreements have an element of a severance or a change of control definition in there. So, severances again, can vary by company so there’s not one size fits all again, but typically you’re seeing a six month severance to anywhere from two years severance depending again on company, what their competitors are offering and what did they come out of, what was there previous package that they had. Change of control is just that the company got sold and typically when a company gets sold, the new CEO comes in and likes to make changes so again they get that severance had a change in control as well. That’s almost another whole topic on an employment agreement that we could do in another podcast. I’m just like long-term incentives. We could do a whole podcast on that too. Perfect.
Speaker_2: 10:42 All right, well, I guess in summary and we’ll wrap things up. Really five elements, base salary, annual cash bonus, long-term incentives, benefits, and executive perks and there’s no one size fits all in this. Unfortunately not. Yeah. So you’ve got to get out, do your homework, understand what the competitive landscape is from a competitive nature, both as a general market and your competitors, but it’s really about incenting and creating a compensation package to drive the behavior you’re looking for, whether it’s the roles even at a top line or a turnaround situation, and sent those behaviors that the company needs most. Well that will conclude this episode and next week we are going to continue on the attraction theme and discuss how companies should view internal versus external candidates, how you can activate your network and finally, how to do that market research to potentially isolate some viable candidates.
Speaker_2: 11:40 So as always, if you want to get ahold of Scott, visit versique.com or look them up on LinkedIn and we are excited to announce that we are now live on all major podcast platforms like Spotify, iTunes, and Google play, so if you like what you’re hearing and you want to get a dose of Inside Executive Search on a weekly basis, please hope out to one of those platforms and subscribe to our podcast. Take care everyone and thanks for listening and we’ll see you next week, Scott. Sounds great, Steve. Looking forward to it.

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