executive compensation

Executive Compensation is a Multifaceted and Complicated Topic

Key executives are a crucial piece of strategic decision making in a business and are expected to work toward reaching those strategic goals within their team. Losing a crucial leader in your business can leak chaos into other aspects and teams of the business. For this reason, it is important for businesses to not only find the right candidate for their executive position, but also to maintain their employment by creating the right compensation plan.

Especially at the executive level, the right compensation plan can be the difference between a team member who just clocks in and out each day and an executive that is motivated to further both their own success and the success of the firm. 

Pre-Hire Planning

Whether you lost a member of your executive staff or you are looking to onboard an additional member, planning is the key to a great hire. Decision makers and business leaders, typically executives, owners, and board members, should meet and discuss what the organization is looking for in their ideal candidate. 

Identify key strategic goals this hire should be accomplishing in both the short term and the long term. Based on these strategic goals the business can identify key traits and experience the new hire should be equipped with. The firm should also identify the mission, values, and key objectives, the size and revenue, number of executives, and whether it is a C-Corp or an S-Corp (for tax implication). 

The business’s financial health should also come into play when planning an executive hire and/or offering a compensation plan. The business’s available cash flow projected future growth, future financial goals in both the short-term and long-term, as well as the business continuity and succession plan. 

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Once the information above is identified for a specific role in a business, firms can look for a candidate that matches the criteria and create a compensation plan that is specific to that individual. 

Elements of Executive Compensation Plans

Base Salary

The base salary of executives is the least complicated aspect of an executive compensation plan. Like any other worker at an organization that is not paid an hourly wage, executives receive a cash compensation in the form of a salary. 

One of the important aspects of executive salaries is ensuring that the cash compensation is competitive in your industry and geographic region. The salary will be agreed upon when the executive is hired and is the simplest aspect of compensation plans to increase in a given year. 

Short Term Incentives

Executives are often motivated by performance-based incentives. Short-term incentives are usually distributed in the form of cash bonuses and can be paid out throughout the year. 

Typically, short-term incentives will be designed to motivate executives to reach more immediate strategic and individual goals. Employers have control over who receives short-term incentives and how much the incentives will amount to. 

Insurance Benefits

Although most executives will consider their cash compensation the most when deciding to accept a new role in a business, other benefits are crucial to finding the best fit for your business. Comprehensive health, life, disability, and even long-term care insurance is crucial in presenting and offering a compensation package that checks all the boxes. 

In some cases, the benefits listed above can be the differentiating factor for an executive deciding between multiple organizations. For example, offering top-notch life or disability insurance can be an enticing benefit for executives with a family. 

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Furthermore, compensation packages can include continued benefits even after the executive is no longer employed. For example, if the executive retires their compensation package could include continued paid benefits for an agreed upon period of time subject to conditions of the business or if the business is undergoing a change of control. 

Executive Perks

Executive perks are another aspect of executive compensation that can be an enticing factor to prospective hires. Benefits such as vacation time, country club or gym memberships, paid parking or transportation benefits, company vehicle use, travel reimbursement and other rewards. 

These benefits are found in the footnotes of executive contracts. Companies should be self-aware when introducing executive perks, however. Perks paid out to executives at small companies can lead executives to be greedy and lose sight of strategic goals. 

All benefits and perks offered to executives should be created and executed all within the capabilities of the organization.

Retirement and Long-Term Compensation

Retirement and long-term compensation are the aspects of executive compensation packages that separate them from typical employees. 

Often referred to as deferred compensation, retirement plans for executives can include both qualified and non-qualified plans to maximize the tax savings when the funds are actually distributed. Most companies will have a qualified plan in place for employees which both the employer and employee can contribute to. Qualified plans must adhere to the Employee Requirement Income Security Act (ERISA) rules and must be available for all employees. These plans will be the typical 401(k) plans individuals are a part of. 

Companies can also offer non-qualified deferred compensation (NQDC). These plans allow organizations to attract and keep crucial employees by offering additional performance and duration-based incentives. 

NQDC are exempt from most ERISA rules and reporting meaning there are no deferral amount limits and it can be offered to only select employees. An NQDC plan is a retirement plan where the employer agrees to distribute money and earnings to a specific employee on a future date. Federal law requires the plan to be a legal document with the amount to be paid, the payment schedule, and the triggering event specified in the document in order to defer taxation. Triggering events can be anything from a future fixed date to a switch of ownership within the firm. 

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NQDC plans come in two forms: elective and non-elective. Elective NQDC plans occur when an employee chooses to defer a percentage of their salary and bonus compensation until a future date. This plan sees the employer fund the entire benefit and the employee’s compensation will remain unchanged for that year. 

NQDC plans carry risk because they are unsecured and not guaranteed if the employer files for bankruptcy. Establishing the appropriate plan designs and the use of trusts to hold plan assets can mitigate this risk, however. 

Long term incentive plans, also known as equity compensation, earn executives a payout over time. The purpose of these incentives is to increase the longevity and loyalty of key employees and executives. 

Long-term compensation can come in the form of employee stock options (ESO), restricted stock units (RSU), and stock appreciation rights (SAR). 

Whether you are the employer offering these benefits or the executive looking for these benefits, you will find more information on long term compensation for executive level employees in the blog of this Pittsburgh wealth management firm, Fragasso Financial Advisors. With such a crucial yet complicated task it is important to have the right resources and experts in your corner.

Investment advice offered by investment advisor representatives through Fragasso Financial Advisors, a registered investment advisor.