Deferred Incentive Pay Plan for Key Employees

Problem Addressed

Traditionally, equity-based deferred pay plans such as stock options or stock appreciation rights are used to attract and retain key talent. Unfortunately, these techniques are unavailable in privately owned companies and in publicly traded companies often fail to establish a strong link between pay and performance.

For privately held companies, the absence of equity opportunities can be a competitive disadvantage for attracting, retaining and motivating key talent. Those companies are often reluctant to change their capital structure to offer real equity ownership.

For publicly traded companies, a rising or falling value based on the stock market will often have no relationship to the actual performance of the company and its leadership team. More and more, publicly traded companies are being asked to hedge the equity portion of their executive pay package against the vagaries of the stock market.

Innovation

One solution is a type of performance unit plan where the units can appreciate in value over time based on income statement results. This synthetic equity plan rewards the leadership team for cumulative income statement results rather than on balance sheet values. By awarding the units for achieving annual revenue and profit objectives, and by linking the appreciation of unit value to the cumulative growth in income statement results, the plan creates an intense focus on teamwork and profitable growth. In short, the plan awards annual synthetic equity units that appreciate in value based on long-term income statement success. The plan drives annual growth in profit and cash, thereby increasing company value.

Such a plan requires a long-term value goal, annual executive performance plans that will achieve the goal and a target reward that provides sufficient incentive to grow company value. It helps retain and motivate the leadership team and it has the ability to attract top talent . . . those leaders who want a guaranteed reward for delivering promised results.

Return on Innovation: Examples

The board of a major public company in the IT industry used this approach to balance the risk in the executive compensation portfolio. The executives were assured that even if their options were under water, they would share in the gain if they increased the value of the company.

The sole owner of a manufacturing and distribution company, located in a rural setting, had a 5-year “grow and sell” plan. He used this plan to attract a top-rated marketing professional who was the key to accomplishing his exit strategy.

An IT start-up company in a hot labor market used this technique to attract and retain key talent in lieu of offering equity or scarce cash. They liked the fact that if an initial partner left the company he or she would not be departing with real equity.

Invitation to Share Innovative Ideas

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