Incentive Based Pay for Executives: Four Steps to Maximize Incentivized Income

Posted: June 9, 2020

In addition to assuming leadership roles, executives of large organizations are primarily tasked with reaching strategic goals and creating long-term value for shareholders. Executives can leverage the proper incentive design in order to maximize incentive based pay. Depending on the length of time committed to the organization and an executive’s performance, incentive based pay may prove to be a significant supplement to an annual salary. Focus on Short-Term Incentives Short-term incentives include annual bonuses and are offered to executives as rewards for achieving short-term organizational objectives. These objectives vary across industries and are often contingent upon the maturity of the organization and broader market conditions. Metrics for evaluating annual bonus amounts include markers such as net profit and revenue growth. Executives may also be offered incentivized income for performance with respect to non-financial metrics including quality assurance and innovation or operational goals. When negotiating short-term incentive based pay, executives should relay how they plan to take action in the short term to advance the organization’s vision and strategy. Executives should also negotiate short term incentive packages based on the overall company performance over individual performance. Effective leadership typically results in strong organizational performance. Plan Actionable Steps Toward Long-Term Incentives An essential component of executive compensation planning is the design of long-term incentives or “incentive design”. Organizations are more inclined to invest in long-term compensation incentives for their executives due to the high costs of turnover at this stage of employment. Long-term strategies that require at least five years or more to implement are best-suited for executive-level leaders to implement policies and strategies in service thereof. When negotiating long-term incentive compensation with employers, executives should consider the ideal balance between cash-based and equity-based incentives. Executives must consider the implications of becoming stakeholders by virtue of equity ownership in the organization. Typically, executives can make a compelling argument for high-yield incentives by considering what the organization may require in order to achieve high performance over the long-term. Often, organizations will use equity compensation as a means to attract talent until the business reaches a desired level of cash-flow. Examine Equity-Based Incentives An executive may determine that equity compensation is the preferred mode of incentive-based pay. These forms of compensation include but are not limited to company stock, stock options, stock appreciation rights, profits interest, phantom stock, and restricted stock. Equity compensation provides a great incentive for high performance because this form of incentive-based executive compensation will be aligned with the value of the company. When negotiating equity compensation as part of any long-term incentive compensation plan, an executive should outline concrete steps for achieving organizational growth and meeting long-term objectives. Consult an Executive Compensation Consultant Before agreeing to any compensation plan, executives should consider reaching out to an executive compensation consultant who can provide sound guidance on how to maximize both long-term and short-term incentive compensation plans. An executive compensation consultant who is well-versed in market trends can also provide insight into the value of equity-based incentives. To learn more, visit our Contact Page, or contact us directly by email at or by phone at 415-618-6060.