The Elements Of Executive Compensation Packages And The Role Of Compensation Consulting Firms

Posted: September 29, 2020

Executive compensation packages differ from other pay structures in the corporate world. Generally speaking they are pay packages that have more of a focus on measured results and benchmark goals. Strong performance will benefit the executive, whereas underperformance will result in a much smaller fraction of the potential pay. Most hourly employees or salaried managers have structures that do not rely on performance and company growth in this way. Short and long-term incentives encourage executives to reach benchmark goals established by a board of directors and they are subsequently awarded when reaching these goals. As the company profits, so will a hard-working executive. Compensation consulting firms use a breadth of experience and expertise to help develop appropriate compensation packages that will retain key individuals and align with company strategies and goals. Unbiased experience with an array of clients gives consulting firms an edge when it comes to developing executive compensation packages. Firms will often work with internal compensation committees to introduce these packages. The incentives normally included in executive compensation packages are broken up into short and long-term. Short-term incentives in executive compensation packages can include things like revenue or profit increase benchmarks annually, or developing a new product line. Perhaps a board of directors will encourage the development of a new company strategy or expansion into a new market. Annual incentives such as these usually result in a cash pay-out at the end of the year which will add to an executive’s base salary. These incentives are often dynamic in that they have tiers or different pay-out levels depending on the extent of the performance. Compensation consultants can offer valuable market comparisons observed at similar businesses in order to help develop well balanced short-term incentives. The other type of incentive, and one of the more impactful elements of an executive compensation package is a long-term incentive. These incentives rely on growth and strategic objectives that will ultimately increase shareholder value. Like short-term incentives, they often have levels or tiers to reward high levels of performance that go beyond the initial benchmarks. Unlike short-term incentives, however, they are often considered over 3-5 year periods instead of on an annual basis. Additionally, long-term incentives are normally paid out in the form of stock-based compensation rather than cash. Compensation consulting firms can help a business ensure that executive pay and shareholder value are aligned by creating sound long-term incentive plans. Ones that encourage executives to reach towards a company’s strategic objectives and create success for all parties. In addition to base salaries, which are paid out annually and dispersed on a bi-weekly or monthly basis, executive compensation packages also include things like benefits, perquisites, contingent payments, and pre-arranged severance agreements. All of these elements work together to create solid and balanced executive compensation packages and compensation consulting firms can help with structure, plan, and incentive metrics. The most important asset for a consulting firm is the breadth of experience and comparable data. Companies that hire consulting firms can rest easy knowing that the impacts of their executive compensation plans will be positive for the business and shareholder growth. To learn more about maximizing executive salary, visit our Contact Page, or contact us directly by email at or by phone at 415-618-6060.