Five Ways To Tell If Your Company’s CEO Earns His/Her Pay

Dr. Linda Henman isn’t as concerned about CEOs getting paid large salaries as much as she is about them being worth it.

CEOs earned an average annual paycheck of $11 million in 2010, with pay soaring by an average of 23 percent last year, according to research released by the AFL-CIO in April. As the economy’s sluggish recovery has analysts worried, Henman, a consultant for Fortune 500 CEOs, believes that company top dogs who actually earn their money are easy to spot.

“Those at the top have three major responsibilities: Develop the business, grow talent, and make decisions that drive innovation,” said Henman, also author of Landing in the Executive Chair: How to Excel in the Hot Seat (www.careerpress.com). “There is much shuffling at the top. Too often Boards don’t make wise decisions about CEOs and CFOs, and these executives, in turn, don’t make wise hiring decisions throughout the enterprise. But if leaders do a better job, companies can do a better job, which means individuals can do a better job. These leaders create companies where customers want to do business and people can do their best work. That all leads to financial health on the micro level, which translates to better financial health for the country. That’s why I think it’s important for people to understand if their CEO evidences the ability to soar above the competition, because in the end, only the strong will survive.”

Henman’s top qualities of a good CEO include:

Strategy – Strong strategic thinking defines the effective CEO. These leaders understand how to match a strong strategy with the tactics and talent to see it through. CEOS who constantly react to events, instead of planning for the future, remain followers and not leaders.

Decisions – When CEOs consistently make good decisions, little else matters; when they make bad decisions, nothing else matters. Even though decisiveness distinguishes leaders from everyone else, effective decision-making stands at the center of executive leadership. A decisive CEO who can’t hit the target is the same as an indecisive CEO who doesn’t even know where to find it. The results are the same.

Hiring – Successful CEOs know how to tie talent to their strategies so they ensures the company hires the best and the brightest and compensates them fairly. Moreover, they give these people a chance to thrive.

Excellence – Leaders who attract and retain top talent stress excellence. They focus on good execution of plans and strategies, and they don’t skew the mission by placing value on tertiary issues that have little to do with execution of strategic goals.

Results Orientation – Too many executives talk about how to motivate the troops. Those who excel in the hot seat do better. They hire people who are self-motivated, define clear objectives, hold people accountable, and then they get out of the way. Couple these practices with challenging, rewarding work, and the organization ends up with both better results and motivated employees.

“It all comes down to leadership, as opposed to management,” Henman added. “Managers come in all different flavors: good, bad, neutral, ineffective, overbearing, innocuous, and more. But true leaders, by definition, move people to perform at levels that allow them to beat the competition. Moreover, leadership doesn’t necessarily come with a title or a status. Responsibility and accountability come with that title, but leading requires the ability to take people to places they wouldn’t have gone if you hadn’t been in the picture. Leaders who possess this ability offer golden opportunities for their organizations and the people who work in them; those who don’t simply hope for a good golden parachute.”

About our guest author:
Dr. Linda Henman holds a Ph.D. in organizational systems, two Master of Arts degrees in both interpersonal communication and organization development, and a Bachelor of Science degree in communication. For more than 30 years, Dr. Linda Henman has helped executives in military organizations, small businesses, and Fortune 500 Companies define their direction and select the best people to put their strategies in motion. She has helped clients in the retail, financial services, food, medical, hospitality, manufacturing, and technology industries. Some of her major clients include Tyson Foods, Emerson Electric, Kraft Foods, Boeing Aircraft, Estee Lauder, and Merrill Lynch. She was one of eight experts chosen to work directly with John Tyson on his succession plan after his company’s acquisition of International Beef Products, one of the most successful mergers of the 21st Century.

Safety Incentive Plans

When examining your own safety reward program or when building one from scratch, consider the following guidelines:
1. Keep Rewards Small

Material rewards should not be perceived as the major payoff. The promise of incentives and rewards should only serve as reminders to work safely, and delivery of such rewards should be viewed by employees as a token of appreciation for performing the desired safe behaviors. If the focus is on the material reward, then the focus is not on working safely. A good rule of thumb is to try and equate the value of the safe behavior with the value of the reward. Therefore, giving away a $20 gift certificate to everyone who completed their observations for the month might be excessive.

2. Involve Workers

Include as many workers as possible in the construction, selection, and delivery of the reward system. By doing this, buy-in is generated up front and support or lack thereof will be evident early on so changes can be made prior to launching the program. Also, by involving workers, you are more likely to choose appropriate reinforcers rather than having management choose what they THINK workers would like. Here is a great link to an employee survey template.

3. Specify The Behaviors You Desire

Behaviors required to achieve a safety reward should be clearly spelled out and perceived as achievable by participants. If safe behaviors are not specified, then employees will not know what they need to do in order to receive the reward and interest will soon wane. Bad example: Receiving a reward if you haven’t had any accidents in the past year. Good example: Receiving a reward for achieving a percent safe goal for a behavior or set of behaviors on a checklist.

4. Collect Data And Post It

Progress toward achieving a safety reward should be systematically monitored using checklist data, and publicly posted for all participants. If safety performance is not monitored, then it will be impossible to accurately determine which employees deserve the reward.

5. Provide Meaningful Rewards

Carefully determine the rewards given as a part of your program. If employees do not find the rewards meaningful, then the reward program will not be an incentive to work safely. Some organizations have done plant-wide surveys to determine what types of social, tangible, and work process rewards are meaningful to employees.

6. Never Penalize All Group Members For Failure Of One Member

Groups of employees should not be penalized or lose their rewards/incentives for the failure of one group member. Group rewards should be tied to the overall performance of the group, but some control must be in place to assure that each member of the group who gets the reward actually earned it.

7. Give The Reward To Everyone Who Meets The Criteria

You should design a reward program with this principle in mind. If you can’t afford to reward everyone who meets your criteria, you should reinvestigate your criteria. Everyone who meets the behavioral criteria you have specified should be rewarded. Otherwise, some employees who have worked safely will not be rewarded. These employees will perceive they have been punished. Some guidelines to follow:

It is better for many participants to receive small rewards than for one person to receive a big reward. Example: An organization decides to use a lottery incentive program where there is a raffle for a television set, a stereo, or a vehicle; usually participants accumulate chances for the drawing and then at the end of a specified period of time, the drawing occurs. One person wins. The problems with this are:

• Everyone worked safely many times but was not rewarded.
• The person who won did so by chance.
• The focus might be on the big prize, not safety.

One group (or individual) should not be rewarded at the expense of another group (or individual). Everyone should have equal opportunity to achieve the reward. The process by which the incentive is given should not be a formal competition where one group "beats" another. Healthy competition can be very effective in generating high levels of safe performance but be careful not to set up a win-lose situation. Those employees who came close to winning will feel punished because they worked safely, but were not rewarded.

8. Keep The Program Rules Simple

The most successful reward programs are also usually the simplest. The less complicated the program, the better the chances that all workers will understand and participate in it, and that the safe behaviors will occur consistently. Launch the program with a special kick-off event or as part of your behavior-based safety program kick-off event to let everyone know the "rules," and to show that the program has the support of management.

9. Follow Through With Rewards

Nothing kills a reward program quicker than failure to deliver the promised rewards. Make a commitment to follow through with all aspects of the program. It may seem frivolous, but an effective Safe Performance Reward Program can play a very important role in workplace accident prevention.

All of these guidelines can be applied to safety programs that focus on automobile fleet safety, employee safety to control Workers’ Compensation costs and the WC Experience Mod, or customer/3rd party safety as it relates to General Liability.



About our Guest Author:

John Keller is a Certified Risk Manager and consultant with Praxiom Risk Management in Tampa, FL. Praxiom is a full-service outsourced Risk Management consulting firm specializing in Workers’ Compensation safety, loss prevention, claims management, insurance placement, and is comprised of veterans of the risk management and financial services industry. Praxiom works with clients nationwide. Comments and questions are welcome at jkeller@praxiom-rm.com. Click here for John's full bio.

Establishing Incentive Plan Measures: Part 1

In order to appropriately establish measures for a comprehensive incentive plan and determine which core approach will be taken to develop a program, company executives must first understand and embrace a few foundational principles.

These foundational principals boil down to three goals – creation of an incentive plan that not only improves profits but is also drives results and is self-financing (paid for with results realized). These principals pilot two basic approaches that company executives should consider in the development of incentive plan indicators – Profit-Based Allocation and Targeted Key Performance Indicators.

We’ll concentrate on Profit-Based Allocation for this month’s posting, and have Targeted KPI’s to look forward to next time.

Under the Profit-Based Allocation method, a company decides that it will allocate a percentage of annual profits to employees; the award amount is divided among employees based on a pre-determined formula with payouts typically occurring at the end of the year.

A “best practices” framework for a Profit-Based Allocation should address the following issues:

-Define profits, be it net income or another measure
-Establish a baseline upon which contributions to the profit pool will be based
-Identify a threshold to ensure that a certain measure or series of measures will be achieved prior to payments being made
-Select a fixed or tiered percentage to share
-Select an allocation formula to determine how the value will be distributed to participating employees
-Establish a personal performance component to clarify the performance threshold that must be achieved to receive benefits

Keep in mind that since the single focus of Profit-Based Allocation is on annual profits, the value created can lead to some inherent drawbacks. Some examples might be: long term needs are overlooked, individual accomplishments are not recognized and it can be possible to “cook the books” shorterm to impact a bonus. Seeing that this approach has its anchor in company performance, the absence of a strong performance management system or an apathetic workforce can compromise the effort.

Next month we’ll examine Targeted KPIs and how they can lead to improvement in profits.



About our Benefits Installment Author:

James E. (Jim) Moniz, CEO of Northeast VisionLink, a Massachusetts firm that specializes in structuring executive compensation. James E. Moniz is a national speaker on the topic of wealth management and on executive compensation. Jim Moniz will be presenting at this years SHRM conference in Phoenx, be sure to check out our presentation: “Creating and Sustaining a Competitive Advantage, The Role and Impact of Effective Compensation and Rewards Strategies”

I’m paying out $1 million in bonuses for my top five people – what’s in it for me?

October Benefits Installment by Jim Moniz:

When Jack Welsh left GE, he received – and by the way continues to enjoy – a retirement benefit valued at about $ million a year, plus perks. Lots of press attention and much controversy followed, but the reality is Welch’s package amounted to less than 3/100s of 1% of the shareholder value that was created while he was at GE. In fact, his total compensation during Welch’s entire time at the company was less than 2/10ths of 1% of the value created.

OK so what’s my point? The Welch example illustrates a fundamental premise in examining the value of compensation. If you juxtapose Welch’s compensation arrangement with GE’s results during his tenure there, it hardly seems exorbitant…that’s because his “rewards” are being evaluated in the context of the bottom line. While the numbers may not be as dramatic in your business, the same premise and principles still apply. Compensation should drive and be tied to results that are quantifiable and measurable.

Here’s the big question – what are you getting right now for what you’re paying out? You’re getting the current result, whatever that may be. But if the results you achieve this year are not measurably different than what you had last year, what are you going to do next year to drive a different performance level? And how will pay differ in regards to these changes? Growth implies different results and by extension the strategies you’ve used to get current results can’t be the same in the future if a different result is desired or expected. Because compensation is one of the strategic tools in a business’ arsenal to affect change, companies looking to develop different performance results can’t expect to achieve forward motion if their rewards programs don’t match up to their goals.

Let’s break it down a little. If your company sets its target on growing net income by 20% per year over the next three years, you need to ask yourself a few important questions. What part of our compensation and rewards plan communicates that goal to employees? If we achieve or exceed that number how much are we willing to share? Who will get their fair share and then some if we meet our financial targets? To what extent will key employees’ participation fuel this desired growth? In other words, what comes first – growth or employees that are motivated by incentives to create growth?

For growth to occur sustained performance must be achieved…and since these results are largely a function of your key employees, compensation becomes a focus. As a business owner you have to determine the right mix of compensation components. These elements should include a strategic mix of core benefits, executive benefits, qualified retirement plans, supplemental retirement plans, salary, short-term incentives, long-term incentives and long-term equity incentives.

Ultimately the proverbial “rubber meets the road” when a rewards plan prompts employees to rise to a higher level of performance. For rewards to be effective they have to create increased focus on the part of participating employees – this focus is a direct result not only of financial reward, but also of a positive work environment and the path that you, as company owner, have drawn for their personal and professional development. Remember, money may be motivating, but so is an atmosphere where a culture of confidence exists.

At the end of the day, compensation can only do its part in changing results within an organization if the model and the compensation plan are understood and valued, results are achievable, and if employees are committed and feel a sense of ownership.

Results must also be concrete and measurable and communicated regularly. If these elements fall into place you will know that you’re paying your key people appropriately and you will also know what you’re getting in return.

About our Benefits Installment Author:

James E. (Jim) Moniz, CEO of Northeast VisionLink, a Massachusetts firm that specializes in structuring executive compensation. James E. Moniz is a national speaker on the topic of wealth management and on executive compensation.

Jim Moniz will be presenting at this years SHRM conference in Phoenx, be sure to check out our presentation: “Creating and Sustaining a Competitive Advantage, The Role and Impact of Effective Compensation and Rewards Strategies”

Competitive Advantage: becoming the “big dog”

Special September Benefits Installment by Jim Moniz

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It’s a childhood memory that most of us share…the loud bark of the snarling neighborhood dog that would come out from no where and scare the “you know what” out of you every other time you walked or rode your bike down “his” street. Chances are you eventually became weary of the scenario and decided to avoid the the big dog at whatever cost, first by avoiding the street then consequently the dog’s neighborhood altogether.

That “big dog” concept continues its chase in the business world. If you have the competitive edge, you have the advantage over others who fearing your loud and well-defined “bark” will retreat, leaving you to reap the business benefits of being “top dog.”

So, how do you become the “big dog” and get that competitive advantage? Competitive advantage is achieved when a business produces surplus profits - greater than it's competitors - due to unique product pricing or resource advantages. As a result, its profitability is greater than the average profitability of all other businesses competing for the same set of customers

The advantage, however, goes to those organizations that can achieve a sustainable competitive advantage. This implies that a business's strategies enable it to maintain above-average profitability for a number of years. This is typically achieved through the creation and execution of processes, positions and/or propositions (as in value proposition) that are difficult if not impossible to duplicate.

Businesses pass the competitive advantage threshold by attracting and retaining great people and then nurturing a unique culture - one that demonstrates passion, executes with consistency, perpetuates success, breeds confidence and rewards performance.

Companies that achieve this start with and build upon a foundation of mission, values and vision that are reinforced by, in and through every aspect of their business plan. As a result, they commonly enjoy a shared value system with their employees - because both are clear about, and compelled by, the direction the company is headed, how it's going to get there, what is expected of everyone and how each will be rewarded for the company's success.

In their book, Strategic Management, Charles W. L. Hill & Gareth R. Jones offer the following insights about organizational culture. Their insights are key to linking the ability of a company to enjoy a competitive advantage in the market place with building compensation strategies that will correspondingly fuel the performance needed to achieve that outcome.

Organizational culture is " ...the specific collection of values and norms that are shared by people and groups in an organization and that control the way they interact with each other and with stakeholders outside the organization..."

"Organizational values are beliefs and ideas about what kinds of goals members of an organization should pursue and ideas about the appropriate kinds or standards of behavior organizational members should use to achieve these goals..."

"From organizational values develop organizational norms, guidelines or expectations that prescribe appropriate kinds of behavior by employees in particular situations ..."

The key word in this quote is "behavior." For a business to achieve the results associated with a competitive advantage it needs the right people consistently doing the right things in the right way and for the right reasons. As a result, any rewards system that is built must, at its core, encourage a focus on the right performance factors and reward their execution. This is how results are achieved and sustained.

Larry Brody and Ram Charan, in their book Execution, put it this way:

"A business' culture defines what gets appreciated, respected, and, ultimately, rewarded; those rewards and their linkage to performance are the foundation of changing behavior. If a company rewards and promotes people for execution, its culture will change. However your organization determines rewards, the goal should be the same - your compensation and reward system must have the right yields. You must reward not simply on strong achievements on numbers, but also on the desirable behaviors that people adopt. Over time, your people will get stronger, as will your financial results."

With the aforementioned principles in mind, consider the impact on your company's ability to achieve a competitive advantage in the marketplace if your culture demanded the following in its efforts to attract and retain great people:

• Only talented, committed and focused people "need apply"
• No entitlements (people are only rewarded for achieving well defined performance standards)
• All employees must think and behave like owners

Such a culture needs a rewards system that reinforces those standards and that attracts the right "fish" to the "pond". That said, the rewards framework needs to be built in harmony with the strategic, operational and performance management systems of the company for a competitive advantage to ultimately be achieved.

The pathway that a company needs to take to achieve a competitive advantage starts with a foundation of mission and values, out of which grows the company vision. At this stage, a company must clearly define why it exists, what it stands for and what it values. Correspondingly, it must build a compatible total rewards foundation and philosophy consistent with the ends it seeks to serve. The company vision is fulfilled only through a well designed strategic plan. That plan is matched on the rewards "side" with a Compensation and Rewards Game Plan that envisions pay for performance programs that will support and reinforce the company's strategy.

Execution of the company's strategy is key to its success. Capital and cash flow need to be managed, marketing initiatives need to be crafted and launched, operations need to be well executed, superior products or services need to be developed, and excellent customer service needs to be rendered. All of these functions depend upon the applied intelligence of a dedicated workforce. As a result, these elements need to be reinforced by compensation strategies that are effectively engineered and tied to roles and expectations that are well defined and communicated.

Through this combined confluence and application of business ideals, organizational architecture and rewards processes and systems, a company ultimately experiences success and builds a culture of confidence.

Rewards reinforcement strategies work hand in hand with performance management systems to elevate that success and create true "line of sight" in the organization. Such a company has unleashed the lifeblood of a competitive advantage.

Ultimately, companies that enjoy a competitive advantage in the marketplace don't just initiate a Compensation and Rewards system. They sustain them. Their ability to do so is dependent in part on the way in which they identify the issues and problems they face and then address them according. We classify these issues in the following categories. In asking the questions associated with each category, a business can better assess its area of greatest priority in dealing with its compensation development.

Future

• Are employees compelled by the future of the organization?
• Is there a belief in the business strategy of the company?
• Are there opportunities for personal and professional growth and development?

Foundation

• Is there an alignment between the compensation philosophy of our company and its mission, values and vision?
• Do we have a rewards value proposition that has attraction capacity - that will help us recruit and retain great people?
• Is there an ownership mentality throughout our organization?
• Framework
• Are we achieving an efficient return on our compensation investment?
• Is our compensation program properly balanced between long and short-term rewards and guaranteed versus incentive compensation?
• Have we established clear performance standards for the achievement of rewards in the organization?
• Focus
• Have we created "line of sight" in our organization between the vision and strategy of the company and the roles, expectations and rewards we have and provide for our employees?
• Do we have a rewards reinforcement strategy in place that keeps employees focused on the expectations we have of them and how they will be rewarded for performance?
• Are we consistently achieving the desired results we want from our employees?

A competitive advantage in the marketplace begins and ends with getting and keeping the right people "on the bus" as stated in Jim Collin's seminal book, Good to Great. Once in place, a culture of confidence needs to be nurtured and achieved through consistent execution of key results emanating from the vision and strategic plan of the business. Such a pattern of execution is achieved, in part, by developing an aligned rewards philosophy and Game Plan, then envisioning, creating and sustaining great compensation strategies.

Best of luck in becoming the”big dog”!

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About our Benefits Installment Author:

James E. (Jim) Moniz, CEO of Northeast VisionLink, a Massachusetts firm that specializes in structuring executive compensation. James E. Moniz is a national speaker on the topic of wealth management and on executive compensation.

Jim Moniz will be presenting at this years SHRM conference in Phoenx, be sure to check out our presentation: “Creating and Sustaining a Competitive Advantage, The Role and Impact of Effective Compensation and Rewards Strategies”

Steps to a Great Incentive Plan

July Benefits Installment by Jim Moniz

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A performance based incentive plan is one element of compensation that most companies recognize as vital to the remuneration mix, but developing such an effective program requires some thought and effort.

To get things moving, you first have to define the specific goals of an incentive plan – are you seeking increased sales, improved customer retention, certain margins? Before you put a rewards strategy in place understand what you’re trying to achieve.

Once key result areas have been determined, identify which employees are best positioned to make these results happen; not every employee will be able to fulfill these initiatives.

Next comes quantifying the value created if incentive objectives are met – in other words, what will be the financial result for shareholders? This process typically requires construction of a model that projects base, target and superior result thresholds.

Once the economic value has been determined, you have to figure out the amount you will share with those employees who helped create the upswing.

First determine an acceptable “target” pay-for-performance return and then earmark an achievable “superior” return. Once those two measures are identified you can better establish an incentive goal.

The next step is to determine a standard that defines the potential value in current terms. The potential reward, then, might be stated as a percentage of contributors’ current salary – of course, the big question is the percentage amount. Incentive plan targets that combine the short and long term will likely be in the 60% to 80% of salary range for top managers and between 40% and 80% for second tier managers.

Establishing tiers comes next. After all, not everyone had an equal part in creating increased value. A business needs to define tier levels and assign participating employees – by establishing different tiers you can assign greater potential value to those who will have the greatest impact.

Weighting – or determining how much of a reward should be assigned to the achievement of various categories of expectations – is the sidekick to the tier concept. Weighting should be based on how much of an employee’s role impacted categories.

Determining allocation is the next step. You need to decide when awards will be paid out…at the end of the quarter, end of year and/or sometime down the longer road. Typically, a percentage of total incentives are paid annually and a percentage rewarded in the future.

The final step deals with the long-term portion of the incentive plan. This could take any number of forms. For instance, it could be held in a pool; credited with interest or investment earnings; or treated as a stock or phantom stock incentive.

With this type of incentive program in place, shareholders know the precise value accrued before managers earn incentives; they know the percentage of future growth shared with the management team; and they also know managers will be rewarded for achieving specific and measurable results.

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About our Benefits Installment Author:

James E. (Jim) Moniz, CEO of Northeast VisionLink, a Massachusetts firm that specializes in structuring executive compensation. James E. Moniz is a national speaker on the topic of wealth management and on executive compensation.

Performance, Compensation and the Recession

June Benefits Installment by Jim Moniz

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One of the key characteristics of companies that move ahead while others are falling behind is the ability to turn obstacles into opportunities.

High performance organizations that advance, even in the wake of a recession, have the foresight and courage to make seemingly counter-intuitive decisions during difficult economic cycles. Companies that adopt this strategic approach can discover opportunities during times when competitors are in defensive mode.

For example, during recessionary periods, high performance companies recognize and take advantage of the following:

• Weaker competition will fade away, creating opportunities to acquire higher market share
  
• Top talent becomes more available in the marketplace and typically at more affordable salaries
  
• Capital expenditures can be re-focused in anticipation of recovery
  
• Acquisitions prospects become more accessible
  
• A challenging economy often forces a company to look closely at it’s compensation structure and subsequently revamp it, positioning the organization more positively not only during the recessionary period but also following it
  

Savvy companies recognize that in both good times and bad times, the ultimate key to success is their talent pool. Likewise, they are also well aware that it is precisely at the trough of a recession that the labor pool will be at its deepest and wage pressures at their lightest.

Regardless of the economic climate, the highest performance organizations look to hire those they believe will commit to the company’s vision and strategy – in other words they want top talent with an ownership, not an entitlement mentality.

So, what type of compensation package does top talent respond to?

The most talented individuals want to participate in an opportunity that rewards them for their performance – they want to clearly see a relationship between how they perform and how they are compensated.

Top-tier employees also recognize and respect the balance that inherently exists between guaranteed and incentive compensation and long-term versus short-term pay. They understand the economic outcomes the company needs to achieve for sustainability and growth and furthermore they are aware that current economic conditions will impact the shape and form compensation will take now…a shape and form that may shift when times are better.

While top talent may be willing to take a little less in their paychecks when jobs are scarce, in general terms a compensation structure that will attract high echelon workers will address the primary needs of sustainable cash flow; security; and wealth accumulation.

Understanding these elements, a company must formulate a compensation philosophy that not only addresses current economic cycles, but takes the longer range into consideration. The compensation philosophy of a high performance company typically includes market salaries; upsides/bonuses for exceeding annual expectations; long-term wealth accumulation opportunities; a flexible benefit structure that bends and shifts to both strong and weaker economic years.

Compensation philosophies of this ilk can absorb adjustments as the company faces various challenges, recessionary or otherwise. For example, when business is on an upward trend, salaries are at or are even slightly above market; short-term incentives are equal to percent of salary; and long-term awards are based on market guidelines. Conversely, when business is trending down, salaries are at or slightly below market; short-term incentives are minimal; and long-term awards are higher than market levels.

Businesses that adopt these compensation philosophies have the capability of interjecting practical solutions when the economic flow is downward.

For example, during recessionary periods, a company with a thoughtful compensation philosophy may offer “sabbatical” leaves to certain employees instead of a cut and dried layoff. Such a leave will reduce or suspend salary, but keep employees eligible for long-term benefits and wealth building programs.

Tiered pay cuts, as opposed to the feared “reduction in force” are another approach to cutting costs, while retaining key employees during challenging economic times. Top quality team players will recognize these adjustments in salaries as a necessary means to maintain jobs.

And during poorer performance cycles, a company might eliminate bonuses or raises, instead granting additional stock options.

Ultimately, companies, regardless of the shape of the economy, must have exceptional people on staff – employees who are aware that shifting financial circumstances may redefine their compensation and short term rewards, but who have the desire to maintain their focus within the organization knowing that the pendulum will eventually swing back toward better times.

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About our Benefits Installment Author:

James E. (Jim) Moniz, CEO of Northeast VisionLink, a Massachusetts firm that specializes in structuring executive compensation. James E. Moniz is a national speaker on the topic of wealth management and on executive compensation.

Executive Compensation as a Strategic Tool

As part of our series of articles by exceptional HR professionals, today we present article by a new guest author, Jim Moniz.

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With the year 2008 gone and its legacy of a weakened economy and even the most understated financial pundits already designating 2009 as volatile, many companies are reevaluating their business plans and shifting into survival mode. While attracting, retaining and motivating key employees are vital to the success of any business, the current economic environment may be the ideal time to re-think executive compensation measures.

The days of the “holiday bonus” may soon be by gone as companies – both private and public – progressively recognize there are other, more creative vehicles that can serve as incentive for retention. For instance, that annual check bestowed during the office holiday party is a short-lived and anticipated incentive and once received, what’s to stop employees from moving on to newer landscapes? This yearly “reward” come the end of December or the fiscal year is often looked upon as part and parcel of salary, essentially diminishing the true definition of performance incentive – and while the intention may be good, this type of across the board reward mechanism can alienate certain employees whose performance is consistently outstanding.

By creating a business environment that fosters achievement and implements long-term incentive programs, the loss of vital employees whose skill and knowledge are fundamental to the overall success of a company may be avoided.

For example, deferral plans are fast becoming a popular executive benefit, since they allow for pre-tax contributions that mirror 401(k) contributions lost under limitation rules. A deferral plan is the bonus that keeps on giving year-round as it allows employees to reduce their current income tax liability and watch their funds grow tax-deferred. In addition, the employer can make matching contributions to cover those contributions not allowed under a 401(k) plan, making the deferral plan a genuine incentive for longevity within a company.

Phantom stock is another incentive that can be tied exclusively to performance. Simply put, phantom stock is a promise to pay a bonus in the form of the equivalent of either the value of company shares or the increase in that value over a period of time. The most essential element of this incentive approach is its long-term understanding. Also, phantom stock plans are not tax-qualified, and as such not subject to the same tax rules as 401(k) plans. A company can promise a new and valuable executive this durable bonus every three or five years or over a longer period of time, making it attractive to remain for an extended run.

Another form of executive bonus is the performance unit – an offer to pay an executive a sum of cash at the end of a long-term performance period. The amount of a performance unit is based on attainment of certain pre-established financial objectives of the company. Some may define this brand of incentive as the ultimate performance carrot, as it consistently encourages an executive employee to tie his or her individual success into that of the company.

Company stock options are another form of incentive compensation appealing to many executive level employees. The amount of equity can be tied to the number of years in service, translating into potentially high returns for employee longevity.

It must be said that there are occasions when a well-timed “spontaneous” reward can be worth its proverbial weight in gold. A check for a modest amount in the aftermath of a key company success can go a long way toward providing management team members with a sense of company loyalty.

Finally, don’t discount other, more imaginative approaches to executive compensation. Options that should be considered are life insurance programs, health-club memberships, tuition reimbursement, flexible hours, and the leeway to work from a home office on occasion.

Ultimately, incentives should be connected to a company’s broad mission and scope of values. Companies must create an environment that fosters success and incentives should be tied to that success. Failure to keep an eye on that goal may result in lack of motivation for certain key employees, whose performance or lack of performance can make or break a business.

An effectively designed executive compensation program impacts the overall success of a company. A well integrated compensation arrangement can assist in promoting the core values of a company and help it along the path to continued success.

About our Guest Author:

James E. (Jim) Moniz, CEO of Northeast VisionLink, a Massachusetts firm that specializes in structuring executive compensation. James E. Moniz is a national speaker on the topic of wealth management and on executive compensation.