The trend toward incentive-based, long-term compensation has increasingly strengthened as companies seek to align shareholder, management, and executive interests, especially in light of the financial crisis of 2008. Privately held companies face a unique challenge because they are not in a position to easily offer stock options as a means of a long-term incentive plan; although possible, it is both cumbersome and dilutes the owners’ control of the company. We have identified two alternative means of providing incentives to managers and executives: deferred compensation and the use of perquisites. In addition, we provide a closer at look at the impact and efficacy of the trend toward incentive-based pay on employee and business performance

Calder, Jane

Shah-Hosseini, Suzanne

English

The trend toward incentive-based, long-term compensation has increasingly strengthened as companies seek to align shareholder, management, and executive interests, especially in light of the financial crisis of 2008. Privately held companies face a unique challenge because they are not in a position to easily offer stock options as a means of a long-term incentive plan; although possible, it is both cumbersome and dilutes the owners’ control of the company. We have identified two alternative means of providing incentives to managers and executives: deferred compensation and the use of perquisites. In addition, we provide a closer at look at the impact and efficacy of the trend toward incentive-based pay on employee and business performance.What_are_the_most_effective_executive_compensation_strategies_for_levels_not_eligible_for_long_term_incentive.pdf: 3355 downloads, before Oct. 1, 2020

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What are the Most Effective Executive Compensation Strategies for Levels not Eligible for Long Term Incentive?

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What are the Most Effective Executive Compensation Strategies 
for Levels not Eligible for Long Term Incentive? 
Jane Calder 
Cornell University 
Suzanne Shah-Hosseini 
Cornell University 
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What are the Most Effective Executive Compensation Strategies for Levels not 
Eligible for Long Term Incentive? 
Abstract 
The trend toward incentive-based, long-term compensation has increasingly strengthened as companies 
seek to align shareholder, management, and executive interests, especially in light of the financial crisis of 
2008. Privately held companies face a unique challenge because they are not in a position to easily offer 
stock options as a means of a long-term incentive plan; although possible, it is both cumbersome and 
dilutes the owners’ control of the company. We have identified two alternative means of providing 
incentives to managers and executives: deferred compensation and the use of perquisites. In addition, we 
provide a closer at look at the impact and efficacy of the trend toward incentive-based pay on employee 
and business performance. 
Keywords 
human resources, executive compensation, work incentives, compensation strategies 
Comments 
Suggested Citation 
Calder, J. & Shah-Hosseini, S. (2013). What are the most effective executive compensation strategies for 
levels not eligible for long term incentive? Retrieved [insert date] from Cornell University, ILR School site: 
http://digitalcommons.ilr.cornell.edu/student/34/ 
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Jane Calder and Suzanne Shah-Hosseini 
April 23, 2013 
Executive Summary 
Executive Compensation Strategies 
Question 
What are the most effective executive compensation strategies for those levels not eligible for long term incentives 
but who are looking for more than a traditional fixed and variable pay program? 
 
Introduction 
The trend toward incentive-based, long-term compensation has increasingly strengthened as companies 
seek to align shareholder, management, and executive interests, especially in light of the financial crisis of 
2008i.  Privately held companies face a unique challenge because they are not in a position to easily offer 
stock options as a means of a long-term incentive plan; although possible, it is both cumbersome and 
dilutes the owners’ control of the company.  We have identified two alternative means of providing 
incentives to managers and executives: deferred compensation and the use of perquisites.  In addition, we 
provide a closer at look at the impact and efficacy of the trend toward incentive-based pay on employee 
and business performance.   
 
Key Consideration: Does Executive Pay Really Work? 
A 2012 study by PwC and the London School of Economics of 1,106 executives from 43 countries 
provides interesting insight into the effectiveness of long-term incentive-based compensation plans 
(LTIPs).  The key findings from the study are as follows: 
 
o Executives discount the value of deferred pay by 50 percent, on average for the course of the deferral.  
This finding begs the question, are you really paying for performance if the award is de-valued by the 
executive so significantly?  Moreover, these plans are typically more costly to the employer, with 
companies paying 10% more to award pay as a bonusii.     
 
o Variation exists among executive demographic groups in terms of how they view risk, recognition, and 
perceptions of pay fairness, so flexibility in pay programs is essential for success. Research suggests the 
role of the executive is important, too.  For example, for sales executives, some research suggests that 
as profit margins and sales fluctuate over the life cycle of a product, so too should the compensation 
strategy.  BI should consider aligning the Variable & Performance-Related Reward (VPR) component 
with the various stages of the Product Life Cycle (PCL).  While this study pertained to sales employees, 
it merits further consideration of how BI’s compensation policies align with the timeline for Research 
Executivesiii.    
 
o Despite the fact that less than 50% of executives view their LTIP as effective, two-thirds of the 
participants want to participate because of the status and recognition associated with the plansiv.  One 
way for BI to respond to the finding that executives value LTIPs because of the recognition factor is to 
strategically use perquisites, as explored below in more detail.  
 
Solution #1: Deferred Compensation Plans 
Nonqualified deferred compensation plans (NQDC) are arrangements under which employers agree to 
compensate employees later for services performed now.  Compensation is usually deferred for 3-5 years, 
although it may be until after an employee has ended employment or retiredv.  To be considered a NQDC 
plan, the plan must meet certain criteria: the employee must not be in constructive receipt of the amount 
promised (no right to accept or decline benefit), the employee does not receive an economic benefit from 
the compensation (for example, use as security for a loan), and a substantial risk of forfeiture must exist 
as executive’s ownership is contingent upon meeting certain conditions or goalsvi.  
A NQDC plan can be created for an individual, or offered to a specific class of employees. This flexibility 
permits the employer to tailor criteria for awarding the deferred compensation to fit the strategic goals. 
Criteria may be tied to performance, such as reducing cost or increasing profit by a predetermined 
amount, or may be less specific, such as a non-compete clause. 
 
Advantages to Employer: 
○ Flexibility in plan design, including ability to establish specific criteria  
○ No need to fund plan until payment is actually made, freeing capital for other priorities 
○ Advanced knowledge of exact value of benefit 
Advantages to Employee: 
○ Ability to defer compensation reduces tax liability 
○ Predictability of benefits 
○ Ability to determine timing of payment of benefits 
○ Advance knowledge of exact value of benefit  
○ Timeline is variable, so employee has ability to determine length of deferral.  The timeline can be 
rather short, or can be tailored to a specific goal (for example, purchasing a new home or funding 
college expenses). 
 
Solution #2: Reconsider perquisites as an incentive and competitive strategy 
o We note that benefits are already a component to BI’s total compensation approach, however we take 
a closer look at their efficacy and new forms of use.  According to a study by Equilar, 2012 CEO 
perks packages rose 18.7 percent in 20121, despite increased scrutiny from shareholders and the 
media.  While BI is not subject to say-on-pay votes, this trend is important for benchmarking as well 
as understanding the important motivating role that perquisites can play.  Perquisites are “privileges 
granted to employees in addition to their salaries and benefits, which make the job more enjoyable for 
an employee.” Recently, companies are expanding the scope of perks from company cars and 
vacations to include ways to allow employees to customize their employment arrangement.  Unlike 
health benefits, for example, perks are most effective when they are perceived to be scarce and when 
Management has discretion over how they are allocatedvii. For example, with their “Blue Sky” 
program, Apple is following Google’s path of allowing employees to spend time on an innovative 
project of their choosing.  The use of this type of perk is powerful in that it places importance on 
intrinsic work values, increases employee loyalty, and serves as a form of recognition for key 
executive talentviii.  BI’s corporate values state “Value Through Innovation”, thus the compensation 
                                                          
1 Data for non-CEO Executive perks packages was not available, but we have included the CEO statistic 
to illustrate a current trend.   
plans should be structured around encouraging innovation, with the right balance between risk, 
rewards, and autonomyixx. 
 
Employee values and their generational cohort should be considered when designing pay programs: 
o It is critical to understand the employee’s perspective and values when designing compensation plans.  
Work values have been defined as, “the outcomes people desire and feel they should attain through 
work”, which influence an employee’s attitude, behavior, career decisions, and problem solving 
ability.  Research suggests that Generation X employees consider intrinsic work values: the learning 
opportunity, opportunity to be creative, and process of work to be more important than extrinsic work 
values, which include the consequences or outcomes of work, such as income, status, and job 
advancement opportunities.  Accordingly, strategies used to attract and retain executives should 
include the opportunity for increased autonomy, decision-making, and career development.  
Surprisingly, increased job satisfaction is so important that US executives were found to be willing to 
give up pay for fulfillment by accepting a 35% pay cutxi.  It is important to note, however, that 
employee work values differ among generations, so BI should contemplate different strategies for 
recruiting and retaining different generations of workersxii.    
 
Conclusion 
Although privately-held companies face additional challenges to offer competitive compensation, there 
are alternative means to achieve this.  Deferred compensation and perquisites, when used strategically, 
can serve to incentivize employees and to enhance a competitive total compensation package. 
 
Works Cited 
 
PricewaterhouseCoopers, LLP.  Making Executive Pay Work: the Psychology of Incentives (2012).     
 
1 Making Executive Pay Work: the Psychology of Incentives (2012).  PricewaterhouseCoopers, LLP.   
1 Madhani, Pankaj M. "Restructuring Fixed and Variable Pay in Sales Organizations: A Product Life 
Cycle Approach." Compensation & Benefits Review 43.4 (2011): 245-58.  
1 PricewaterhouseCoopers, LLP.  “Making Executive Pay Work: the Psychology of Incentives.” (2012).   
 
1 Executive Compensation. (2013). (Bloomberg BNA) Retrieved from HR and Payroll Resource Center: 
http://hr.bna.com 
 
1 Cossack, N. (2011, December 29). Designing Executive Compensation Plans. Retrieved from Society 
for Human Resources Management: www.shrm.org 
 
1 Knowledge @ Wharton.  “A Recession for Perks?  What Companies Offer and What Employees Want.” 
(2011).   
 
1 Knowledge @ Wharton.  “iPerks: Apple, Like Others, Takes Stapes to Woo Employees”.  (2012).   
 
1 Hunt, M.  “Use Compensation to Inspire Innovation.”  Society for Human Resource Management 
(2012).   
 
1  Conlin, Michelle. "THE CASE FOR UNEQUAL PERKS. (Cover Story)." BusinessWeek.4124 (2009): 
54-5. 
 
1  PricewaterhouseCoopers, LLP.  “Making Executive Pay Work: the Psychology of Incentives.” (2012).   
1 Twenge, Jean M., et al. "Generational Differences in Work Values: Leisure and Extrinsic Values 
Increasing, Social and Intrinsic Values Decreasing." Journal of Management 36.5 (2010): 1117-42.  
                                                          
i PricewaterhouseCoopers, LLP.  Making Executive Pay Work: the Psychology of Incentives (2012).     
 
ii Making Executive Pay Work: the Psychology of Incentives (2012).  PricewaterhouseCoopers, LLP.   
iii Madhani, Pankaj M. "Restructuring Fixed and Variable Pay in Sales Organizations: A Product Life 
Cycle Approach." Compensation & Benefits Review 43.4 (2011): 245-58.  
iv PricewaterhouseCoopers, LLP.  “Making Executive Pay Work: the Psychology of Incentives.” (2012).   
 
v Executive Compensation. (2013). (Bloomberg BNA) Retrieved from HR and Payroll Resource Center: 
http://hr.bna.com 
 
vi Cossack, N. (2011, December 29). Designing Executive Compensation Plans. Retrieved from Society 
for Human Resources Management: www.shrm.org 
 
vii Knowledge @ Wharton.  “A Recession for Perks?  What Companies Offer and What Employees Want.” 
(2011).   
 
viii Knowledge @ Wharton.  “iPerks: Apple, Like Others, Takes Stapes to Woo Employees”.  (2012).   
 
ix Hunt, M.  “Use Compensation to Inspire Innovation.”  Society for Human Resource Management 
(2012).   
 
x  Conlin, Michelle. "THE CASE FOR UNEQUAL PERKS. (Cover Story)." BusinessWeek.4124 (2009): 
54-5. 
 
xi  PricewaterhouseCoopers, LLP.  “Making Executive Pay Work: the Psychology of Incentives.” (2012).   
xii Twenge, Jean M., et al. "Generational Differences in Work Values: Leisure and Extrinsic Values 
Increasing, Social and Intrinsic Values Decreasing." Journal of Management 36.5 (2010): 1117-42.  
 


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