As the above examples show, there's no question that the executive compensation plans form a crucial part of the overall business strategy for every firm.
Depending on the company's size, stage in the business cycle, idiosyncracies of the sector in which it operates, competitive challenges, external conditions and black swans in the form of the pandemic or energy crises, as well as internal visions and goals, the executive compensation structure and plan vary.
Yet, if used well, the executive compensation package can shield against the negative factors and foster an environment conducive to long-term growth while simultaneously conditioning actions critical in the short-term.
Executive Compensation should be designed thoughtfully to incentivize the appropriate level of risk taking that align with the company’s objectives, and yield the best outcomes for shareholders and other stakeholders, in the short term and long term. If it is too highly leveraged and variable in nature, it could lead to excessive risk-taking, and if it heavily indexed towards guaranteed pay, it may deter innovation and growth.
Rekha Gurnani Chowdhury
Head of Compensation & People Analytics at Box, Wharton Executive MBA Candidate
Employee retention is one of the essential purposes behind the package design that resurfaces in the above-analyzed examples. Great Resignation has not passed the upper echelons of the management by. Quite the opposite. The fierce fight for executive talent is acutely felt by most companies, notably smaller businesses in Silicon Valley, experiencing dynamic growth and wishing to sustain that trajectory. AirBnB, LendingClub, InPost, and Beyond Meat all formed plans where competitive, above the median awards suited to the geographical location, and frequent equity payouts help them successfully vie for and keep key employees.
At the same time, the right amalgam of short-term incentives and LTIPs furnished with key performance metrics steers the decision-making in the direction aligned with the stakeholders and ultimately supports the creation of long-term value.
They also encourage the proper response in the face of changing winds. The Covid-19 pandemic particularly hit firms such as Inditex, AirBnB, and Beyond Meat. Some of them, such as Beyond Meat, discovered that their package doesn't provide the needed level of protection and had to seriously reshape their executive compensation plans in response to the calamity.
On the other end of the spectrum, tech giants fostering unconstrained innovation use executive compensation plans to create an unconstrained environment conducive to experimentation and testing creative ideas. Reduction of the plans solely to variable pay in the form of equity-heavy LTIP awards with unusually long vesting schedules and a single performance metric - the stock price - nurtures the right conditions and builds the ownership structure securing Tesla, Amazon, and the likes' position as market leaders long-term.
Those wanting to join their score need to ensure that their executive compensation plans are competitive and crafted to the particular needs, goals, business stage, and environment in which they operate.