Time is a consideration with incentives in compensation management

by on July 2, 2009 · 0 Comment POSTED IN: HR Info Center

Timeline for long-term incentives in compensation management

Depending on the ownership structure and depending on how the compensation management program has been drawn up, time may or may not be a consideration

Three types of long-term incentives in compensation management.
The first is based on business performance. Generally, we use about a three-year performance period in order to assess performance and make a pay out as part of the compensation management strategy.. Once you start to get much beyond the three-year performance period, it’s tough with comfort to be able to judge how well we’re going to do, and what we should be shooting for.

The performance criteria in compensation management are generally based on either business operating objectives, financial returns over a three-year period, cumulative earnings over a three-year period, or in some cases – in some industries have embraced this –total shareholder return. How much did we earn for our shareholders between stock price and dividend payouts over the performance period? In many cases that’s done on a – mostly it’s done on a relative basis of how did we compare against the other people in a comparative group that we formed? Some cases it’s an absolute assessment.

Most of these business performance based compensation management strategies use vesting at the very end of the performance period. What that means is if you quit before the end of – or you’re terminated during the performance period – you’re probably not going to get anything. You’ll have probably left any (gains) there on the table. Generally, you have special provisions in place for death, disability or retirement, but that’s part of the design that you’ll look at as you’re putting it all together. And in these cases, payout may be in cash and very often payout may be in stock of the company if it’s a public organization.

Edited remarks from the Rapid Learning Institute webinar-Executive Compensation: What Worked and What’s Fair by Steve Hall

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