Trends in the use and size of executive long-term incentives
I was recently asked by a client about the use and size of long-term incentives (LTIs) when applied to executive positions below the top level of the organization (Chief Executive Officer). To help answer that question we referenced information from a nationally-known survey of executive pay practices—The Towers Watson survey. Our findings are briefly discussed below.
Long-term compensation plans are unique pay arrangements generally reserved for senior executives. These plans are designed to both retain top executives for the long-term and also allow top (and other select employees) to share in long-term enterprise success with stockholders or other stakeholders.
Long-term incentives are generally paid for multi-year (three years or more of) performance. They typically use performance/pay vehicles such as stock options or restricted stock in for-profit companies, and cash-valued arrangements in other firms or institutions.
The use of long-term incentive vehicles for the retention of services is generally reserved for a handful of top executives—often the CEO and their select direct reports. On the other hand, using long-term incentives for “enterprise-success sharing” is more widely used amongst executives, managers or other employees. So while long-term incentives can be experienced anywhere in the organization, they are most often highly focused on senior executives—where both retention and success-sharing objectives are readily achieved
To answer our client’s inquiry, we looked at the prevalence of long-term incentive usage at various levels of executive (CEO through select functional executive [say VP]), and the comparative value of those LTI annual awards.
As a practice, executive participation in such plans is common at the CEO level and with their key direct reports—such as Executive Vice Presidents (e.g.: CFO),but then drops rapidly below these levels. This finding is very supportive of our experience with historical LTI eligibility.
However the biggest differentiator found amongst executives occurs in the size of LTI awards where the value of annual awards can drop 50% (or more) from level to level, below the CEO.
The table below (drawn from recent 2010-11 survey data) Demonstrates these findings by organizational level.
What does this analysis say? We suggest you take away two conclusions as you look at the use of long-term incentives with your executive team.
- It is very common to offer long-term incentives to the top-2 levels of the organization—both to the CEO and the jobs directly below them. Below that level, inclusion is often the exception.
- The CEO will always get the lion’s share of LTI award value—nearly double that of anyone else in the organization.
This is a clear case where less is more. Put your value-creation chips on key players and let them do their thing. That is an easy decision. Expanding LTI’s below top jobs should be very carefully considered and justified based upon need and dilution. In the end, most decide not to do so. Are your needs and objectives different? We doubt it.