Executive compensation solutions are both unique and complex. There are three main challenges in designing effective executive compensation programs.
- The first is to carefully balance and understand the needs of other owner and executive.
- The second is to choose the “right” pay vehicle and measures of performance which will drive the desired strategic goals.
- The third is to build a program which will endure the long-term for many of these plans can last ten years or more.
Wilkening & Company has built a solid and tested process to build successful executive compensation programs. These programs have included both cash, equity and equity-like vehicles.
Phantom Stock or SARs
Phantom stock is the use of a long-term cash incentive compensation system to allow a privately-held firm to allow its key employees to share in the growth in value of the company for which they work. These types of plans are designed to be substitutes for stock option plans in private companies. Hence, a private company can gain the benefits of stock options—primarily key executive retention and “ownership thinking” which can come from a well-designed stock option or phantom stock plan. Phantom stock plans are also often called “stock appreciation rights” or SARs.
When a privately held company considers the use of phantom stock there are a number of decisions to consider. Some of these are:
- What key executives should be eligible for such a plan?
- What share of future company value is the firm willing to share with its key executives?
- How will the company determine current and future company value?
- How long should such a plan last?
- What is a fair and reasonable reward for the eligible executives at the end of the plan period—say 10 years?
- Over what period and in what amounts should executive awards vest?
- How will the firm allocate funds to pay its executives their earned share of company value increase?
Wilkening & Company has assisted clients with the addressing each of the above questions to design and implement phantom stock or SAR compensation plans.
One of the most widely used and desired compensation vehicles today is stock options. This tool is being used by both public and private corporations to attract and retain the type of talent needed to drive the company to the highest levels within its industry. Options are now used for executives and other other employees. Wilkening & Company has developed expertise and tools in the application and analysis of options to specific client needs. This includes extensive long-term simulation methodologies, valuation techniques (including economic value-added), and peer group analyses designed to determine appropriate option practices.