The Advisors' Blog

It has been a difficult hiring market for employers over the past several months, and this is equally true for executive talent. Meridian notes that traditional retention approaches are obsolete, and lists several tasks that may help your company get ahead of the curve on retaining and recruiting executive talent today – below are some of the highlights:

– Structure effective packages for new hires and promotions. Our experience suggests that companies often overpay outside hires to attract the candidate, and underpay internal promotions because the increases are large enough that it is not necessary to come all the way up to the market median. It also is common to focus on the individual packages rather than on broader internal pay relationships and equitability. All of this needs to be avoided.

– Leverage long-term incentives to increase real pay delivery for outperformance. A strong business strategy that provides opportunity for compelling real, earned pay from equity is one of today’s keys to attracting and retaining talent. This is apparent from the growing prevalence of executives leaving secure, long-term employers for startups and IPOs. They see the potential upside leverage as more than offsetting the potential downside risk.

Companies need to review the structure of their long-term incentives in response, especially where there is heavy reliance on restricted stock and performance shares designed to regularly payout in the target range. Such reviews should recognize that there are two ways to enhance potential pay delivery for high performance without increasing the grant value. The first is structuring performance shares with higher maximum payout opportunities than the standard 200% of target shares, with steeper performance curves for outperforming and underperforming against financial (i.e., non-market-based) metrics. The second is setting high-risk goals for relative and/or absolute total shareholder return (i.e., market-based) metrics. This shifts the GAAP valuation of shares/units being granted from face value to Monte Carlo value. Under the Monte Model, the higher the performance risk, the lower the grant value per share and the more shares that can be granted and subsequently earned at a multiple for above-target performance.

– Refine peer groups. Where executive talent-market competition extends to growth companies and successful recent IPOs, these companies should be in the peer groups, if not to directly benchmark executive pay levels, then at least to know their pay practices. For example, it is common sense that established financial services companies should be looking at fintech, and Big Pharma should be looking at drug discovery companies. The fact that there may be exceptions to the standard revenue-size and market- cap thresholds in peer-group selection criteria should not be the determining factor.

You can also visit our “LTIPs/Annual Incentives” Practice Area to see how other companies are currently tackling executive incentive programs.

– Emily Sacks-Wilner