The Advisors' Blog

This alert from Meridian Compensation Partners discusses how to prepare executive compensation programs for a business transformation. First, it says you should be asking these questions to determine whether special retention awards will be necessary:

– Do our executives have sufficient unvested equity awards (“holding power” or “retention glue”)? There are a variety of circumstances that can lead to retention risks – insufficient “skin in the game,” recent business challenges, uncertainty and risk in the transformation itself, etc. Whatever the cause – insufficient equity holding power increases the risk of losing key personnel. Equity holdings also create an incentive for achieving company objectives and reward executives for the longer-term value created for shareholders from the transformation.

– Is our compensation competitive with (or better than) market? Ensuring that ongoing compensation is market-competitive reduces an executive’s incentive to look for alternative opportunities.

– Do we have the right severance and Change-in-Control termination protections? Business transformation may increase employee concern with loss of employment. Reasonable severance protections can mitigate these concerns, keep key leaders focused on the business and the transformation and reduce retention risk.

Once retention risk is addressed, focus should turn to incentivizing executives by asking this next set of questions:

– Are we paying for the right outcomes (i.e., correct performance metrics)?
– Are we setting the right performance goals?
– Does our payout curve provide adequate upside while balancing risk and uncertainty?

It concludes with this reminder:

Your compensation program should be tailored to your company’s unique circumstances, particularly in a transformation scenario. A business focused review of your pay program is a critical part of getting ready for a business transformation.

– Meredith Ervine