Privately-held companies are increasingly performance-based bonuses as a key way of compensating their executives. Today’s executives are being measured more by how much value they create for the company’s owners than just simply getting the job done. For CFOs, for instance, it is not just about crunching numbers; it is about being a strategic business partner with the organization.
A lot of companies have been through tough times, but they have also learned to better operate their businesses. Many have available cash right now and are wondering whether to pursue an acquisition, launch a new product, incentivize the current team, or upgrade their talent.
If they decide to upgrade their talent by hiring an executive, companies want to make that new executive happy from a compensation perspective, but they do not want to give away everything. While companies realize there is a talent war and know they need to pay for top talent, they also want to share risk. So, they are designing packages that provide long-term rewards.
One way to do this is by offering more in bonus compensation than salary. Companies will negotiate a base salary everyone is happy with, and then determine how to link the bonus to company performance. Executives might be asked to accept less cash upfront in return for the potential upside in bonus compensation and earn-outs.
To do this, companies are increasingly using alternatives like phantom stock plans and stock appreciation bonuses that put a percentage of an increase in revenues over a specified period of time into an executive’s retirement plan. These are excellent options for new hires as well as for motivating existing top performers. With these plans, the executive does not own equity in the company but shares part of the increase in value. These vehicles reward executives for growth and profits with a focus on specific goals and objectives that need to be accomplished.
All of this ultimately comes back to companies expecting value creation from their new hires. When an executive joins a company, it is difficult to know upfront exactly where or how he or she will add value. But if the executive helps generate leads that double revenue, for instance, companies are willing to revisit compensation because they want to reward that behavior.
Companies have become more transparent — owners are more willing to allow key team members to know the company’s cash position, and understand why bonuses are down if it is not a great year. Their philosophy is that everyone is in this together, and, if the business grows, everyone will win.
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