The board needs to put together a package which is both in line with business strategy and performance and which is of significant value to the executive - or there is a risk that value is lost by both.
“Linking incentive to reward and reward to performance is an art form and many companies and reward specialists spend a good deal of time and effort in identifying and implementing the best solutions for their business,” says reward expert, Laurence Grubb, Exco member of the South African Reward Association (SARA).
“You need to define performance and establish which measures – financial and other – evaluate that performance. Companies need to be focusing on making sure that performance criteria are well-defined and that they are as relevant in five years as they are today.”
There are three basic types of long-term incentive schemes that align shareholders and executive interests and work best over a period of between three to five years.
These schemes should ignite executive commitment as benefits are closely tied to the success of the business. “The challenge with this type of solution is that the share price can be impacted by factors outside of the executive’s control and it can be tricky to set the performance measures today for market conditions and organisational objectives in three to five years.”
“The ways in which the schemes are structured depend on who the shareholders are and what they prefer, the executives and the expertise within. Some companies have their own reward departments with specialists on board to advise them. In other instances, executives seek the expertise of outside consultants on how best to construct and manage their packages. In both cases it is essential that the final package align with company strategy and ensure executive buy-in,” concludes Grubb.