One of the most critical aspects of accepting a job for an executive involves evaluating its benefits packages. In this blog, we will outline commonly offered packages and differentiate between them. Benefits packages illustrate the shareholders’ willingness to incentivize the executive’s work. Keep reading to apprise yourself on evaluating them.
Types of Benefits Packages for Executives
Executive compensation generally falls under one of the following categories:
1. Cash Compensation:
This type of compensation refers to base salary, and executives can locate a prospective employer’s current base-pay in its proxy statement. In general, comparing one business’s to base pay for executives to an analogous business can be handy in evaluating an offer.
2. Option Grants:
A business may offer an executive the ability to purchase shares of the business’s stocks at a lower price. This option generally exists at a certain price over a certain period of time. Thus, the executive “buys” into working for the success of the company and its shareholders. Commonly, this time, or exercise period, lasts about 10 years.
3. Deferred compensation:
Typically viewed as a supplement to a retirement plan like a 401(k), deferred compensation involves an executive delaying part of his or her income being paid until a later date. While this creates a significant boost to one’s 401(k), the money cannot be accessed and cannot be considered a liquid asset. Furthermore, tax liabilities on these plans are not as light as they have been in the past, which is reduced their popularity among executives.
4. Long Term Incentive Plans (LTIPs):
These plans signify all compensation as tied to performance. This benefits the executive in terms of his or her tax liabilities as tax laws favor this type of compensation at the moment. Customarily, executives must fulfill certain criteria that demonstrate his or her contribution to the continued success of the business. Once these criteria have been fulfilled, the executive is compensated.
5. Retirement Packages:
Compensation paid upon retirement can include health care, as well as, funds contributed and matched in a retirement account. However, some retirement plans may include special clauses (“golden parachutes”) that allow the executive to be paid even in cases of unethical behavior or if the business is unprofitable or sold to another company.
6. Executive Perquisites (Perks):
These perks can include travel compensation, use of the business’s private jet, etc. While these luxuries are an incredible deal for the retired executive, they can contribute to a decrease in the overall financial health of the business, which could spell disaster, especially for small businesses.
Analyzing Compensation Packages
Pay vs. Performance
Basically, look at the top executive’s pay vs. the stock price of the company. If the change in the stock price beats the change in pay of the executive, you can be fairly certain that the executives are not overpaid. This signifies that the business rewards results rather than the title.
Peer Compensation
Generally speaking, executives within their respective industries should have fairly similar salaries. In some cases, industry leaders will exceed the group, but this should be a one-off.
What Investors Want and the Law
Investors can be hesitant to contribute to a company that overcompensates poor or just-adequate performance. Therefore, evaluating executive benefits packages using these criteria can indicate both the health of the company and its attractiveness to investors.
Due to unjustified compensation of executives at failing companies, laws have been passed to curb outrageous perks for executives. An example of this is the removal of deferred compensation as a so-called tax shelter for executives. Similarly, the closing of tax loopholes now makes executive compensation more transparent to investors.
Evaluating Executive Benefits Packages
Ideally, this blog has given you a window into the most important criteria with which to evaluate executive benefits packages. If you’d like more tailored guidance, contact the advisors at Argent Bridge Advisors at 833-568-4900 to speak with regard to your unique situation.
