Many public companies are having to reduce compensation costs to
survive the current economic conditions. Doing so makes it
difficult to retain and motivate the best employees and executives,
who are essential to a company's survival during these
If you want to be well-positioned to survive and emerge as a
stronger and better competitor, now is the time to think about what
you can do to retain your key talent.
Some companies may try to do so merely by hoping that fewer
employment opportunities will be available in the marketplace. This
strategy seems short-sighted, because the best and brightest will
always have other opportunities, even in troubled times.
During the stronger economic conditions of the recent past,
shareholder pressure drove companies away from awarding stock
options and toward compensation such as performance share units.
While there are good historical reasons for this shift in
compensation strategy, the present circumstances require cash-tight
companies to use rewards with greater upside and a longer-term
focus to keep key talent.
If you are experiencing financial difficulties in the current
economic environment, you should
reduce cash costs, such as salaries and payments under cash
remove or reduce annually measured incentives, such as annual
bonuses and performance share units that vest on the achievement of
annual financial targets, both of which are unlikely to be achieved
in the short term, given global economic conditions; and
provide incentive compensation to retain and motivate your
leadership to weather the turmoil and build for the future.
A combination of (i) reduced salary, (ii) reduced or no annual
cash bonus plans, and (iii) generous option grants may solve the
problems you are currently facing.
Returning to the use of options as a compensation tool may
garner public criticism, but companies should be able to defend
this criticism by emphasizing the need to conserve cash and retain
key personnel and by adopting the measures suggested below, which
will avoid the problems created by option-granting practices in the
Options are taxed favourably to the optionholder, who can defer
tax and be taxed at capital gains rates. Cash-starved companies can
satisfy their obligation with treasury shares. Companies that have
funds available can satisfy stock appreciation rights in cash and
benefit from a tax deduction while retaining capital gains tax
rates for the optionholder.
Options with an exercise price at current market prices are
likely to be perceived as valuable by employees, who should see
significant upside potential.
Options can vest over time, either in installments (e.g., 25% of
grants vesting per year) or as cliff-vesting (e.g., vest all grants
at the end of three years). This makes options an effective
To prevent some of the abuses and shortcomings attributed to
options in the past, you may add features such as
requiring executives to give significant advance notice (e.g.,
three to six months) to exercise options, to avoid executives
creating or playing on share price volatility and to require them
to focus on long-term value creation.
requiring executives to hold options during employment and
prohibiting the exercise of options for a period of time (e.g.,
three to six months) after resignation.
adding performance-vesting criteria, to prevent an option
payout if the company's performance is well below that of
comparable companies but an improvement in the overall market
raises the share price.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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