Board Advisory Launches Media Campaign to Spotlight Simpler Executive Compensation Packages

Share Article

Managing directors urge companies to follow the lead of private equity and venture capital firms that use one-time stock grants with very long-term vesting

Board Advisory, LLC Managing Directors Paul McConnell and Jeff McCutcheon, in response to arguments that executive compensation plans need to be revamped and streamlined, have published an article entitled "Heads We Win, Tails You Lose." Released on August 20, 2009 to the online information library Boardmember.com, the article will also appear in the September issue of the library's affiliate print magazine, Corporate Board Member.

The article highlights the current practice of compensation committees spending a great deal of time calculating the annualized value of executives' pay based on future projections. The authors argue that in reality, a large portion of executive wealth is tied to equity valuation cycles and the timing of stock option exercises and stock sales. Said McCutcheon, "If executives are to be motivated consistent with investors' long-term interests and if incentives are to influence long-term executive decisions, the incentive must be substantial and fairly illiquid."

"Recently, there has been a movement toward requiring executives to hold their annual stock awards until retirement. This may align executive and shareholder interests, but it isn't a complete solution," said McConnell. "The conventional approach doesn't complete the shareholder link because of two factors. First, the size of the annual awards is driven by competitive values rather than a specific percentage of company ownership, resulting in executives receiving more shares when stock prices fall, and vice versa, not correlating at all with performance. Second, we are creating incentives on a piecemeal basis, over many years. If investors are to get the full return on their incentive investment, a compelling equity incentive should be established at the time the executive takes the job."

To that end, Board Advisory's executive compensation consultants recommend that boards of directors consider how private equity and venture capital firms typically handle executive compensation. In such companies, where compensation is determined by individuals with a great deal of personal capital at risk, executives are granted a one-time, full-value share package upon hire or promotion, which vests over the life of the individual's career or when certain performance goals are met. These one-time awards are based on a percentage of the outstanding shares of the company, rather than any projected value.

"When we eliminate the concept of an annual competitive equity award, it enables boards to better manage salary and cash incentives, and ensures that the executive feels more like a long-term owner in the company with an ongoing stake in it," continued McConnell. "While there are a host of advantages, one advantage is that shares granted using this approach are consistent with a smart, long-term investment strategy for all stakeholders."

About Board Advisory, LLC
Board Advisory, LLC, an executive compensation consulting company, was formed through the combination of separate, distinct executive consulting practices addressing different aspects of the emerging board responsibility. Their core belief is that superior shareholder value is created when an organization's mission is shared by its board, executive leadership, and investors. With offices in Boston, New York, Atlanta, Jacksonville, Orlando, and Santa Fe, the firm works with companies from $100MM over $100B in revenue across the U.S. and Europe. For more information on the firm and its leadership, please visit http://www.board-advisory.com.

About the Authors
Paul McConnell and Jeff McCutcheon are managing directors of Board Advisory, LLC. You may contact Paul at (407) 876-7249 and Jeff at (904) 306-0907.

# # #

Share article on social media or email:

View article via:

Pdf Print

Contact Author

Elizabeth Ferrer
Visit website