The delicate art and science of executive incentives
15 Dec 2016 by Jairus Ashworth
When it comes to executive incentive plans, it seems that these days there are as many detractors as there are advocates. Even many of those who support the principle of incentivising executives find shortcomings in popular incentive plan arrangements.
How can organisations find the right way to motivate their executives?
Recently, Aon published a white paper ‘Getting executive incentive pay right’ that highlighted some of the common problems with executive short-term incentive (STI) and long-term incentive (LTI) plans. This white paper outlined an approach that could be more effective than current mainstream offerings.
Across the board, executives and shareholders agree on one thing: executive pay is far too complex and difficult to comprehend. There is a pressing need to simplify and streamline the incentive framework.
A key issue is that STI and LTI plans are simply not on a level playing field, which carries ambiguous messages around the relative importance of short-term versus long-term goals. Shareholder groups are increasingly saying many STI performance targets are too soft or not transparent enough, while many executives find typical LTI structures too hard or random and attribute little value to their LTI awards.
Just as Goldilocks found one bed too hard, one too soft and finally discovered the one that was just right, our aim is to steer a course between incentive plans that are too hard or too soft and land on one that is just right, while at the same time unravel the extreme complexity of current incentive structures.
A good starting point is to get back to basics and remind organisations of the core aims of these plans:
- Motivate and reward executives for performance over which they have reasonable control
- Strongly align executive incentives with recent shareholder experience.
When these aims are in conflict, designing incentives is a delicate balancing act between satisfying both parties’ expectations. Our white paper outlines a way of merging these two incentive plans into one, while retaining a balanced approach to rewarding both short-term and long-term performance, with the end goal of driving up performance and leaving both executives and shareholders better off.
Start a conversation with us
If your organisation is struggling with these issues and would like to explore an alternative path to getting executive incentives just right, download our white paper ‘Getting executive incentive pay right’ or get in touch with an Aon consultant today.
