This article was written by guest author Brandon Auster, Principal Consultant at BEA HR.
Acquiring and retaining top executive talent can be one of the biggest challenges faced by early stage and growing businesses. Maintaining a high-impact suite of executive compensation programs is a key strategy for meeting this challenge. These programs must be viewed as an investment in growth and value creation that requires diligent focus in order to be maximized over time.
Executive turnover is a disruptive and costly setback, with a financial impact of 100% or more of a departing executive’s salary. Meanwhile, engaged leaders are far more productive and effective at rallying their teams to drive growth. Getting the right mix and design of rewards elements enables companies to attract, engage and retain top talent, while maximizing their compensation ROI and driving growth.
Let’s explore some of the highest-impact compensation strategies that high-growth companies can employ in the effort to cultivate top talent, including:
- Aligning compensation with company culture and strategy
- Leveraging bonuses at every stage of growth
- Rewarding real results
- Leveraging uniqueness
Alignment with Culture and Strategy
Compensation is one of the most powerful and visible ways a company demonstrates what it values.
Well-aligned compensation programs give companies an advantage in the talent market and are a catalyst for teamwork, goal achievement and thriving cultures.
On the flip side, when full alignment is lacking, even the most well-intentioned and technically elegant pay programs can lead to disappointing results, discord among team members or tension between executives and ownership.
Looking at the alignment of each individual rewards element is required, as is a holistic look across all elements of the rewards portfolio including base pay, bonuses, equity, perks and benefits. This will ensure each element individually supports and drives the desired company results and culture, while together, the overall rewards program is greater than the sum of its parts.
Additionally, as a company grows and evolves, it must continually reassess its compensation programs to stay in alignment with new circumstances and objectives.
Bonuses for Every Stage of Growth
Bonuses can be a powerful element of an effective overall compensation program. It is a common misconception that cash bonuses are only useful for established cash-rich companies, while early-stage companies should focus solely on equity compensation. However, the reality is that currently, almost three quarters of pre-IPO startups with less than $50M in revenue include bonuses in their executive compensation program.
Augmenting equity with cash bonuses can increase focus and urgency, while helping employees stay energized during the series of sprints required to generate long-term growth and equity payoffs.
Given their sometimes unpredictable and volatile pace of growth, smaller companies may face challenges when designing bonus plans. This makes stress testing compensation plans against the entire range of possible business scenarios especially important. It is required to fine tune plans to ensure that fiscal realities are well balanced with desires to pay for performance and retain key talent.
Not only do bonuses encourage executives to contribute to the company’s short-term goals that will ultimately lead to its long-term growth, but they are essential in helping growing companies compete for high-quality executive talent with larger, more established organizations.
Reward Real Results
Annual bonuses are an extremely useful tool in the compensation arsenal. However, creatively supplementing a traditional bonus plan with a results-based program, such as one of those listed below can improve the impact and ROI of a company’s variable compensation investment even further.
- Milestone Plan – payouts are tied to hitting a fiscal or other key objective. This serves to: focus the team on specific goals, incentivize attainment of important results, provide execs with added pre-liquidity cash and celebrate short-term successes. Costs can be fixed upfront at an amount that is commensurate with the value created by hitting the milestone.
- Ad Hoc Awards – discretionary payouts are tied to positive performance. While this approach is quickly gaining popularity below the executive level, it can also be used to recognize and encourage upside results for executives. Costs can be managed by pairing with a bonus plan that uses modest targets and/or maximums payouts.
- Medium-Term Plan – a two to three-year medium-term performance period is created and payouts are tied to a key success metric such as revenue growth or value generation. These plans can provide liquidity if a longer exit period is anticipated and generate longer-term focus with more tangible risk/reward than either short-term bonuses or long-term equity.
When clearly and proactively communicated, these plans contribute to a culture of transparency and goal-oriented thinking that is crucial to rapid and sustainable growth. They lead executives to feel that their efforts are rewarded fairly while ownership has confidence that payouts are tied to results that also generate value for them. This win-win situation creates a great foundation for long-term partnership and success.
While smaller companies don’t have all the resources of major industry players, they possess many unique advantages in the war for talent. Understanding these and using them for maximum impact goes a long way in attracting, motivating and retaining top talent.
Start with ensuring that people know how much the company is investing in them. This is most effectively done through concise, graphical, high-impact total rewards and equity statements. Total rewards statements depict the value of base, bonus, equity, benefits and perks. Equity statements demonstrate current equity value and holdings along with the potential value derived from future vesting and growth in the company’s valuation.
Closely held companies can exercise far greater flexibility in issuing equity awards than public competitors for talent. They can use equity awards to reward strong individual or team performance, recognize milestone achievements or demonstrate commitment to key talent. It’s also important to carefully develop a vesting and refresh equity grant structure that ensures everyone continues to earn equity for ongoing contributions while avoiding vesting droughts that entice them to look elsewhere.
Strong leaders seek out companies and roles where they will have significant impact, experience professional growth and contribute to an important mission. Each small company has its own compelling story to tell current and prospective team members that other suitors for their services cannot match. For example, will company executives: have greater access to the CEO, board, or other thought leaders; be part of shaping the future of an industry; work with uniquely passionate team members; build a team from the ground up?
Every company is unique. The most successful ones understand and use their special blend of culture, opportunities, programs, perks and purpose to create a competitive advantage whenever possible.
Highly capable and motivated executives are required for any company to generate sustained growth and succeed in bringing its vision to life. Implementing smart and creative rewards programs are a difference maker in the ongoing effort to acquire, engage and retain top executive-level talent.
The high-impact compensation strategies outlined above are a great start for any organization looking to optimize its approach to executive compensation:
- Let business strategy and company culture guide compensation priorities
- Leverage bonuses to engage employees at every stage of growth
- Focus on bonuses that reward real results to fuel company growth and long-term success
- Leverage the unique assets at your disposal to attract and retain the best talent
If you want to take your compensation strategy even farther, don’t miss our upcoming webinar on high-impact executive compensation strategies. We’ll delve more deeply into the strategies in this article and provide more strategies to optimize the effectiveness of your compensation plan, including the most effective approaches to equity grants. Register today.