As the Great Resignation and War for Talent continue through 2022, executive compensation remains a critical topic among corporate boards. Prior to a growing trend of compensation reform measures for executives, the general compensation model was based entirely on the individual’s status rather than their performance over time. This was, at one point, thought to be the most accurate measure for additional compensation, as the executive’s status would reflect their skill set and capacity to execute change. However, long-term incentive plans (LTIPs) are growing in use due to volatility shown on the global stage, impacting every area of business.
Beyond the pandemic, new tensions have emerged around the Russian-Ukrainian crisis, putting strain on every global industry. These events further highlight the efficacy and utility of LTIPs in this type of setting, as ideal motivational tools for executives to continue to strive to go above and beyond.
Rather than having a compensation scheme based solely on individual performance, choosing a strategy that requires both organizational health and accountability can assist organizations in avoiding overpayment for the actual difference that is being made by the executive. That’s why LTIPs for executives are on the rise in 2022.
The utility and effectiveness of the LTIP for executive compensation is only as strong as the design framework in which it is placed. Companies and compensation specialists must create a flexible need that is both within reach and motivational to corporate executives in their zone of excellence. This requires a more nuanced approach than a ready-to-use or pre-made model.
LTIPs should be customized to every executive they serve, even if they follow the same basic framework tenets. There should also be additional acknowledgment and room for dynamic results due to the increasing instability at a global level.
This article examines the top LTIP trends seen in Equilar’s latest Executive Long-Term Incentive Plans report, designed to guide compensation specialists in creating the most competitive, comprehensive and advantageous LTIP plans possible while serving the strategic needs of their organization.
The market trends lean more favorably toward relative total shareholder return (TSR), a metric standard for LTIPs that has consistently dominated other types, such as overall revenue or return on capital (ROC), between 2020 and 2021. Post-pandemic, the use of TSR as a metric hit a total prevalence of 65.7% as the main measure of success within Equilar 500—the 500 largest U.S. companies by revenue—CEO LTIP design framework (Figure 1). This trend continues to race toward a more positive use case, shown by its momentous 13 percentage point jump from 2017.
This leaves many organization leaders with the question: Why is TSR such a favorable design element within a C-suite LTIP?
The concept is that TSR provides a more “close-to-home” measure that accurately shows the effects on stakeholders in the long term. It also is a tool that can help to fairly gauge the amount of positive attributed change that an executive has brought to a business, removing the additional outside factor of global dynamism as much as possible.
ROC as a metric came second only to TSR. However, there is increasing data that shows that ROC may be a less desirable contributing factor in LTIP creation over time.
While the goal of LTIPs is to indicate the organization’s health and true market mastery within a given year, data shows that it continues to empower professionals to overdeliver and pursue new frontiers of success within a given company or brand.
Organizations continue to set exceedingly high standards and expectations that a professional must attain before becoming eligible for their first LTIP payout, using a preferred zone of achievement that looks different in every organization. Equilar dug deeper to see if it was possible to find a medium range that most listed organizations preferred to attain before releasing the first payment.
Data shows that award payouts for Equilar 100—the 100 largest U.S. companies—CEO LTIPs were most commonly triggered when performance hit 80% and capped when performance hit 120% of target, with 84 of the 119 metrics falling within this range (Figure 2). This means that the individual must reach approximately 80% of the target goal prior to triggering the benefits that they are offered through the LTIP.
Additionally, the tiered structure of an LTIP further incentivizes the executive to outperform the company’s prior set of targets and goals. This is evidenced by the variable performance ranges that extend past 100%. In fact, many Equilar 100 companies worked within this type of a structure, featuring up to 61 separate metrics that offered a payout at or above the 100% performance range.
In this report, Equilar sought to find the new, driving metrics behind some of the most succinct and efficient LTIP frameworks within successful organizations. LTIPs provide the benefit of added flexibility and accommodation for what is going on beyond an executive’s scope of control within the industry—and continue to effectively motivate and empower them to create top-down change within an organization.