Executive compensation
The need for new thinking on long-term incentives
As the scrutiny of executive compensation intensifi es and macroeconomic conditions become increasingly volatile and uncertain, boards must achieve a delicate balance between fl exibility and staying in line with market practice when rewarding their senior offi cers. Jon Szabo and Darren Moskovitz, partners at Meridian Compensation Partners, talk to CEO about the importance of creativity in designing long-term incentive plans.
A
fter many rounds of comments and proposals, the US Securities and Exchange Commission (SEC) finally adopted its long-awaited pay versus performance (PvP) rules towards the end of 2022. That has resulted in more intense focus on executive compensation – even as the design of executive pay plans has become more complex. This challenging situation arises from the fact that the new rules require public companies to disclose information reflecting the relationship between compensation actually paid (a SEC construct) to a company’s named executive officers and the company’s financial performance. Plan designers and compensation committees face the difficult task of developing compensation programmes that strike the right balance between achievable goals and competitive
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pay. While there are several purposes for awarding long-term incentives (LTIs) such as retaining key talent and fostering shareholder alignment, a core purpose of LTIs is to reward executives for hitting performance targets over a given period. They aim to give executives the ability to prove to shareholders that they are worth what they are paid and to provide an incentive towards achieving longer-term performance goals. With this new level of scrutiny, there is a growing need for compensation committees to be creative in the design of LTI programmes, particularly as external factors – not least unpredictable macroeconomic factors – can make it hard to predict future performance. Economic uncertainty, rising inflation, market volatility and a turbulent geopolitical landscape all complicate the forecasting process and help muddy
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