As the economy is (albeit slowly) improving, many people believe that executive turnover will increase because: employers are now hiring again; executives are dissatisfied with current pay levels and working conditions that might have been adversely effected by the economy; and candidates believe that there is less risk in accepting a new position. A recent study by Liberum Research demonstrated a significant increase in turnover in executive positions at publicly traded companies – for example, there was a 107% increase in reported changes in corporate level positions between January 2012 and January 2011.
Non-forced executive turnover can significantly negatively impact employers for a number of reasons:
- The former executive leaves with a great deal of knowledge about the employer, which can be difficult to replace internally and could damage the employer from a competitive standpoint.
- Finding a suitable replacement can be expensive and time consuming – to say nothing of the costs of conducting that position’s duties while there is no one in that position.
- In many cases, there is significant ‘ramp-up’ time involved in bringing a new hire up to speed.
We are seeing more employers taking action to retain key executives through the use of various types of financial incentives.to retain key executives. Among the arrangements that we have recently been involved with:
- Retention bonus programs: An up-front payment that (a portion of) must be returned if the executive leaves within a certain period; or, a fixed payment at the end of a certain period if the executive has not left the company.
- Performance based, formalized short-term bonus program: Many employers who pay an annual bonus to executives use an informal program – that is, any annual bonus is awarded at the owner’s/CEO’s discretion. More companies are guaranteeing an annual bonus if certain performance targets are satisfied; the goals appear to be more easily satisfied than I would have expected.
- Equity programs: Employers are promising key employees stock, stock options, a cash payment equal to the value of a share of company stock (phantom stock) or the appreciation in value of a share of company stock (stock appreciation right) if certain events occur – typically the passage of time or the sale of the company.
The plans also provide that, to receive payment, the executive must be employed on the date that the bonus is paid – this gives a retention aspect to the program – and can forfeit their benefits if they violate non-compete agreements.
All of these programs serve as ‘golden handcuffs’ – they give the executive a reason to stay with the company for a longer period of time, and it makes it more expensive for a prospective employer to hire the executive (they would need to make up for the loss of benefits from the programs described above). The other benefit is that the design of these programs can be used to drive executive behavior, by encouraging them to meet specific goals that they have an impact upon to receive the benefit.
We would be pleased to assist you with questions related on these and other types of executive compensation programs. For more information on this topic, post a comment below or contact our Compensation & Benefits Advisory Services Group at 440-449-6800.