RSM Resources

With new accounting rules and increasing pressure to hold executives accountable for their performance, many companies are rethinking executive compensation packages that once seemed standard. One of the biggest changes starts in 2006, when public companies will be required to expense the value of stock options offered to employees — taking a hit on the bottom line.

As public companies strive to justify executive compensation to inquiring regulators and skeptical investors, private companies are well-positioned to recruit and retain the best and brightest. Such companies can increase their competitive advantage by:

• Focusing on strong cash compensation (such as base salary, performance-based bonuses and phantom stock).
• Providing growth opportunities, new challenges, and the training and authority required to tackle them.
• Offering greater flexibility — in strategic approach, scheduling, dress code, and more.

For many private companies, retaining executives has long been an uphill battle against bigger, better-equipped adversaries. But increasingly, more-responsive, smaller employers have the opportunity to win top talent.

Private challenges
Public companies have countless rules,regulations and requirements to negotiate, but their private counterparts face challenges as well — and not just in terms of dollars.

Case in point: According to one researcher, while midsized companies often are more able to respond quickly to competitive pressures or unexpected opportunities, they often tend not to. With less market share, less revenue and less room for error, many midsized companies are conservative by nature. Owners often retain a great deal of control over the business and can regard earnings, performance and future plans as private matters.

As a result, executives at private companies can find themselves with little authority and even less to do. When neither the pay nor the professional challenge measures up, leaders look for other work.

These problems can be exacerbated in family-owned businesses, where family ties sometimes trump experience, education,performance — and ability — when it comes to promotions, power and pay. Even in the most "enlightened" family-owned companies, employees may perceive or suspect blood-based favoritism, setting the stage for discontent and turnover.

How can private companies overcome these basic challenges? Ad executive David Ogilvy once said, "Don’t buy the dog if you’re going to do your own barking." Similarly, don’t hire executives if you’re going to hamstring them. Be open and empowering:

• Establish clear performance goals grounded in the company’s business goals and strategic plans.
• Provide information and authority that leaders need to succeed, including details regarding their performance and the company’s.
• Give employees opportunities and power to push the envelope and challenge themselves.

These basic guidelines can help companies retain employees at all levels, but are especially important in retaining executive talent. Private companies that mimic their public counterparts by developing informed, empowered and accountable executives will be well-positioned to recruit and retain leaders.

Public competitiveness
Public companies generally offer highly compensated executives annual salaries and bonuses bolstered by generous long-term compensation programs (such as stock options) and substantial deferred compensation (including supplemental executive retirement plans, or SERPs) to "top off" more traditional pension or 401(k) funds. These forms of compensation, along with health care and other benefits, can add up to a substantial total compensation package that’s difficult for some private companies to match. But some private companies may find strength in their smaller size. One compensation expert suggests that what midsized companies lack in wealth, depth and capacity, they can make up for with flexibility and an emphasis on total rewards.

Compete with cash. With less bureaucracy and "process" to deal with,smart private companies may have less trouble finding and shifting funds when needed — making it easier to go head to head with public companies on cash compensation. Be competitive with base salary to entice executives to consider your organization, and aggressive with performance-based bonus opportunities to motivate them. Top performers who meet profitability goals deserve to be rewarded, and your company will be in a position to do so.

And while public companies are scaling back stock options, private companies can and should consider offering stock appreciation rights or phantom stock to executives:

• Stock appreciation rights. Grant executives stock appreciation rights for a specified number of shares that are paid according to how those shares appreciate over time.
• Phantom stock. Grant executives shares of phantom stock that are equal in value to a share of "real stock," enabling them to benefit from both the appreciation and base value of that stock, which company ownership still holds and controls.

Many owners of privately held companies are reluctant to issue shares to additional people and cede ownership of their businesses. However, both stock appreciation rights and phantom stock allow executives to benefit from the company’s financial performance while keeping financial control solidly in the hands of the owners. Plus, both programs use fewer shares of stock, if any, than stock option programs to yield greater motivation. Why? Because, unlike stock options, stock appreciation rights and phantom stock programs tend to promote long-term performance over short-term profit and quick sales.

Create a rewarding work environment. Too often, companies recruit and hire executives, then leave them to sink or swim. They assume a person at a high level can navigate the company. But smaller employers sometimes have established practices and entrenched behaviors that don’t conform to practices outside the company. In addition,employees sometimes perceive private companies as providing fewer opportunities for professional development or advancement.

Companies should assume executives have a strong desire to perform but may not know what’s expected. Executives need orientation like any other employee:

• Open the lines of communication immediately.
• Establish clear goals and expectations.
• Provide all the information an executive needs, and be prepared to provide more.
• Take the time to answer basic questions before they’re asked.

As stated previously, because privately held companies are smaller and leaner, they have the potential to be more responsive, providing more hands-on executive opportunities. As executives become acclimated, let them spread their wings. Continuing education,professional development, additional responsibilities, and opportunities to take risks and make decisions will help executives feel like they’re making a difference.

Keep it loose. Part of the appeal of working for a midsized company is that they often function less like a corporation and more like a community. People know each other and pull together toward common goals and the common good.

Without the pressures of pleasing a myriad of shareholders, private companies can afford to keep things looser than their large public counterparts. One consultant shared an example of a private-company CEO who eats lunch with his employees once a month. If the company is hitting its numbers for the month, the CEO buys; if not, employees buy their own. Either way, everyone shares in the company’s fortunes, adding to a sense of community.

Today’s employees may be looking for more than traditional compensation. Many yearn for a sense of community, flexibility and fairness. Casual dress,flexible schedules, telecommuting and other lifestyle perks are all increasingly in demand, even in the executive ranks. While the big-business demands of public companies might not allow for such perks, private companiescan and should use them to their advantage.