Which Model and When?
No model is exclusive to a specific type or size of company. Further more, the design elements and execution of a specific model differ widely among employers. As a result, the pay model adopted by a private company artfully reflects the owner's distinctive mindset about rewarding executives for their contribution to the company's long-term economic success. The 6 pay models described in this article are commonly used under the following circumstances:
- 1. Hired Hand: The owner wants a seasoned executive who is paid to execute the owner's vision and strategy without a commitment to share in the future value created for the enterprise.
- 2. Annual Settle-Up: The owner wants to "pay as he goes", for the annual achievement of enterprise goals that lead to long-term financial success with no intent to share in any value that is created.
- 3. The Big Event: The owner wants to offer an above-median base salary and a significant future pay opportunity that is contingent on the consummation of a "big event," such as retirement after long service or the achievement of an aspired corporate milestone.
- 4. Some Now/A Lot Later: The owner wants to reward the company's executives even though the achievement of a âbig event,â such as an initial public offering (IPO), has become illusive.
- 5. Classic: The owner wants the company's executives to take "ownership" of the ongoing success of the business. They seek profitable growth and value creation, not an IPO or sale.
- 6. Classic Plus: The owner wants to monetize the value created in the company through a sale, merger or IPO.
Each private company's selection of pay model reflects the owner's answers to the following questions:
- What does sustainable success look like and how can it be measured?
- Who creates and thus, should financially share in that success?
- How much of the financial benefits of success should be shared?
- What payout vehicle should be used?
- When should the "success share" be paid out and what limitations/conditions should be associated with a payout?
The 6 pay models used at private companies help categorize how base salary and incentive arrangements respond to an owners' specific mindset toward sharing long-term economic success. However, a successful LTI plan for one company may fail when an exact copy is applied at another. The secret to successful LTI design at private companies rests with the owner's' ability to reject a generic solution and seek a unique fit for the company and the executives who are to be rewarded for long-term value creation.
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