Plan Design and Work/ Life Management in Incentive Compensation

Abstract

or many organizations during the bull market of the 1990s, attracting, retaining and motivating highly qualified employees was a matter of offering them sufficiently large stock grants, option grants and/or bonuses. Often despite their profitability, growth in the market capitalization of these organizations ensured a growth in the market value of their stock and, at the same time, ensured employees that their options would remain "in the money." So long as profitability was not a major concern, it was also relatively easy for these organizations to generate yearover-year revenue growth. Under these conditions, it was difficult for employees not to get excited about the payout potential of their incentive compensation plans.Such is no longer the case. On December 21, 2001, the Dow Jones Industrial Average was down more than 5% for the year, the S&P 500 was down more than 12% for the year and the Nasdaq Composite was down more than 22% for the year. The economy is now officially in recession, and it is difficult to predict what economic conditions will look like in 2002. Although there is a growing consensus that 2002 will be kinder to investors than 2001, stock strategists warn that investors' growing risk aversion will limit stock gains in 2002.For both the employees participating in incentive compensation plans and the employers who are sponsoring such plans, these deteriorating economic conditions have encouraged a more sober view of incentive compensation. With yearover-year revenue and profit growth no longer a foregone conclusion, employers are increasingly concerned about encouraging their employees to accomplish goals that will not have a clear, positive impact on business. And with incentive payouts harder to come by, employees are increasingly concerned about three potential problems:• being held accountable for goals they cannot attain,• opportunities for rewards that are not commensurate with the compensation risk they are being asked to take and • managers who are not going to provide the support necessary for them to optimize the opportunities for goal attainment and rewards.As a result of such concerns, there is a renewed interest in the fundamentals of effective incentive compensation. Most notably, there is a renewed interest in the importance of both plan design and managerial support to incentive compensation. These issues are discussed below.

Give everyone a prize? Employee stock options in private venture-backed firms

“…For example, a 2002 survey conducted by the National Opinion Research Center of the University of Chicago indicated that among public companies with 500 or more employees, only 23% percent use broad-based stock option plans (defined as a plan in which at least 50% of employees are eligible to receive stock options). stock options are a source of financing (Yermack, 1995;Guay, 1999, 2001) and an important part of a comprehensive human resource management program (Blasi et al, 1996(Blasi et al, , 2003Liccione, 2002;Lam and Ho, 2006). I therefore predict that the more cash constrained are private venture-backed firms, the more likely they are to grant options deeply to their employees in order to conserve cash.…”

Give Everyone a Prize? Employee Stock Options in Private Venture-backed Firms

“…Since granting employee stock options involves no outlay of cash by the firm, the more its employees' total compensation is tilted toward stock options, the less are the cash demands put on the firm. Thus, all else held equal, stock options are a source of financing (Yermack, 1995;Guay, 1999, 2001) and an important part of a comprehensive human resource management program (Blasi et al, 1996(Blasi et al, , 2003Liccione, 2002;Lam and Ho, 2006).…”