The competition for top talent in certain pockets of businesses such as data analytics and digital has been intense, as companies focus on transforming their organizations to better leverage technology. And because talent in these areas is valuable in all industries, companies are not just competing with peers for top candidates.
This highly competitive landscape has pressured some companies to take action outside of their annual compensation process to enhance the retentive value of executive packages. A recent survey by Corporate Board Member and Compensation Advisory Partners (CAP) found 39 percent of directors saying their board has granted special equity awards to attract or retain the CEO—and 51 percent have done the same for other senior executives.
Far fewer companies used cash retention bonuses at the CEO and senior executive level. Equity awards achieve the objectives of conserving cash and linking executives’ interests to those of shareholders. Companies typically use cash retention bonuses deeper in the organization, where employees may not be eligible for equity.
But practice is split between performance-vesting and time-vesting awards, the survey found. Time-vesting awards are a powerful retention tool because they are not “at risk” in the same way as performance-vesting awards. However, proxy advisory firms and shareholders prefer performance-vested awards that still require executives to deliver results to earn value.
In its own research, CAP has found that boards that use special awards for the most senior executives spend time weighing the business case for granting such awards with the potential cost and external reaction. Proxy advisory firms and shareholders tend to criticize special awards granted to the CEO. For instance, shareholders pushed back on JPMorgan’s special award granted to the CEO in 2021 through the Say-on-Pay vote where only 31 percent of shareholders voted in favor of the program, versus 91 percent in the prior year. As a result, companies often address retention concerns for the CEO through the core compensation program to avoid doing something outside the norm.
Enhanced salary increases were also common among survey respondents: 27 percent said their board provided enhanced salary increases to the CEO, and 49 percent provided them to other senior executives. Salary increases directly address issues like inflation and market pressure because they provide present day value to executives. Some companies may have been hesitant to provide enhanced salary increases at the most senior levels because they build significant fixed cost into the compensation program. Companies may view incentives, which are a variable cost, as a better way to address short-term retention concerns.
Other benefits like additional perquisites and flexible work arrangements that many companies provided to address retention concerns deeper in the organization were less common at the executive level. In many cases, executives may have already received these types of benefits, such as wellness and travel benefits.
CAP expects talent retention to continue to be a major focus of compensation committees well into 2023. Salary budgets in 2023 are again projected to be above the historical norm of 3 percent, and companies will likely continue to use special onetime equity awards, though they may be more targeted at retaining current leaders than attracting new ones in 2023.
The prevalence of compensation actions and the rate of compensation increases that companies made to address challenges in 2021 and part of 2022 may start to stabilize, though, according to CAP’s experts. In addition to providing competitive compensation, companies will need to ensure they offer a meaningful value proposition to employees, including training and development opportunities, flexible work arrangements and wellness and other benefits to support retention.
You can read more about the survey findings and strategies boards and their comp committees may want to consider in our latest report, free to download, Navigating the Current Talent Environment.
