It is now unusual for an executive, especially at the top management level, not to participate in a short-term incentive program. Bonus payments play a key role in the total compensation package, and will represent an increasingly significant portion of an executive's total cash compensation. In many industries, CEO bonus payments now exceed 50 percent of base pay for achieving corporate targets, but average between 30 percent to 40 percent of base salary. At the middle management level, bonuses average 20 percent to 30 percent of base pay. However, the bonus payments are income at risk. You must meet or exceed the specific goals established in the strategic plan before the bonus plan kicks in.
While short-term pay-for-performance bonuses play a key role in today's executive strategy, U.S. companies recognize the need for a balance between short- and long-term capital performance awards. These long-term incentives in the past generally took the form of stock options. However, the collapse of the bull market combined with the changes in the federal tax treatment of capital accumulation plans caused by the 1986 Tax Reform Act has changed the kinds of plans that companies use to reward executives. Companies are trying a variety of approaches, some of which are performance-based programs (such as performance shares) that do not have some of the disadvantages to the company and to the executive of the stock options plans. The long- term compensation plans will continue to change, especially with the changes in accounting procedures being initiated by the Financial Accounting Standards Board (FASB). Companies seeking to implement entrepreneurial spirit inside the corporation (i.e., to create entrepreneurs) will continue to structure their compensation packages so that they provide significant long-term rewards to those producing significant results for the company.
In the area of benefits, the 1986 and 1987 Tax Acts have had some impact on perquisites. However, companies continue to provide basic medical, death and retirement benefits for employees and executives, but shift some costs back to the employee through flexible or cafeteria programs. And, executives still have a number of options (cars, extra life insurance, participation in 401K, Matched Savings Plans, Supplementary Retirement Plans, etc.) which can be negotiated as perquisites.
The average executive compensation package in 1988 consisted of 40 percent base salary, 20 percent short-term incentives, 20 percent long-term incentives, 15 percent benefits, and 5 percent perquisites. Within those averages is a large area for negotiation. What you can't get in base salary, you may be able to negotiate in one of the other areas-and ultimately end up with more growth opportunities than if the base salary were larger.
