High-performing companies design exec pay plans around stock options, incentive plans

When it comes to executive pay, the debate over whether how much is too much continues

When it comes to executive pay, the debate over whether how much is too much continues. Whether you think top executives deserve to be paid 20 times or 200 times the average worker, a new study revealed that high-performing companies take a notably different approach to their executive compensation programs. 

The Towers Watson study looked at executive compensation plans at 50 companies with the most consistent outperformance in total shareholder return versus the S&P 1500 over the past 15 years, bringing to light that such businesses take into account stock options and incentive plans—and incorporate the use of return metrics. 

Among these companies, stock options represent about 50 percent more of the LTI mix than in the broader market. In addition, the high performers place less emphasis on long-term performance plans (e.g., LTI plans that have explicit performance measures such as relative total shareholder return)—one of the more surprising findings, Lippincott said.

“Stock options, in particular, are often singled out as a symbol of short-term management thinking. It’s interesting that companies that actually sustained performance over time have embraced them,” he said. “The prominence of stock options among this group, with their stronger share price performance, also explains why they are able to deliver higher actual (versus target) compensation than the market.” 

Editor in Chief

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Erin E. Harrison

Erin E. Harrison is the Editor in Chief of InsideCounsel magazine. Harrison’s professional background includes extensive expertise in both print and online media, highlighted by...

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