Incentive portfolio for compensation

The bull market in many parts of Asia has been declining with a suddenness that has left management and investors confused and reeling. After almost two years of irrational market exuberance when almost any strategy worked, companies are facing the challenge of certain Asian economies beginning to show signs of slight reduction in GDP growth.

As a result of this, we are headed towards a maturing growth mode versus a historical growth mode. In India, for instance, the month of January 2008 produced an increase of industrial production by 5.3%; however, in January of 2007, industrial production had increased by 11%.

With the increased volatility of the stock markets, each correction in stock price adds another element of mystery in how the markets value organisations in many corporate boardrooms. As a result, many organisations have concluded that over the long-term (which in Asia is defined as 12-18 months), the primary business strategy will be executed on the lofty promises made to the markets and investors.

In this environment, strategy execution is even more precarious, demanding talented and experienced managers and visionary leaders. But the challenge becomes how to retain these executives, motivate them to achieve new strategies and reward them for their success? The challenge is even greater given that the use of long-term incentives is still in its infancy stage in many parts of Asia, and long-term incentives are what each executive wants as they have seen their Western counterparts get rich by such incentives in the similar growth phase of the mid to late 1990.

Executive pay in Asia is changing by the minute. Long-term incentives, and in particular stock options, have been the incentive vehicle of choice for the past several months for most private and public companies. However, many investors are questioning the alignment of stock options with the operational performance of the business, as all of them have a strong pay-for-performance mindset. With this mindset, companies are beginning to look at alternatives as to how they assess and reward performance.

What incentives will best motivate executives and other employees? The answer is a balanced incentive portfolio. By offering a combination of incentives, each tied to specific goals, you can tailor-make compensation packages that put the right amount of pay at risk in order to motivate people. Rather than rewarding only an increase in the stock price, a balanced portfolio seeks to align people with company goals and with the interest of shareholders.
It engages people’s commitment by specifying what they have to gain if the company achieves specific targets, and what they stand to lose if it does not. With a balanced incentive strategy, you can determine the optimal mix of cash, options, restricted stock, and other incentives that best meet your goals and match your strategy and culture.

Whatever the choice, equity-based incentives will play a key role. The chance to earn a stake in the company remains a powerful incentive. An equity interest ties an individual’s wealth directly to the company’s fortunes. When something is earned, not merely given, there is a greater emotional connection. Equity interests offer a reward for what is done and an incentive for innovation that makes the company grow. We have identified six incentive imperatives that should be evaluated relative to your company’s culture and strategy, and built into a balanced combination of incentive vehicles.

Studies show that recognition has a positive impact on performance, either alone or in conjunction with financial rewards. For example, in one study, combining financial rewards with non-financial ones like recognition produced a 30% performance improvement in service firms, almost twice the effect of using each reward alone. The Minnesota Department of natural Resources conducted one study of recognition. Respondents said they “highly valued” day-to-day recognition from supervisors, peers, and team members. More than two-thirds said it was important to believe that others appreciated their work.