Incentives are monetary benefits paid to encourage executives with talent in recognition of their outstanding performance. The primary advantage of incentives is the inducement and motivation of talent for higher efficiency and innovative ideas. It may not be difficult to get people for fixed wages and salaries. But with fixed remuneration, it is difficult to motivate executives to remain with the organization. Positive response will surely come when incentives are included as a part of the total remuneration in the form of loyalty to the firm.
Earnings of employees would be enhanced due to incentives. There are instances where incentive earnings exceed to three times the time rated wages or salaries. Increased earnings would enable the senior and mid-level employees to improve their standard of living.
The future is about incentive pay, not about bulk pay increases. If you are an employer, constantly worried about increasing employee costs, this should reassure you. Double digit salary increases are unsustainable over the long-run and being termed as a poor business practice, especially for senior executives.
If you are an employee concerned about whether your company’s performance management systems resonate with your needs, this trend should reassure you as well.
Long-term incentive plans are designed keeping an employee’s interest in mind and creating the proverbial ‘win-win’ between employees and the company. In managing talent and rewarding people companies still struggle the most with issues around pay.
First, long term incentives are here to stay. Second, stock options are not the only solution to long-term incentives, and finally, long-term incentives need not be a knee jerk, one-size-fits-all response to organizational pressures.
It is possible to design long-term incentives with a high level of precision by embedding their design in a highly analytical, quantitative, business-driven framework.
A long-term incentive is a performance award that is delivered to employees over more than a year and in most cases, over three to four years. Awards can be provided in the form of cash and/or equity and are generally tied to service or a combination of service and performance.
Companies implement long-term incentive plans for a variety of reasons; key objectives include attracting or retaining employees, driving long-term performance and value creation, aligning employee and shareholder interests and shifting fixed costs to variable costs.
Designed correctly, a long-term incentive program can help a company deliver on its business plan, increase value for its shareholders and provide wealth to employees in a cost-effective manner.
While there may be variations, long-term incentives can be broadly categorized into four primary types : Stock options or ESOPs, restricted stock, performance share plans and performance cash plans.
Given flexibility in design parameters, there are an infinite number of possibilities, thereby enabling companies to customize a solution based on their unique business, talent, and compensation context. Stock options are the most prevalent vehicle in India today. Leading technology companies such as Infosys and Wipro were early adopters in the late 1990s and early 2000s along with Indian units of multinational companies based abroad.
In most cases, stock options are equity based (one option generally means the right to purchase one share of stock) and enable employees to share in the appreciation of the company’s stock price.
Among the long-term incentive alternatives, they are relatively well known, have high upside potential, strong perception value among employees, and favorable accounting under current standards, but are also riskier for companies.
Restricted stock and performance shares are relatively new to emerging markets such as India but are prevalent in more mature countries such as the United States.
Restricted stock is the safest and most conservative of the alternatives and is sometimes used when retention is the primary objective of the plan. Performance shares are more complex, but provide many benefits, including high upside potential for employees, strong link between pay and performance, strong corporate governance, favorable accounting and more sustainable dilution.
Performance cash is a performance share plan except that it is paid in cash. It is often used by companies that want to achieve the objectives of a long-term plan but are unwilling or unable to share equity. This alternative is particularly popular with unlisted companies with no immediate IPO plan and foreign multinationals with Indian business units.