Executive Compensation Programs

How do family businesses retain key non-family executives?

Retaining a key executive means simply keeping an executive content or satisfied within his/her position in the family business. There are many non-compensation factors that support executive retention such as career opportunities and working conditions, but this article concentrates on how to use techniques of executive compensation to retain key executives.

Successful Compensation

Successful compensation policy in a family business is no different than in any other business. The basic principles are the same for almost any type of business. Successful compensation policy in a family-owned business treats family owner-employees the same as non-members. However, while the substance of compensation policy must be the same for family members, the form that this compensation often takes often differs, and in many instances should differ.

Objectives

Every company’s compensation program has three objectives:

to attract
to retain
to motivate key executives.

In other words, to enable the company to hire executives from outside the company; to keep key executives from leaving the company; and to motivate these executives to excel and create value for the company and its shareholders.

To attract and to retain ultimately means the same thing: that the company’s compensation programs remain competitive within the company’s defined market for executive talent. If compensation levels are attractive, existing executives will stay with the company and the company will easily be able to hire new executives when needed.

Elements of Compensation Package

An executive total compensation package consists of five elements.

There are two fixed pay elements: base salary, which is the minimum annual cash payment, and benefits and perquisites, which are non-cash, non-variable pay, such as retirement plans and car allowances. There are two variable pay elements: annual and long-term incentive, which vary based on company or individual performance. Finally, there is an employment contract, which is a legal agreement that specifies the executive’s right to receive pay, the duties of the job, the terms and conditions of employment, the company’s rights and obligations, and what severance pay the executive will receive in the event of termination.

Conclusion

These elements play various roles in attracting, retaining and motivating executives. Base salary typically has the highest impact in attracting an executive. Annual incentives and long-term incentives, because they vary based on performance, play the greatest role in motivating executives. In terms of retaining an executive, a long-term incentive plan often plays the strongest role, although certain types of retirement plans may also be a strong factor.

This article has been partly extracted and modified from Core, J.E. (1990). Using executive compensation programs to retain key non-family managers. Proceedings of the 1990 Family Firm Institute Conference, October 17-20, Atlanta, Georgia, USA.

George Tanewski is Senior Research Fellow in the AXA Australia Family Business Research Unit at Monash University. Dr Tanewski writes extensively on family business issues and also sits on the board of a prominent Melbourne family business. For further information please contact George Tanewski on 61-3-9903-2388 or george.tanewski@buseco.monash.edu.au
First published: 23 May 2001.
Last updated: 6 October 2005.