For New Jersey and its proximity to the business centers of Philadelphia and New York, executive compensation is an important aspect of running a business properly. The correct compensation structure aligns the executive’s incentives with the company’s best interests.
How to structure executive compensation
Executive compensation has to be structured so that the executive will respond to the right signals and take the company in the right direction. There are several ways to accomplish this, but they all come back to ensure that the compensation is tied to performance. The compensation should be variable and based on key metrics and goals, which can be short term, long term or both. Either way, the alignment between the executive’s compensation and the company’s health is key.
Many companies make the mistake of thinking it is the size of the compensation package that matters. What is truly important is incentivizing a fruitful relationship between the company, the CEO and the board of directors. When they all work together and make a long-term commitment to the company’s trajectory, the relationship will yield great benefits. Otherwise, breakdowns can lead to mistakes or poor strategy as well as executive turnover, which could be just as damaging.
This is not a simple process, and there is no one best compensation structure that will work for all companies. But with the right care and attention, the two sides can create a package that works for everyone and puts the company’s well-being at the forefront of all of the incentives for the stakeholders as well as the shareholders and the board. That is the first step to a beneficial relationship.