Alignment, along with the retentive value of long-term incentives, has proven to be a successful way to ensure “pay-for-performance” and continuity within an organization.
- A well-thought-out compensation structure for executives comprises three elements: base salary, annual bonus, and long-term incentive plans (LTIPs):
- Base salary. Seemingly obvious, but meaningful base compensation rewards a professional’s time and efforts since, without guaranteed success of every initiative/transaction, compensation cannot be solely tied to successful outcomes. Otherwise, most professionals will seek to limit risk.
- Annual bonus. Although annual bonuses tend to be discretionary (see chart below), annual bonuses are useful if there are certain specific objectives that leadership would like to see achieved. For example, specific HR or operational objectives are common.
- Long-Term Incentive Plans (LTIPs). These plans intend to incent and retain talent by enabling them to create wealth alongside the family through metrics that align professionals with owners. More recently, family offices have begun to allow (or even require) their senior-most executives to co-invest (with their own funds or funds lent by the family office), which cultivates a sense of ownership and further aligns the interests of all parties.
- Vesting. Due to the long-term nature of successful initiatives/transactions, family offices often require several years of vesting even after value has been created.
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