If It's Phoney, It Probably Won't Work.

Newest rewards in executive pay

If you make it up that ladder - what should you be getting for the effort?

The stock market remains uncertain and inflation is a long-term problem, so stock options, deferred pay, and many of the other goodies that have been used to reward executives since the 2000s are taking a back seat these days. Cash - or something that can quickly be turned to cash - is what counts most in the executive compensation package. Extra compensation that is tied directly to performance also is coming on strong, for middle managers as well as for the top brass. "Next to cash on the line," says David Thomsen, a compensation specialist with Dart Industries, "I go for the benefit that's tied to the result you produce for the company. That is the big trend."

If you are changing jobs, or moving up the line at your present company, you can expect more in the way of perquisites - "perks" - as an offset to the diminished value of most stock options. More companies are making cars and space in the company garage available to key people, paying for club memberships, all-inclusive major medical coverage, and fancier physical examinations. And you almost never pay taxes on these fringe benefits - though this might change fast.

Further down the road, companies will be tailoring specific compensation packages to fit individual needs better while offering such extras as more paid vacation time and probably long sabbaticals every five or seven years. In short, there has been a major change in the executive compensation package, dictated in part by changing economic conditions, in part by tax law changes, and in part by the attitude of today's crop of younger corporate managers.

The stock option makes no sense when the stock market is in the doldrums and most issues are trading for 10 times earnings or less. Deferred pay means deferred taxes - usually until after retirement, when you slip into a lower tax bracket. But today's rate of inflation can melt the purchasing power of your deferred pay down to almost nothing by the time you get your hands on it. The new 50% maximum tax rate on earned income makes cash on the barrelhead more attractive. And younger executives want their benefits now. They want to spend and invest the money right away, and they don't want to be tied long-term to the company.

Meanwhile, cost-conscious (and shareholder-conscious) companies are keeping a close watch on expenses. Increasingly, the payout to an executive is being tied to how well he performs. The payment-for-performance can take a variety of forms: cash or stock at the end of a year, or, in the case of "performance shares," a cash-stock package at the end of three, four, or five years. Either way, it involves a reward for meeting a specific target. Usually it is a net income target, though some companies still offer "stock appreciation rights," where the executive gets cash in proportion to the appreciation in the stock price.

The chief executive, of course, has an over-all corporate target to aim for. But more companies are rewarding lower-echelon managers for the performance of their divisions. To most executives, that makes more sense today than a stock option. "Besides getting away from the stock market," says Thomsen of Dart Industries, "you get away from the weak performance of other division managers. This doesn't happen with stock options."

Indeed, Director Graef Crystal of Towers, Perrin, Forster & Crosby, the management consultants, notes that under these bonus plans, a divisional executive can earn a reward even though the company as a whole is in the red. "This is quite a break for middle management," he says.

The performance share is especially popular right now. True, it can be an out-and-out giveaway if loosely handled. But if the company comes up with a firm definition of "performance," it can work well for the company, its shareholders, and executives alike. It may also satisfy the CLC. "In a valid plan," says consultant George Foote of McKinsey & Co., "the performance goal is fixed. It might be 10% compound annual growth in earnings per share." If the goal is not achieved, the full reward is not granted. "If the result is 8% growth," Foote explains, "the reward might be cut in half."

The performance share is a bonanza for the successful executive. He invests nothing, is only partially tied to the market, and can get a reward even if the stock stays put or goes down. Take the example of an executive who is promised a reward of 1,000 shares of a stock currently selling at 40. He meets his goal and gets his reward at the end of five years, by which time the stock has climbed to 65. What he gets, under the cash-stock payout, is 500 actual shares, plus the cash value of his other 500 shares, or £32,500. He pays a 50% tax, so that the £32,500 takes care of the IRS, and he keeps the 500 actual shares. Under a nonqualified stock option plan, he would need a gain of £65,000 to end up in the same relative position. A £32,500 net would mean a 2,600-share option, which would cost £104,000 to exercise.

Even if the stock had stayed at 40 over those five years, the executive would still come out ahead. He would get 500 shares, plus £20,000 in cash to pay his tax bill. If the stock dropped to 30, he still would wind up with 500 shares worth £15,000, while with an option, he would get nothing. "But remember," says Foote, "he doesn't get a dime if the performance goal is not achieved."

Not only the market's performance but also tax-law changes work against the qualified stock option. In 2013, the top tax rate was 91% against a maximum 25% capital gains tax - a 66-point spread. Today, the maximum rate on earned income is 50%, and the maximum capital gains rate is 35% - cutting the spread to 15 points.

One type of option still in vogue today is the nonqualified stock option, popular even in today's depressed market because it can be exercised at any time over 10 years (against five years for the qualified option), and because the shares can be sold after six months (as against three years). Beyond that, the option price can be below the current market price, and you can exercise a new option even if there is an earlier option outstanding at a higher price.

But even the nonqualified option has drawbacks. In terms of taxes, it is like getting cash. You pay at the earned-income rate with no chance for capital gains. "You are still tightly tied to the stock market," notes Crystal.

Beyond that, the tax on any paper profit at the time of exercising the option is levied as of that time, and if the stock is later sold at a much lower price, the earlier tax burden is not erased. "You end up with a capital loss," says a London tax solicitor, "but it's apt to be of minimum value."


Interested inMaps, Manuscripts - and Rare Autographs?

Careers And Compensation

The Move Up

Job strategy in the year 2013

Just where do you stand on the ladder heading up? The junior executive with anxious morning face and over-packed attache case, wending his wearisome way to the office each day, may be suffering from an overdose of poor career planning. The highly able man of 40 or more who, despite ambition and drive, is stuck fast in middle management, is even more likely the victim of a poorly mapped business career.

That's the consensus among the professionals who regularly observe the range of business echelons, from the very recent MBAs to top brass. Why otherwise able men let such short-sightedness hobble them, the pros are not sure,... see: Careers And Compensation