Executive Compensation Answer Book

Bruce B. Overton and Susan E. Stoffer · 2004

A comprehensive question-and-answer guide for designing, implementing, and administering effective executive compensation programs aligned with strategic business objectives.

The Executive Compensation Answer Book is an indispensable resource for anyone involved in the field of executive pay. Authored by experienced professionals in law, corporate compensation, and consulting, this book provides practical answers to the complex questions encountered in designing, implementing, and administering executive compensation plans. It covers the full spectrum of topics, from hiring and defining executive roles to structuring total remuneration packages—including base salary, annual and long-term incentives, perquisites, and supplemental benefits. With detailed chapters on special situations such as international executives, not-for-profit organizations, and mergers, this guide equips you with the knowledge to create competitive, motivating, and legally compliant pay strategies that attract top talent and drive company performance.

The model it argues

This model outlines how a company's strategic approach to total executive compensation, shaped by its context and philosophy, influences executive motivation and retention, which in turn drives company performance. The model specifies that the design of each compensation component (base salary, incentives, benefits) acts as a lever to achieve these outcomes.

Key ideas

Company Context: The set of internal and external factors that define the company's operating environment, including its business philosophy, life-cycle stage (growth, maturity, decline), industry, size (e.g., revenue, assets), and organizational structure. These factors shape the strategic priorities that the executive compensation system must support.
Total Compensation Strategy: The company's formally stated philosophy and strategic intent for executive pay, which defines the purpose of all compensation programs, establishes the company's competitive positioning relative to the labor market, and dictates the desired mix of various compensation elements.
Base Salary Design: The design of the fixed cash component of executive pay, intended to support the executive's lifestyle and provide financial security. This includes its competitiveness, internal structure (e.g., salary ranges or bands), the job evaluation methods used to set levels, and policies for increases.
Annual Incentive Design: The design of short-term variable pay programs intended to motivate executives to achieve annual business goals. Key design features include the plan type (e.g., profit sharing, target performance), performance measures, leverage (payout curve), and funding mechanism.
Long-Term Incentive Design: The design of compensation plans with a multi-year horizon, aimed at retaining executives and aligning their long-term interests with shareholders. This includes the choice of compensation vehicles (e.g., stock options, restricted stock, performance units), grant size, vesting conditions, and performance requirements.
Benefits and Perquisites Design: The design of supplemental benefits (e.g., non-qualified deferred compensation, SERPs) and perquisites (e.g., club memberships, company car) that provide executives with financial security, status, and tax-effective compensation, aiding in retention and recruitment.
Executive Motivation and Alignment: The psychological state where an executive is driven to focus effort on achieving specific, company-aligned short-term and long-term goals. This alignment stems from a clear understanding that personal financial outcomes are directly linked to the achievement of those goals.
Executive Retention: The behavioral outcome of key executives choosing to remain employed by the company. It is influenced by the total value and security provided by the compensation package, especially through elements like base salary, benefits, and long-term incentives with vesting periods.