Incentive programs work best when they reinforce, rather than force, desired results. Companies customarily use short-term incentive plans (such as annual or quarterly bonuses) to recognize valuable achievements that support organizational goals. They are also an effective way to control fixed expenses while allowing for value sharing through variable pay arrangements during periods when strong results are achieved.
If this is true for short-term goals then the same purposes can be considered for long-term goals. Most business owners and CEOs focus their attention on both short-term as well as long-term business objectives. These goals may differ or even compete with one another. Thus, owners strive to fulfill the annual business plan (a short-term result) while also growing equity value (a long-term result).
The financial objective of nearly all businesses is value creation—the ultimate dual meaning term. By creating value for customers, a well-run business also creates value for the shareholders. Profits and improving equity illustrate that a company achieves the financial purposes for its existence. Business owners are constantly asking “how do we improve our business value” whenever they revise their business model or business plan, hire new employees or strive to improve execution.
Not-so-obvious questions arise when considering the allocation of resources within the business: Should we invest in new equipment or a new bonus plan? Should we expand our marketing territories or upgrade our pay levels to market standards? Should we develop new products or adopt a phantom stock plan?
Obviously, these decisions are not customarily made in such a black-and-white fashion. Yet, ultimately any “compensation investment” should produce a positive return for shareholders. Companies that do this successfully come to see that well-constructed compensation programs become self-financing. That is, the financial value to be paid under the plan becomes available because of the plan itself. When done right, a phantom stock plan is expected to accomplish this result.
Successful companies find creative ways to attract and retain premier employees. They don’t settle for top 25% quality, or even top 10%. They are committed to the presentation of a value proposition that appeals to the top 2% caliber talent. Many factors beyond compensation must be included in this proposition. But the compensation offering must resonate with them and differentiate from competitors. For this reason, growth-committed organizations utilize incentive programs that enable top performers to build meaningful wealth. Phantom stock plans, along with other forms of long-term incentive plans, are designed to produce this result.
A well-structured phantom stock program that is linked to a growth oriented business plan can send the right message. Key employees can visualize the potential value that can be earned over time. This allows the company to communicate the uniqueness of its value proposition in a concrete way.
Phantom plans also include vesting schedules. These limit the value to be received by participants if they leave the company prior to the fulfillment of the plan distribution schedule. Once value has built up within the plan, employees are less likely to depart (e.g. to a competitor) since they would be forfeiting some or all of their plan value.
The most important perception to avoid in any company’s compensation programs is a sense of unfairness. Once employees believe that compensation plans are unfair, engagement and productivity will immediately begin to decline.
Owners and CEOs seek to rally employees around the organization’s growth objectives. Employees understand that growth in sales, margins and profits produce wealth for the shareholders. Those employees who recognize that they directly and meaningfully contribute to growth will begin to wonder how and when they get to participate in this value. Successful companies don’t let this happen. They send the right message: “At ABC Company, you participate in the value you help create!”
Owners and CEOs intrinsically understand this principle. They know that sharing value through long-term plans is essential to capturing the loyalty and commitment of top achievers.
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