Private Companies Typically Award an Incentive Pay Mix

Short-term cash incentives and bonus programs continue to dominate the incentive-pay landscape among private companies in the U.S., but companies also are using long-term incentives to drive performance, at least at the executive level, according to a new research report by WorldatWork, an association of total rewards professionals, and Vivient Consulting.

“As organizations continue to recognize that incentives are powerful tools, short- and long-term incentive programs remain prevalent across both the public and private sectors," said Kerry Chou, WorldatWork senior practice leader in compensation. “Both short- and long-term incentives can enable companies to create and sustain improved employee performance and organizational success.”

The March report, 2016 Incentive Pay Practices: Privately Held Companies, draws on a November 2015 survey of WorldatWork’s nonpublicly traded members. The findings reveal that at private, for-profit organizations last year:

• 94 percent of companies offered short-term incentives (STIs).
• 53 percent provided long-term incentives (LTIs).

Short-Term Incentive Programs

Annual incentive plans were the most prevalent STI plan, offered to employees at the exempt, salaried level and above at most organizations. Almost 75 percent of privately held companies with an STI plan offered at least three programs.

Median spending on STIs at private companies held constant at 5 percent of operating profit, the survey showed. However, at the 75th percentile, spending rose from 11 percent of operating profit in 2014 to 12 percent for 2015, with spending at 14 percent of operating profit planned for 2016. “This indicates that some companies are augmenting their STI budgets to compete for talent,” said Chou.

Performance Measures

For STI plans, profitability and earnings were the most common financial measures—used by 75 percent of private companies—while revenue measures were used by about half of companies. “This implies that companies emphasize profitability, but growth is an important objective as well,” Chou noted.

Among operational measures, no metric stood out as being the most consistently applied at private companies.

Long-Term Incentives

Long-term cash plans continue to be the most popular LTI vehicle at private companies. But private company LTI awards continue to be granted primarily to the CEO and top executives, with minimal use at lower-position levels.

Among LTI performance awards, long-term cash plans were used at 44 percent of private companies, followed by stock options (30 percent) and restricted stock (22 percent).

“While cash continues to dominate long-term incentives at private companies, we are seeing an uptick in the use of real equity,” especially stock options, said Bonnie Schindler, partner at Vivient Consulting. “The improved economy may have prompted companies to prepare for a value-realizing event, such as a sale or public offering, by providing real equity to their executives.”

Also released in March, a related WorldatWork survey report, 2016 Incentive Pay Practices: Nonprofit/Government Organizations, examines incentives at nonprofit organizations and government agencies.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

Related SHRM Article

• Short-Term Incentives Are Playing Larger Retention Role, SHRM Online Compensation, August 2015
• Flat Pay Raises Spur Variable Rewards, New Metrics, SHRM Online Compensation, August 2015
• Private Company Incentives Face Transparency Hurdles, SHRM Online Compensation, March 2015
• Apply Long-Term Incentive Plans at Private Firms, SHRM Online Compensation, August 2013