Defense Against Talent Raiders : More Companies Resort to Golden Handcuffs

As corporate raids in search of quality executives increase, one search-firm executive says companies are offering more “golden handcuffs” to retain an executive in the company.

Paul R. Ray Jr., president of an executive-search firm bearing his name, says the so-called golden handcuffs are designed to offer long-term incentive compensation plans, instead of one-time pay-outs such as bonuses and stock options.

He said the handcuffs are tied not only to the employee’s performance but to the length of his service.

“The most important development in attracting and retaining top executives has been these handcuffs which tie an executive’s compensation package directly to his company’s performance over time.”

Packages Continue Indefinitely

The incentive packages, for example, are spread over a three-year period and continue indefinitely once they start. Executives would have to walk away from an attractive package if she or he left the company.

“The idea is to make the executive’s decision to leave the company as difficult as possible,” Ray added.

“In the case of stocks, they could become grants instead of options over a period of time.”

Ray said both long- and short-term incentive compensation amounts to more than 40% of a typical chief executive’s pay package these days. A decade ago, it was about 20%. With so much of the total package taken up by benefits, corporations ought to look at them carefully and decide what would be most attractive to executives it wants to keep.

Seniority an Issue

The more senior or more valuable the executive, the stronger the golden handcuffs. Once they reach a certain salary level, executives really aren’t looking so much for immediate cash as for tax-deferred or tax-sheltered plans such as vesting and company-matched 401K programs, Ray said.

“Many of today’s top executives already are in the $200,000-plus base compensation level, and they are in that bracket because they are worth it,” he said. “But most of them also are in their mid 40s and are looking for future security.”

Unless management pays attention to those needs, an executive may be vulnerable, Ray said. But when an offer comes along, it will be more difficult to decide if the offer matches current benefits if they are long term.

“It is not the immediate compensation but the total package where many of the benefits have tax-deferred consequences,” he said. “The executive in turn must carefully weigh what the new company has in terms of incentive programs that will benefit the individual in the long-run.”

He said thrift and profit plans can also be tied to a vesting schedule based on years of service where the vesting percentage increases with the length of service. The perquisites and bonuses also should be calculated on the basis of seniority.

“Those plans that recognize rewarding people for pay-out over a period of time have the potential to keep people within the organization.

“Of course, there can never be a perfect plan,” he said.