Long-term incentives are evolving: What do startup leaders need to know?
The COVID-19 pandemic has sparked immeasurable shocks to the business landscape locally and around the globe, with looming uncertainty, accurate revenue projections are nearly impossible.
This uncertainty has caused more organizations to develop or re-examine long-term incentive (LTI) components of the CEO compensation package rather than bolster short-term compensation.
As LTI components grow for CEOs, we expect that such long-term thinking will also fuel compensation for executives at other levels and throughout organizations. Recent data from Mercer found that 78% of HR executives in India expect the pace of salary increase to slowly get back to pre-Covid numbers but with heightened focus on performance linkage. Against this backdrop, companies can enrich their LTI strategy to recruit and retain talent and thrive in the post-pandemic world.
Whether you are developing an LTI strategy from scratch or re-examining your current incentives, there are a few things that leaders should keep in mind, particularly as market conditions change and organizations grow. In the first installment of this two-part series, we’ll explore fundamental considerations for startup companies as they seek to design LTI plans that align organization and employee interests. For startups, LTIs are often critical to growth as capital is not always readily available. Having a strong strategy in place can help alleviate some of the ‘growing pains’ that can be encountered while trying to build a strong – and sustainable – business with top talent.
Diversify offerings and expand eligibility by position
In the recently concluded Mercer Incentive Practices study which covered organizations across sectors, 39 % organizations have a Long Term Incentive plan, out of which 29% have implemented two plans and 5% have three plans. Startups, in particular, benefit from diversifying their LTI policy to improve the impact of their incentive plans.
By offering employees a combination of service (longevity) and performance-based plans, startups will be in a better position to attract the grassroot dream team that can grow with them. . In our experience of working with our clients in the internet segment, there is a clear movement of LTI being allocated base proximity to the Founder (as core team) to being more broad based and starting right from campus hires. High-growth startups in the earliest phases often lack the cash flow necessary to recruit and retain leading talent, this is where a sound LTI offering can come in handy.
By offering a mix of incentives, organizations can ensure their leaders are motivated to reach financial goals and employees across all levels are rewarded both for individual performance and their tenure.
Currently, 90% of organizations (of all sizes) in India determine LTI eligibility based on position, while less than half (45%) also consider individual performance to power growth in the short and long term, and startups should prioritize the latter. We have seen plan type and coverage evolving in line with growth and maturity of the firm, for example, startups offer stock options only to key executives and personnel in key functions and use MOIC as a key performance metric; while in rapid growth phase service based RSUs find their way to compensate for lower fixed pay and finally as organisations mature, PSUs with vesting based on financial metrics becomes mainstream.
Startups, in particular, would reap the benefits of offering a mix of both of these vehicles, while considering how stock options, phantom stock, long-term cash and stock appreciation rights may also elevate their framework.
There is no one-size-fits all
The goal of every company is to grow and expand its operations. It’s never too early to think about how expansion plans will factor into your LTI strategy. Traditionally, LTI offerings have had little to no localization. In fact, Mercer found that 85% of organizations in India have implemented globally uniform LTI plans while just 15% offer globally differentiated plans. While it might be difficult to think about this now, it’s important to think about how LTIs can be localized as part of expansion plans into new countries and regions. For example, income from vehicles such as stock options are taxed differently across jurisdictions, rendering certain LTIs more attractive in some countries over others. For startups, it’s key to consider how important international talent is to the company. If appropriate, they’ll want to localize LTI plans.
Know the norm in your industry
The prevalence of LTIs varies by industry so it’s important that organizations understand how they stack up against competitors, particularly in highly competitive industries like enterprise software, healthtech and fintech. Notably, we’ve found that a vast majority of firms in the technology industry offer LTI plans, while this number tends to be lower in other sectors. Regardless of industry, however, organizations must design LTIs in a way that will resonate with the talent they’re looking to recruit and retain. This also means properly communicating LTIs right from the recruitment process starting from campus, to job changes and enhanced coverage in certain functions and levels. The fact that LTI forms 15 -35% of annual total remuneration in terms of stack up in the high-tech industry, makes it a key and an indispensable anchor of total rewards. A clear view on prevalence, coverage, type of plans offering wealth creation opportunity is important as organizations build their armor to hire and retain best in class talent
Adjust to keep pace with growth
Growing a startup is like raising a child and the team involved serves as family. Much like parenting, the growth strategies that work in year one may not be effective in the future. LTI plans are no exception. As startups in India grow up, LTIs will need to be continuously refreshed to keep pace with the organization’s own growth as well as external marketplace factors.
In the next installment of this series, we’ll explore how mature enterprises can refurbish LTI strategies to retain top employees, provide opportunities for competitive wealth creation and incentivize long-term value creation.