Time, Value and a Bonus
“The accruals cost us millions, but the executives value their bonus at a fraction of its face value.”
…… the trends in executive compensation to long deferral periods, bonuses held in stock and the potential value reduction through future downward adjustment and claw back.
The issue for executives is economics 101. A dollar has less value tomorrow than today and uncertainty over the number of tomorrow’s dollars reduce the value still further. Yet, the increasing costs of executive incentives weigh heavy on the corporate balance sheet and in the eyes of the shareholder advocacy groups.
The demand for longer bonus deferral periods reflects the perceived risk horizon of the impact of executive decisions. The driver for deferral into stock is to increase executive alignment with shareholder interests. Increasing conditionality around claw back of bonuses paid and value reduction of unvested payments is a reaction to executive misdemeanours.
Long deferral periods lead to great uncertainty as to value (the very basis of the Black Sholes calculation). Stock value is heavily impacted by external events such as market crashes.
Capital protection rather that appreciation becomes a driver to reduce future uncertainty. As we have seen in some labour markets, upward pressure on base salary and thus dollar certainty is increasing.
We are at a tipping point. Remuneration costs are rising, for executives value is falling; external criticism is increasing rapidly as is remuneration regulation.