While payments to secure senior executives have shown some sign of diminishing in recent years, they are still often necessary as organisations endeavour to attract appropriate talent on both a national and global footing.
Sign-on benefits come in a variety of forms including:
- upfront and deferred cash;
- deferred shares to replace forgone equity incentive opportunities; and
- accommodation benefits, low interest loans, tax equalisation, relocation and/or dislocation allowances;
and can vary in value depending on how critical it is for the organisation to secure the executive, the circumstances of the executive and their family, and the executive’s prevailing remuneration arrangements.
Executive Search firms engaged in seeking Chief Executives, Chief Financial Officers and major Business Group executives have prime carriage of managing the strategy for securing senior executives who forfeit benefits with their present employer should they choose to leave.
If organisations limit their recruitment to resident Australian nationals, sign-on payments are more likely to be focused on replacing lost equity and providing a degree of compensation for a foregone annual incentive. When securing executives from international markets such as North America, Canada and Europe including the United Kingdom, there are more elements to consider.
Executives from Europe and Canada are likely to miss out on defined benefit retirement arrangements. For example, an executive in their 50s might be entitled to receive a defined benefit representing a multiple of their salary if they remain with their current company until they are 55, with the benefit being significantly diminished if they retire before the nominated age. Sign-on payments can account for this over a period of employment with the new employer, provided by way of a separation benefit, a post employment benefit or an equity grant.
Other costs of acquiring talent can include:
- Relocating an executive and his or her family;
- Providing temporary accommodation (up to six months);
- Supporting the executive’s spouse and children until a school or university year is completed;
- Assisting with appropriate high school and/or university placements for dependents;
- Meeting stamp duty, real estate or legal costs associated with the sale and purchase of accommodation; and
- Meeting associated relocation costs of goods and chattels.
In North America, senior executives often have termination benefits that represent more than 12 months’ salary, participate in purely tenure-based equity incentives or have performance-based equity on foot that will vest in less than 18 months. This can occasionally involve senior executives leaving substantial value on the table in the case of departure, a major disincentive for starting a role in a new organisation that cannot be readily equalised without some form of sign-on payment.
In addition, the executive is assuming a risk of losing their position within the early years of appointment resulting from a:
- Acquisitive initiative;
- Capital restructure event;
- Possible change of Directors including the Chairman; and
- Possible change of CEO (if not appointed at that level);
These issues represent continuing challenges for Boards and for search companies in securing talent at an appropriate cost, especially if the Board has aspirations to secure executives with particular experience or calibre to substantially uplift the bench strength of the executive team. Appointing an internal candidate may present a cheaper alternative, but one that is not always the optimal path, particularly if an organisation is going through major transformation where the right talent will be the difference between success and failure.
Shareholders have the right to be concerned when sign-on arrangements have not been thoroughly considered and shareholders’ interests protected. Yet it must be recognised that well considered sign-on benefits made with stakeholders’ interests front of mind are necessary levers to hire talent capable of adding substantial value to the organisation and its shareholders.