Risk Level – MODERATE: Retention Level – MODERATE
Both long term incentive and equity compensation are intended to promote a longer term performance focus and align the interests of the executive with the interests of shareholders. Long term incentive plans, even if paid in cash, attract the participants to perform over a multi-year period. These plans generally have a minimum vesting period, and depending on the bank’s objectives, may include longer vesting periods. This longer payment period reduces compensation risk, and with money on the table at any particular time, provides some retentive attributes.
Equity compensation comes in many forms, including stock grants, stock options, restricted stock, and a number of synthetic equity types, such as phantom stock, restricted stock units and stock appreciation rights. The type of equity provided depends on a number of factors, including shareholder dilution, the value of the shares and the stock’s market liquidity. If liquidity is a problem and the ability to sell the shares in any volume is difficult, the recipient may question the “real” value of the equity. In any case, equity, or a long term cash incentive, is a valuable component of the compensation package.
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Note: The following assumptions where made in the illustration: a three year cliff vesting schedule, retirement at age 65 with continued payments, a 25% annual award contribution, a 4% annual salary increase, a crediting rate equal to 7% for all years.