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Small Businesses Make Stock Options a Preferred Employee Reward

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While larger companies are now giving executives rewards based on company performance, new research finds that smaller employers are still serving up a piece of the company pie to its leaders.

Conducted by independent compensation consultant Pearl Meyer & Partners, the study found that company stock options for executives remain very popular among smaller companies and in certain sectors, such as life sciences, despite a shift among large companies toward performance-based awards that don't depend on the ups and downs of the market.

Of those surveyed, stock options accounted for 42 percent of all executive long-term incentive (LTI) programs for companies with less than $100 million in revenue. At the other end, only 15 percent of companies with more than $10 billion in revenue are using stock options as an incentive program.

"It's not surprising to see the largest companies denominating more of their LTI in the form of performance shares,” said Jim Heim, managing director of Pearl Meyer & Partners.

"They’re under greater scrutiny from shareholders and are often at a mature stage of development where setting multiyear goals is a bit easier than what you’ll see for emerging life sciences or high-tech companies ."

Executives looking to cash in on either type of long-term incentive program better be prepared to step up their performance this year, according to the study.

More than 40 percent of the companies surveyed said they expect to raise the performance bar next year, continuing a three-year trend of companies upping the ante when it comes to performance expectations.

In addition, about one in five companies surveyed said they expect to change their performance measures for 2012, mostly to incorporate a metric that is more closely tied to creation of shareholder value.

"This continues a trend of moving away from the traditional and simplistic approach to goal-setting, in which a few percentage points were just added to the previous year’s performance," Heim said.

Those who do meet the higher standards and help the company reach its goals can plan on seeing their efforts pay off in their paycheck. The research shows that two-thirds of companies that outperform their peers predicted a salary increase of 3 percent or more in 2012 executive base salaries, while 55 percent expect bonuses to exceed internal targets for 2011.

Conversely, only one-quarter of the surveyed underperforming companies projected base salary raises above 3 percent or an above-target bonus payout.

"Normally, we'd expect more of the poor performers to switch up their incentive metrics for fiscal 2012, but apparently their appetite for change is no larger than that of the strong performers," Heim said. "Most likely, many lesser performers believe they are using the right metrics, but their executive teams just are not executing."

Overall, the study estimates nearly 60 percent of companies are planning executive salary increases of between 2 and 4 percent next year, with only 10 percent planning either salary freezes or decreases in 2012.

The Pearl Meyer & Partners’ study, "PM&P on Compensation Planning: Looking Ahead to Executive Pay Practices in 2012," is based on surveys of nearly 200 executive officers, board members and human resources professionals at companies ranging from Fortune 50 to emerging high-growth companies.

Chad Brooks

Chad Brooks is a Chicago-based writer who has nearly 15 years' experience in the media business. A graduate of Indiana University, he spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including, local and state government, crime, the legal system and education. Following his years at the newspaper Chad worked in public relations, helping promote small businesses throughout the U.S. Follow him on Twitter.