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Long- and short-term incentives growing fast in private firms

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in Compensation and Benefits,Human Resources

Most private companies in the U.S. now offer long-term incentives (61%) in addition to short-term incentives (95%), according to a new study on pay practices by the nonprofit organization WorldatWork and Vivient Consulting.

Researchers for the groups found that 61% of private employers offer long-term incentives, such as stock and stock options. Almost all employers—95%—use short-term incentives, such as bonuses and performance-based pay.

Both long- and short-term incentives have grown more popular in the past five years. Long-term incentive use increased from 35% of employers in 2007 to 61% in 2011.

“Private companies face unique in­­centive compensation challenges,” said Kerry Chou, who leads Worldat­Work’s compensation practice. “The jump from 35% to 61% in four years was significant and reflects the need for private com­­panies to compete for senior executive-level talent with both private and publicly traded companies.”

Use of short-term incentive programs also grew from 2007 to 2011, from 79% of private employers to 95%.

“On the short-term incentive side, we saw an increase in the use of individual incentives and team/unit/small group incentives,” said Bonnie Schindler, co-founder of Vivient Con­­sult­­ing. “Spend­­ing on incentives as a percentage of operating income stayed constant overall from 2007 to 2011. This indicates that private companies are focusing their in­­­centive dollars on specific key players with specific objectives in mind. Private companies are being smart and strategic about their compensation dollars.”

Four types of short-term incentives are most popular with private com­panies today (percentages indicate companies offering each incentive):

  • 88% Bonuses
  • 39% Individual incentive plans
  • 26% Team/unit/small group ­incentives
  • 19% Profit-sharing plans.

Private companies are most likely to offer these long-term incentives:

  • 52% Performance awards or long-term cash plans
  • 33% Stock and stock appreciations rights (SARs)
  • 26% Stock
  • 19% Restricted stock.

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