The Compensation Committee Handbook, 4th Edition

CHAPTER 12 Incentive Compensation

Most executive compensation arrangements consist of annual base salary, short-term incentives (e.g., annual bonus), long-term incentives (e.g., equity awards or multiyear cash awards), retirement arrangements, welfare benefits, perquisites, and sometimes severance benefits. This chapter provides a general overview of the design of short-term and long-term incentives, while a more detailed focus on equity-based incentives is covered in Chapter 13. This chapter also presents ideas, issues, and market practices that compensation committees should consider with respect to any kind of incentive arrangements. Finally, while not an incentive arrangement per se, retention-only plans are discussed at the end of this chapter.

The following items are covered in this chapter:

• Useful definitions and abbreviations when discussing incentive arrangements
• General comparison of using cash-based or equity-based incentive compensation
• Typical plan and award types and features
• Shareholder approval requirements
• Retention-only plans

Useful Definitions and Abbreviations

The following is a list of definitions that may be helpful in discussing incentive arrangements. Note that these definitions are neither universal nor absolute, but generally are part of the executive compensation lexicon and will be used for purposes of this chapter:

• ASC 718/FAS 123R. The accounting rules generally applicable to equity-based compensation arrangements.
• Award. A compensatory grant ...