Why Executive Compensation Matters: How to Attract, Retain, and Reward Key Leaders

In today's competitive business landscape, companies—especially private businesses and wholly owned subsidiaries—must recognize that top executives are more than just employees. They are strategic assets that can drive business success, accelerate growth, and create a lasting competitive advantage.

However, many organizations struggle with executive compensation, often overlooking non-monetary incentives, tax-efficient compensation structures, and long-term rewards that help retain top talent.

The Need for Competitive Executive Compensation

Compensation for key executives is more than just salary. It must be strategic, performance-driven, and holistic, including various financial and non-financial components. Companies that fail to offer competitive compensation risk losing their best talent to competitors.

Executives require more than a paycheck—they seek equity participation, long-term incentives, retirement planning, and a sense of ownership in the company’s success. Moreover, they want to feel valued through benefits that match their contributions, such as comprehensive health plans, stock options, profit-sharing, and professional development opportunities.

Common Compensation Structures for Executives

The most effective compensation plans are diversified and tailored to the executive's needs. Here are the key components of an ideal executive compensation strategy:

1. Base Salary & Performance-Based Pay

While salary remains fundamental to executive compensation, many companies incorporate performance-based pay to align executive rewards with business success. This can include:

• Bonuses tied to company performance (e.g., revenue growth, profitability, or strategic milestones)
• Profit-sharing plans, allowing executives to benefit from the company’s financial success
• Stock options or phantom stock plans, where executives gain ownership-like benefits without actual equity transfer

A balance between fixed and variable pay ensures that executives are motivated by results while maintaining financial stability.

2. Profit Sharing & Equity Participation

Equity-based compensation can be a powerful tool for companies that want to encourage long-term executive commitment. This includes:

• Stock options: Giving executives the option to purchase shares at a set price
• Restricted stock units (RSUs): Shares that vest over time based on performance or tenure
• Phantom stock plans: Providing financial benefits linked to company valuation without issuing actual stock

These plans create stronger incentives to drive business growth by linking executive rewards to company performance. What many organizations don’t know is that there are creative ways to emulate profit participation and equity using other financial instruments like group RRSPs and Cash Value Life Insurance.

3. Executive Benefits & Perks

One often overlooked aspect of executive compensation is benefits. Many executives receive fewer benefits than regular employees, which is known as “reverse discrimination”. A well-structured executive benefits package should include:

• Health insurance: Comprehensive plans covering medical, dental, vision, and mental health
• Life insurance: High-value policies tailored to executive lifestyles
• Disability & critical illness insurance: Protection against income loss due to severe health conditions
• Long-term care insurance: Support for medical care in later years
• Retirement savings plans: Executive pension plans and Group RRSPs to secure financial stability post-retirement

While somewhat long in the tooth, a survey conducted by PPI Financial Group in Southwestern Ontario found that companies with strong executive benefit plans have better retention rates and improved executive satisfaction.  A modern approach to Executive Benefits and Perks would include a flexible spending account that allows an executive to customize their compensation through new-to-market, flexible funding mechanisms like the BeniPlus Executive Wallet.

4. Retirement & Deferred Compensation

Executives need long-term financial security, making retirement planning a crucial aspect of compensation. Common options include:

• Registered Retirement Savings Plans (RRSPs): Tax-deferred savings for executives
• Deferred Profit Sharing Plans (DPSPs): Employer-funded retirement plans linked to business performance
• Retirement Compensation Arrangements (RCAs): Plans that offer tax-efficient retirement savings

Providing executives with a well-structured retirement package ensures financial peace of mind and strengthens company loyalty.

5. Executive Education & Career Growth

Beyond financial compensation, ongoing professional development is critical for executive success. Companies can offer:

• Executive MBA sponsorships
• Leadership coaching and mentorship programs
• Access to industry conferences and networking events

Investing in executive education and career growth can improve leadership effectiveness and contribute to long-term business growth.

Overcoming the Challenges of Executive Compensation

While executive compensation is essential, private companies and wholly owned subsidiaries face unique challenges in designing effective reward systems.

1. Balancing Pay Transparency and Trust

Many business owners fear disclosing financial results to executives, believing it may lead to higher salary demands. However, pay secrecy often leads to dissatisfaction and misperceptions about fairness.

Companies that promote transparency in compensation decisions build trust and retain top executives. Clear communication about salary structures, bonus eligibility, and long-term incentives helps executives see the value of their compensation package.

2. Creating Tax-Efficient Compensation Plans

Taxation plays a significant role in executive compensation. Companies must design tax-efficient strategies to maximize benefits while minimizing tax burdens. Examples include:

• Deferred compensation plans that delay income tax payments
• Stock option plans that align with capital gains tax advantages
• Company-paid insurance benefits that reduce taxable income

A well-planned, tax-efficient compensation strategy ensures executives receive maximum financial benefits while complying with tax regulations.  Flexible Spending Accounts allow an executive to balance non-taxable and taxable uses of funds when they customize their spending.  Putting the executive in the driver's seat when it comes to taxation gives them control and leads to higher satisfaction.

3. Customizing Compensation for Different Business Stages

Executive compensation should evolve as the company grows. Emotional rewards (like autonomy and company vision) may outweigh financial rewards for startups and small businesses. However, as the industry matures, financial incentives should take center stage.

The best approach is to balance financial and non-financial rewards at each stage of the company’s lifecycle.

The Future of Executive Compensation

Companies must rethink their executive compensation strategies with changing workforce expectations and economic uncertainty. Here are three key trends shaping the future:

1. Greater Flexibility & Personalization

Executives today demand customized compensation plans that align with their lifestyles and long-term goals. Expect to see more flexible benefits, such as:

• Personalized health & wellness benefits and customizable flexible spending accounts
• Work-from-anywhere policies and remote work flexibility
• ESG-linked compensation (rewards based on sustainability and social responsibility goals)

2. More Equity-Based Compensation

With rising executive expectations, more companies are shifting towards equity-based compensation over traditional salary increases. Stock options, phantom shares, and long-term profit-sharing will play a bigger role in keeping executives invested in company success.  Recent innovations allow for flexible spending accounts to simulate stock options, phantom shares and long-term profit sharing through the combination of flexible spending accounts, the Deferred Profit Sharing (DPSP) component of a group RRSP and life insurance.

3. AI & Data-Driven Compensation Planning

As businesses become more data-driven, compensation plans will be optimized using AI and analytics. Companies will use real-time compensation benchmarking to ensure that executive pay remains competitive and aligned with industry standards.

Final Thoughts: Building a Winning Executive Compensation Strategy

Attracting and retaining top executives requires more than just a high salary. It demands a strategic, well-rounded compensation approach that includes:

1. Performance-based pay & profit-sharing
2. Equity participation & long-term incentives
3. Comprehensive health & retirement benefits
4. Executive education & career development

Businesses prioritizing executive compensation will attract top talent and drive sustainable growth and long-term success.

By designing customized, transparent, and tax-efficient compensation plans, companies can create a winning formula for executive retention—ensuring that their leaders stay engaged, motivated, and invested in company success.  The recent addition of flexible spending accounts, driven by technology, mobile apps and innovation, simplify much of the above and solve many long-standing challenges with offering an executive the compensation they want and need.