Costs, share usage, and internal issues need to be considered in managing long-term incentive programs globally, an executive compensation expert said April 29 at the 2013 WorldatWork  Total Rewards Conference in Philadelphia.

Managing long-term incentives involves designing the most efficient plan, and determining whether to tailor the plan by country or region, said James Matthews, director of executive compensation at the consulting firm Towers Watson.  Fortune 250 companies averaged $50 million in long-term incentives outlays a year, the survey said. In one case, International Business Machines Corp. paid about $500 million in long-term incentives globally.

Determining who would be eligible to participate is part of the process, along with whether location and job status should be taken into account, Matthews said.

In determining the size of the award, companies need to understand the amounts that are competitive. Employers also need to adjust for local market demand and to seek ways to optimize management of the program while holding down costs, Matthews said.

About 95 percent of the Towers Watson survey respondents generally extended the same type of plan globally, Matthews said. The structure of the plans remained the same, but about 66 percent of respondents adjusted some award amounts based on location. Five percent of respondents had set up different plans to administer in other countries, he said.

Seventy-nine percent used some manner of restricted stock arrangement to implement the long-term incentives plan, Matthews said. While U.S. multinational companies generally apply common criteria for global eligibility and participation, appropriate award size was the biggest concern among respondents as companies sought to adjust payments based on regions, he said.

IBM has about 6,000 executives operating under the company’s global LTI plan, said by Laura J. Morrison, CCP, IBM’s long-term incentives program manager. Generally, wages are determined by banding, and the company’s program allocates by band and geographic tiers, she said. The funds were pooled and final rewards distributed in a decentralized manner by executives overseeing particular locations, she said.

A big part of implementing the long-term incentives plan involves working with the company’s finance team, scrutinizing corporate results, comparing the company to peers in the industry using their reported financial statements, and then applying a three-step analysis procedure, Morrison said.

Here are the three steps applied by Morrison’s group in helping IBM adjust executive compensation globally:

• A macro economics analysis, a study of competitors, and an evaluation of company anecdotes about the long-term incentives plan. The process also involves examining shareholder perspectives and more traditional measures, such as a financial analysis of the corporate balance sheet, Morrison said.

• A bottom-to-top analysis using surveys of personnel and local data from overseas. Such data are difficult to standardize, but the need to triangulate the information is substantial, Morrison said. Data, even when incomplete, still can be useful to the decision process, she said.

• A trend analysis that involves comparing year-to-year data with noncompensatory information was used to set up the long-term incentives plan at IBM. This is the glue that holds together the incentives plan, Morrison said.   

By Michael Baer