11. Advanced Topics in Business Unit Incentive Plans:
Paying for Value Creation at Its Source

This chapter focuses on how to put an effective business unit
incentive plan in place. The author begins this rigorous presentation
by making a strong case for the increased use of such plans
for business unit executives, rather than corporate plans; arguing
that the recent emphasis on corporate plans and measurements is
likely due to their relative ease of use and the fear of unfavorable
competitive comparison. “Easy and prevalent” are not compelling
justifications, the author points out, and are certainly not tantamount
to good practice.

In particular, the author presents support for the view that
there is too much emphasis on corporate stock compensation for
business unit leaders and not enough focus on value creation at the
business unit level, where most of the value in a company is in fact
created. The chapter discusses a number of ways for creating
business unit equity, from phantom stock to subsidiary equity and
explains the ins and outs of technical issues such as formula versus
market valuation. A number of common problems in designing
business unit incentive plans are identified and discussed, with the
author providing one or more solutions for handling each type
of problem.

The pros and cons of using a more traditional performancebased
cash or stock incentive plan to motivate business unit
performance are detailed, closing with a review of a number of
important design considerations for any type of business unit
incentive plan such as setting grant sizes, determining performance
targets, capping payout opportunities and determining
pay/performance leverage. —Editors



In stock and shipping next business day. U.S. residents can order the
542 page casebound book, including templates and sample documents on CD,
direct from the Publisher for $99.95. The book can also be ordered through any
retail store by the title Executive Compensation: The Professional's Guide to Current
Issues & Practices or by its ISBN number: 1-893190-25-0.