Executive compensation methods have undergone significant revisions in recent years, resulting in major legislative and regulatory changes to the tax and accounting treatment of equity-based compensation and nonqualified deferred compensation. These changes include: increased Securities and Exchange Commission disclosure requirements for public companies; Internal Revenue Code (IRC) Section 409A ? which broadly affects many forms of compensation; and the new accounting rules under Financial Accounting Standard (FAS) 123R relating to equity-based compensation for employees, for both public and private companies.

Despite the changes to compensation practices, keep in mind that a compensation package is still a critical element in attracting, motivating and retaining key employees, and a company should always base its compensation program on its corporate strategy, not on legislation and regulatory requirements.
 
A common theme among many changes to executive compensation is the result of increased transparency between performance and rewards for performance. This has led to a number of compensation treatments that use some sort of performance measure to pay out an incentive, accelerate vesting or grant awards.

Below are three common compensation vehicles with a twist on their more common applications: 

1. Restricted Stock Awards ? These are typically common shares granted with restrictions, such as a vesting schedule based on time. However, grants now based on performance or accelerated vesting based on performance are becoming more common. The proper setup requires a strong link to a company's overall goals.

2. Nonqualified Stock Options (NQSOs) ? This type of compensation is now required to be expensed. As a result, companies have taken advantage of FAS 123R and tied this equity to more performance-based criteria.

3. Stock Appreciation Rights (SARs) - This award allows the holder to profit from the appreciation in value of a set number of shares over a set period of time without having to purchase the stock. Simple and flexible in design, these too have become more prevalent in establishing performance-related goals for vesting, grants, and tiered grants.

Not only are these powerful compensation elements available individually, but also they can provide more incentive arrangements when combined or used in tandem to help support the company's goals.

For example, for an employer hiring a key executive who may be leaving unvested equity in his or her former company, a time-vested restricted share grant can be considered to address the value of the lost equity. A performance grant on another tranche of restricted shares can also be considered to align the new executive with the company's long-term goals.

For short-term goals, an annual performance-management program or scorecard can be implemented. This can assess executives' performance during different business cycles or on a quarterly or yearly basis. The program will most likely also maximize the company's tax and accounting effectiveness, once performance goals and metrics are aligned with the company's goals and the chosen compensation elements and levels are benchmarked.

Whatever executive compensation method a company selects, it is important to verify the understanding of the corporate strategy among key employees. Any confusion at this level will only be exacerbated once performance metrics and goals for the measurement of success are considered for rewards.

Randy Ramirez is regional practice leader of the Compensation & Human Capital Consulting Group of BDO Seidman. Peter Klinger is a tax senior director of BDO Seidman's Compensation and Benefits Group.