Most executives are familiar with the basic concept of risk management. Risks that may seem to be relatively slight when viewed from the perspective of a single individual over a short time frame become virtual certainties when considered in larger groups over extended time periods. The more significant and unpredictable, the more important it can be to "hedge against loss and incur a relatively small, budgeted annual expense to protect against the "big hit. Liability insurance or workers compensation are classic examples of this type of business risk management.

These same principles of risk management should be applied to a company's executive compensation plan. An executive compensation program is arguably the most important obligation a business has, both in terms of expense and in terms of the successful execution of a company's business plan. Through the compensation program, the executive and the company have entered into a compact with their key performers. If each party meets their obligation, there will be financial rewards in accordance with the terms of the plan. But what if the executive dies or becomes disabled. What becomes of the compact then? What is the impact on both parties? Outside of business failure, the greatest threat to the successful realization of the goals of the executive compensation program is death or disability.



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