Chief executives of Fortune 500 companies receiving lavish pay,including significant stock options and other forms of deferredcompensation, have become commonplace.

But now, with the U.S. labor market tighter than it has been in years,these incentives are being considered more frequentlyat middle-market companies and smaller firms across America tryingto attract key staff by matching incentives at larger, publiccompanies.

I hear a growing number of owners of middle market firms saythat key staff are now requesting an ownership share in exchangefor a commitment to stay at the firm. In one recent case, a CEO wasapproached by his chief financial officer seeking equity in thecompany, valued at $2.5 million—ten-times the CFO’s annualsalary.

The question for any CEO is whether that’s reasonable? Theanswer is informed by the U.S. labor market where it isincreasingly difficult to find and retain talent.

Unemployment fell as low as 4.4 percent in April and CEO pay wasup 6.8% last year on the back of higherprofits. The labor market is so tight that the Federal Reserve Bankof San Francisco noted in a recent report: “The expectation that the(unemployment) rate will fall even further raises the possibilitythat the labor market will exceed the Federal Reserve’s goal ofmaximum employment and could push up wages and pricessubstantially.”

It’s little wonder then that chief executives are scared theymight lose their best talent. To retain top performers, especiallyif they are key to succession planning, compensation packages haveto be meaningful to the employee while not giving away thefarm.

That is not easy to do, but here are six things to consider toget that balance right:

1. What is being paid elsewhere? A good placeto start assessing whether any demand is reasonable is to find outhow competitors are dealing with compensation. A specialistexecutive recruiter will know what market conditions aresustaining. More detailed information is available in the annualreports of public companies, and private firms such as Compdata have detailed information on executivecompensation at the industry and regional level. That research mayreveal creative alternatives that do not involve giving awaypartial ownership of the company.

2. Is the employee worth it? If thecompensation is in line with market conditions, the nextconsideration is to discern whether there will be a likely returnon investment. For example, if a CFO charged with growing corporateearnings is seeking 2.5 percent ownership and already has a strongtrack record in that regard, a case can be made to the compensationcommittee that giving the executive equity will benefit allshareholders.

3. Link compensation to targets. Once a companygives extra compensation to executives it should be tied tospecific targets that are relevant to the role and business. Forexample, if you ask an executive to grow revenues but that growthis done through acquisitions funded by debt, there may be noimmediate return on investment. Specific, meaningful goals are moresuitable. For a CFO at a mature firm that could be maintainingyear-over-year sales from existing clients or reducing costs by acertain amount. At a start-up, a CFO could be rewarded forincreasing venture capital funding. Payouts should be split betweencompany goals, team goals and individual goals so that even if thefirm struggles, the executive is still incentivized to workhard.

4. Think about timing. Employers must balancethe desire to reward the employee now with securing theirretirement. Packages might also contain a mix of certain andvariable rewards. For example, a key executive could receive anannual bonus in cash (paid out in a range tied to performance,) a“bond” that pays out as a fixed annuity in cash after an initialvesting period of several years, as well as stock options or grantsthat could add variable value over the longer-term.

5. Explore a supplementary retirement plan. Ifyour CFO is asking for better compensation, other top executivesmay not be far behind. Adding a supplementary retirement plan togive key staff a set payout upon retirement—such as two orthree-times final year salary—is an effective tool to lock intalent.

6. Add a claw-back clause. Even withthe best will in the world, things go wrong, so plan for alleventualities. Adding a clause in compensation contracts that clawsback deferred compensation when executives are fired for causeremoves a crucial risk. In April, Wells Fargo did just that, takingback an additional $75 million in pay and stock grants from twoexecutives at the center of a scandal over fraudulent accounts,the largest claw back in banking history.

Adding improved deferred compensation plans for key executiveswill be a pressing issue for as long as the labor market remainshot. It’s a seller’s market for top talent. The companies that winthe bidding war will come up with creative solutions for classes ofemployees while also figuring out how to fund such arrangements ina way that makes economic sense.

It’s a lot of work. But, when done right, key executives arehappier and the company ensures an easier time with successionplanning.