For venture capitalists, the calculation is straightforward: set aside 10 to 20 per cent of the equity for people driving a business and expect to see a much higher return on the remaining 80 to 90 per cent.

For organisations far removed from the world of high finance, the same principle applies. By designing a reward strategy that fits business goals, they can attract and retain performers of a higher calibre than they might normally expect without having to put all their money immediately down on the table.

In the short term, benefits can be inexpensively tailored to meet the aspirations of individual executives. And in the longer term, financial incentives such as share schemes and bonuses can be linked to the achievement of stretching targets.

As yet, few organisations are explicitly running a rewards strategy that drives executive behaviour. Most packages still tend to be reactionary and political rather than looking at the broader picture.

But even organisations with limited financial resources can compete for executive talent by taking a joined-up approach to rewards. Off-the-shelf tools are readily available that allow a pick and mix of incentives to be offered using software to give an accurate calculation of any outcome.

By the time executives reach senior level, most of the softer benefits, such as cars and health, have been covered and the focus for rewards is more financial.

The most popular way of structuring a share scheme is through an enterprise management incentive, available to organisations with gross assets worth less than £30m. When a scheme is set up, a strike price is agreed with the Treasury to reflect the underlying value of the company.

Executives then have the right to buy shares at the original price in a defined period. Any gains are treated as capital – not income – and taxed at 10 per cent, instead of 40 per cent. If they leave the company, however, executives forfeit their options.

Where options work particularly well is when a company is building towards a flotation or a trade sale, as there is clearly a buyer for the shares in prospect. For organisations with no plans to exit, share options can still act as a powerful incentive, although it is important to be clear about the potential benefits for executives.

Graeme Nuttall, a partner who specialises in employee share plans at Field Fisher Waterhouse, says organisations have to create an internal market for shares. They also need company money to create liquidity.

‘You could set up a trust, so when someone retires or leaves, the trust has the resources to pay their shares,’ he says. ‘Executives then know that there is a mechanism ready and waiting to buy their shares. Otherwise they are dependent on the whim of the owner.’

To link rewards even more directly to performance, executives may be given shares directly, which is less tax efficient but more financially transparent. ‘For owners, there is tremendous flexibility in the rights that they can attach to shares,’ says Nuttall. ‘It is possible to create plans with non-voting shares or limited votes.’

And for some private companies, it might be simpler to create a back-pocket option, exercised only when the owner decides to sell the company, or a scheme where rewards are linked to the firm’s value.

If the gains from shares appear too distant, the behaviour of executives might be better driven by linking pay to performance through a variable cash component such as a bonus. Generally forming about 30 per cent of an executive’s package, a bonus is best designed to finance itself when targets are outperformed.