April 8th, 2013 by Ken Gibson
Determining what’s most important “right now” can be difficult in any context. The issue can take on an additional layer of complexity when trying to address which compensation program should get most of your attention at a given point in time. Should you perform some kind of salary study to see if you are competitive with the market? Is it time to revise the annual bonus plan? How are you going to address the promises made to key people that they will participate in company growth through some kind of long-term value-sharing arrangement? Is it time to begin sharing stock with employees? Is there an alternative to stock you should be considering? And so on. The list of issues can be endless–and every item on that list is important.
Unfortunately, there is no silver bullet solution for setting compensation priorities. And I don’t know that I can, in a short blog post, define the best answer for the myriad circumstances businesses might be experiencing. That would be like asking a doctor to tell all potential patients what health measure is the most critical for them to address right now. It’s impossible. That said, there are some logical questions that can be posed to help guide you in setting pay priorities. Here are a few to consider:
- Compensation Philosophy Statement. Do you have a written compensation philosophy statement? Does it clearly articulate what the company will pay for and how it plans to share value? Does it define where the company wants to be relative to market pay standards for salaries and total compensation? Does it establish a balance between guaranteed and incentive pay? What about between short-term and long-term incentives (or what VisionLink refers to as value-sharing)?
- Pay Grades. Have you established clear pay grades? Are you satisfied your organization is competitive with market pay standards for the most critical positions in your company? Are your salary levels consistent with your compensation philosophy?
- Incentives. What is most critical to your organization right now–sales growth, short-term performance (12 months or less) or long-term performance (12 months or longer)? I know they’re all important, but which is crucial right now? Do you have an incentive plan that addresses that need? Is it clear? Is it “working?”
- Growth. Does your company plan to grow? Does it have a clear business model and strategy? (The model defines how the company generates and grows revenue; the strategy focuses on how the business will compete in the marketplace.) Have you identified a compensation strategy that reinforces your growth plan? Is it tied to specific roles and clear performance expectations?
I suppose the list of questions could be longer, but this offers some pretty good categories and issues to examine as you consider what pay programs might be most important “right now” for your company. I would also submit they are organized in a pretty logical order. First, define your philosophy. Be very clear and comprehensive. Next, make sure your pay grades and associated salaries are well defined and competitive–as well as consistent with your philosophy statement. Then, define what kind of performance you most need employees to focus on right now. Force yourself to be clear about that issue. (This isn’t to suggest all three elements summarized above won’t need to be ultimately addressed, if not right now.) Finally, be clear about your growth plans and how compensation can be used as a strategic tool to support that effort. Don’t fall into the trap of ignoring this priority because you think today and tomorrow are all you can worry about “right now.” The way you pay your people is a powerful communication tool. It tells them what you consider to be important. If growth is important to you, don’t pay your workforce in a way that communicates it isn’t.
In the end, sorting through these priorities is an important skill for any company that wishes to develop a value proposition that is a competitive advantage in recruiting and retaining premier talent.
Tags: compensation, compensation philosophy and strategy, Employee Trust, Growth, incentive plan, Incentive Plans, incentive programs, incentives, long-term shareholder value, Pay for performance, Sustained Results
Posted in Business Growth & Compensation, Business Growth and Rewards, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent, Return on Compensation Investment, Uncategorized | No Comments »
February 21st, 2013 by Ken Gibson
It’s not uncommon for a prospective client to inquire about the kinds of results companies have achieved through the compensation plans we’ve helped them implement. It seems like a valid question but in truth it misses the mark. What really needs to be answered is how the success of a given compensation plan should be measured. What determines a successful pay plan? Let me explain the distinction.
If we install, say, a phantom stock plan for a client and that company goes on to double revenues over the next three years, should we credit that success to the new compensation strategy? Probably not. After all, there are many factors that potentially impacted the organization’s performance over that period. It may have introduced a new product, made a key acquisition, saw a competitor leave the marketplace or caught some phenomenon in the economy at just the right time. Would the company have had that success without the phantom stock plan? Possibly. Conversely, if the company’s revenues remained flat over that same period, does it mean the phantom stock plan was a flop? Also, probably not. Confused? Are you asking, “So why bother implementing any pay plan if there’s no way of knowing its impact on company results?” Well, not so fast. I’m not saying there’s no impact. It’s just more subtle than that. Here’s why.
Compensation plans are strategic tools that wield only so much power. They are primarily intended to communicate to employees “what’s important” to the organization. They give proportion and timelines to priorities and place a value on their fulfillment. If effectively designed, pay plans should introduce then promote a consistent and unified financial vision for building the future company. They should also reinforce a person’s role in the business model of the company and what their financial stake is in meeting the expectations associated with that role. While the metrics associated with some specific pay plans might be tied to company performance, it isn’t the compensation plan’s job to achieve that result. It is a simply a mechanism for defining the financial partnership that exists between the company and the employee when roles are fulfilled. And here’s the key, it is also (or should be) a gatekeeper that protects shareholders from paying out value if it hasn’t been created.
So, if that’s the appropriate role of a pay strategy, how do you measure a compensation plan’s success? Well, the measure should be whether or not it is fulfilling its role. To determine that, here are some questions that should be answered.
- Before designing the plan, did the company clearly define what value creation is? Does the plan include metrics consistent with that definition? Does value sharing occur out of productivity profit–the threshold at which shareholders have already received an appropriate return on their capital account? If the answer is yes to these questions, then it means the plan is only paying out value when value has been created–it’s self financing. This also suggests that during periods of economic decline or stagnation, the plan is self-restricting in its payouts. That’s a successful approach.
- Does the company have a clear philosophy statement? Is the pay philosophy communicated effectively to employees? Are the company’s compensation strategies consistent with the pay philosophy? If you answered affirmatively to each of those questions, then the company is being clear about what is willing to “pay for” and is implementing plans that follow that rule. This again must be considered a successful approach.
- Does the company compare its pay strategies to market pay standards? Does it’s philosophy statement define where the company wants to be relative to market pay and total compensation? Do those in charge of evaluating these standards also perform an “internal equity analysis” to compare the data with the value the company places on given roles and positions? If this is the approach being adopted, then the company is using some outside metrics to determine if it is over or underpaying for certain functions to be fulfilled in the organization–particularly relative to salaries. When such is the case, it knows that it is not making itself noncompetitive in trying to attract and retain the best talent. If it likewise offers significant upside potential relative to the market, but within the parameters defined in the first bullet point, then it knows it has a competitive advantage in attracting key producers. That’s also a successful approach to pay.
- Does the company market a future to employees? Is there a compelling vision? Is there a positive work environment? Are there opportunities for personal and professional development? Is the financial partnership with employees clearly defined? These questions point to what is what is known as a “total rewards” approach to building a value proposition for employees. If a company adopts this framework, it is not expecting remuneration to be the sole issue upon which attracting and retaining key producers is based. If it pays attention to each of those questions, and works hard to ensure evaluation and implementation in all categories, it will become more successful at becoming a magnet for the “right talent.” And companies that get great people usually get great results. Hence, a total rewards approach is a successful one.
If your company feels good about its answers to these questions, then my position is that you have a successful compensation strategy in place. It is successful because it is based on a sound definition of value creation and a clear philosophy about value sharing. It is successful because it protects shareholders. It is successful because there is a clear basis for the pay levels that have been set. It is successful because it effectively defines the financial partnership between employees and ownership. It is successful because it markets a future that attracts the best talent.
So, here’s to your success.
Tags: breakthrough success, compensation, compensation philosophy and strategy, Culture of Confidence, Employee Trust, Growth, incentive plan, incentives, Pay for performance, phantom shares, phantom stock, profitability, Sustained Results
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent, Phantom Stock, Uncategorized | No Comments »
February 8th, 2013 by Tom Miller
Income taxes are going up dramatically this year for high income earners. Is there a bright side? No! But let’s deal with it.
Top earners will now be in a 39.6% marginal bracket. Add state taxes (for most states)—let’s assume 5.05%. (Wouldn’t that be nice Californians and New Yorkers?) Then add the Medicare tax on income over $113,700—2.35%. That would add up to a true marginal rate of 47.0% on the top dollars earned by high achievers. Ugh!
Let’s consider some compensation strategies that will help creative employers offer relief to their top earners. There are a few but let’s look at two examples for now.
First, revisit deferred compensation plans (DCP). These plans allow high earners to voluntarily defer parts of salary or bonuses and postpone taxes to a future date. Deferring to the future offers several immediate benefits:
- Reduce taxable income below the new top rate threshold ($400k for single filers; $450k for married/joint filers);
- Reduce MAGI (modified adjusted gross income) below the Medicare tax threshold ($200k/$250k);
- Reduce AGI below the threshold where personal exemptions and itemized deductions are phased out ($250k/$300k).
In addition, assuming the same tax rates in the future as today, deferred dollars almost always result in larger after-tax values in the future (given the same growth assumptions inside the DCP as in an outside investment account). For more information, you can view a webinar that I presented in February.
Second, beef up long-term incentives. Employees may be pleased to exchange some of their incremental “53 cents on the dollar compensation” for long-term equity or phantom stock. Or, a smart employer may simply add such a plan to existing promises. Let’s consider phantom stock. Grants received today equal a financial stake in the future company with no current tax! That’s right. You can give me 1%, 5% or 10% of your company “value” through phantom stock and I will incur no taxes today. What happens when the shares are redeemed in the future? Yes, taxes. However, we might be able to move payments into lower tax years, or spread them over time. In other words, we can often find ways to move the reportable income into periods where the employee may fall below the tax maximizing thresholds discussed above.
But here’s my main point: Employers that explore and implement techniques to help high income earners reduce, avoid or delay taxes are offering a benefit that just went up in value thanks to Washington. Don’t let your key employees be lured away because your competitor adopts these ideas before you do.
Tags: compensation, dcp, deferred compensation, employee tax, income tax, long term equity, phantom stock, taxable income
Posted in Business Growth & Compensation, Compensation Planning, Current Pay Trends and Topics, Key Talent Compensation, Phantom Stock | No Comments »
January 24th, 2013 by Ken Gibson
Now that we’re at the start of a new year, many organizations are looking at their compensation strategies and attempting to break new ground in their effort to develop pay programs that will support business growth. Hopefully, the issues discussed in this space, as well as the webinars, white papers and e-books VisionLink has produced, will give you a “leg up” in your attempt to improve things. That said, I thought it might be helpful to offer a few tips about steps to consider taking this year if you haven’t already addressed them. They are in no particular order of importance–just a kind of “brain dump” on compensation issues that should take priority in your pay planning.
- Plan compensation strategies that will address a high income tax environment. Everyone, but especially your highly compensated people, are going to face higher tax rates in 2013 and beyond. It’s time to consider a strategic deferred compensation plan if you haven’t previously, or shore up the one already in place. (For further insight in this regard, consider watching our February webinar entitled: “Compensation Strategies for a High Income Tax Environment.”)
- Put more emphasis on value sharing and upside earnings potential and less on guaranteed income. Hopefully your company is committed to innovation and keeping at bay those organizations intent on the “creative destruction” of your business. You will need to recruit talent that has entrepreneurial capacity and inclinations. They will want a pay program that simulates what they could have if they started their own business. (For more ideas in this regard, check out our December 2012 webinar entitled: “The Future of Compensation: What’s Next and Why.”)
- Begin measuring the return on your company’s total compensation investment; know your organization’s “productivity profit.” If you’re going to share value you’ll need to get very good at defining value creation for your firm. Incentives (value sharing) should be “self-financing” and come out of the productivity profit of the company. This is the profit that is calculated after an appropriate capital “charge” is assessed against the earnings of the business. The capital charge reflects the amount of return shareholders should expect to receive on the operating capital already at work in the business. (For a more complete understanding of this concept, check out our September 2012 webinar entitled: “Compensation Standards that Both Shareholders and Employees Will Embrace.”)
- Adopt a “Total Rewards” approach. This means you recognize that financial rewards represent only one of four elements employees will evaluate this year in deciding to either join your company or stay with it. They will also want to know if the company has a compelling future–and that its fulfillment relies on their unique abilities and contributions as key producers. Premier talent will seek a positive work environment–one in which it enjoys the team of people it works with, the nature of its role in the organization and that it has the ability to get problems solved. Finally, your best people will want to know that there are personal and professional development opportunities. This is not just training. This means that their unique abilities are aligned properly with the company’s resources so they get better at what they do because they are part of your organization.
- Implement an effective rewards reinforcement strategy. A “B-” plan that is highly promoted and well communicated will have more value than a “A+” plan that employees heard about once in a launch meeting but hasn’t been talked about since.
- Craft and communicate a compensation philosophy. Put it in writing. Make this the year you clearly define what you will “pay for” and how you feel value should be shared in the organization. Define where the company wants to be relative to market pay standards for salary versus total compensation (including value sharing). Communicate that philosophy as often as you can in team or company-wide meetings and whenever or wherever the vision and strategy of the business is being discussed.
There are certainly more things that could be added , but that’s a pretty good list for now. If you do the things indicated here, you will see measurable improvement in your ability to recruit and retain the best people and keep them properly focused on the outcomes you want achieved. You will sense a greater ownership mentality emerging in the organization and a more unified financial vision for growing the business will be apparent.
The proof is in the doing. Try it. Test it.
Tags: compensation and the recession, compensation philosophy and strategy, Culture of Confidence, Employee Trust, Growth, incentives, key people, long-term shareholder value, Pay for performance, Sustained Results
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent | No Comments »
January 10th, 2013 by Ken Gibson
There is no constitution that dictates how compensation should be designed. Nor is there a “one size fits all” approach to building pay strategies that will help a company succeed. However, there are what might be considered self-evident principles that businesses should use when they approach the development of rewards strategies. I call them self-evident because companies that have succeeded in their approach to compensation have applied these principles and seen positive results; the principles have been tested.
So, not in any particular order, here are the guiding principles that any company wishing to develop an effective compensation strategy should follow:
- Know Your Philosophy. Every company needs to be able to articulate what it believes about pay and value sharing. This should be in writing.
- Define Outcomes. This means a company knows the results its looking for and how to prioritize those results. All leadership needs to be in agreement about those outcomes and that they are achievable.
- Envision the Future. A business must be able to effectively model what the future will look like if the defined outcomes are achieved. It needs to be able to envision what will happen to shareholder value if certain assumed results are achieved.
- Define Value Creation. This should technically be part of the compensation philosophy. A business must be able to articulate the point at which additional value has been created beyond that attributable to the financial and physical capital at work in the business.
- Identify Clear Roles. An organization needs to link outcomes and value creation to people. What functions need to be performed to achieve the results that have been identified? Are the right people filling those roles now? Are additional or different people needed?
- Share Value–Especially Long-Term Value. There needs to be a relationship between value created and value shared. Key producers want to know that there’s a mechanism for participating in the growth they help create.
- Adopt a “Total Rewards” Approach. Financial rewards is only one of four reasons individuals join and then stay with an organization. Pay is a critical component but premier talent also wants to know that the company has a compelling future, that a positive work environment is being nurtured and that there will be opportunities for personal and professional development.
- Market a Future to Your People. At a minimum this means a company has to have a clear and compelling means of communicating its value proposition to its people. But it has to more than communicate how a bonus plan works. It has to create “line of site” between vision, strategy, roles, expectations and rewards. Innovative leaders such as Steve Jobs, Mark Zuckerberg and Jeff Bezos have developed ways of transforming the way both their employees and their customers view the future. Compensation has to be framed in such a context for it to have impact.
Well, there you have it. Now you’re equipped and should never fail in your development of effective pay strategies. Okay, you should have smaller failings at least. No one gets it all right at the outset, but if sound principles are being applied, making adjustments will be much easier. Your people will also sense there is a fairness to your approach and will help you get it right.
In the end, growth companies know that if they don’t get rewards right, there is a high likelihood they will fall short of the results that hope to achieve. Correct principles will help make sure you get it “right.”
Tags: compensation, compensation and the recession, compensation philosophy and strategy, Culture of Confidence, Employee Trust, Growth, Pay for performance, profitability, Sustained Results
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Key Talent Compensation | No Comments »
December 12th, 2012 by Ken Gibson
Who doesn’t want to be called fair, right? A desire to be considered fair is in our bones and to be called unfair is one of life’s ultimate insults. (Unless of course it’s your teenager claiming something is unfair; in which case you know you’re on the right track. But I digress.) Likewise, we instinctively sense unfairness when we experience it.
Fairness in compensation, however, is a topic almost no one seems to want to think about. How can we objectively determine if a pay plan is fair and do we even want to “go there?” Well, I think we can (determine it) and should (go there). Here’s a list of questions I think a company should consider to determine if their compensation package is “fair.”
- Compensation Philosophy Statement. Has your company put in writing it’s philosophy about compensation and what it is willing “pay for”? Does your company communicate that philosophy to its employees?
- Market Pay. Do your current salary levels comport with market pay standards? Are they consistent with where your compensation philosophy statement says you want to be in this regard? (E.g. 50th percentile of market pay.)
- Value Sharing. Does your company define value creation for its employees and have a mechanism for sharing value that is created–both short-term and long-term (particularly for key producers)? Is it consistent with your compensation philosophy statement about sharing value?
- Benefits. Does your benefit’s package offer employees an “adequate” if not superior opportunity to insure against risks that could impact their financial future and allow them a mechanism for retirement planning? Does it recognize the potential ”reverse discrimination” impact of qualified retirement plan restrictions for high income earners and allow the latter opportunities to offset those limitations (i.e. 401(k) mirror plans or other supplemental executive retirement plans)? Is there adequate choice and flexibility in your benefit plan?
- Line of Sight. Do your compensation philosophy and its associated plans create a clear link between the vision of the company, it’s business model and strategy, roles inherent in that strategy and expectations associated with those roles, and how individuals will be rewarded for fulfilling those expectations?
I suppose other questions and categories could be added to that list, but that’s a pretty good start. I believe most companies have more control over the sense of fairness employees feel about compensation than they sometimes allow. For example, many are confronted by employees who have looked at market pay data online and concluded they are under paid for their positions. Never mind that there is a range of variables in evaluating such data, and that employees who are overpaid will never make that known to their employer. The overriding issue is that most companies don’t have a philosophy driving their pay strategies. They are not armed with a cohesive approach, so they are left sensing that such employees feel the company is “unfair” when it comes to pay–regardless of the logical explanations that are offered in response to their challenges. Such business leaders need an approach to rewards that will allow them to respond in such situations with something like the following:
“Our company’s philosophy about compensation is that we will pay salaries at the 45 percentile of what market pay data indicates for the positions in our organization. (By the way, our last check of that data indicates you are at the 47% for your position, based on an average of four surveys we evaluated.) However, we also believe in providing significant upside potential through the two value-sharing plans you are eligible for. Our annual bonus plan allows you to earn an additional 25% plus of salary if you and the company meet the performance standards we have set and communicated. Likewise, you participate in a phantom stock plan that allows you to earn an additional 30% of your salary in phantom shares of stock which, if we continue to meet our targets, will grow in value and be paid out to you in five years. You also are part of our company’s deferred compensation plan which has a performance match of up to 25% of your contributions. That is not counting the match we give all employees on their 401(k) program contributions. All told, your pay package has a value of $1.7 million over the next five years.”
I think most people would not only would consider such an approach “fair” but would likely find it a compelling reason to join and or stay with such an organization. And by the way, the “self-financing” approach to the value sharing described here makes CEOs and shareholders happy to write incentive payout checks. Value is being paid out of superior value created–and nothing is paid if certain performance thresholds aren’t met. So it is not only a fair approach for employees but for the business as well.
Companies that give this much thought to their approach to pay communicate the value they place in the relationship with their people and a respect for the unique contributions individual members of the workforce make. That sense of partnership makes fairness self evident.
Tags: compensation philosophy and strategy, Culture of Confidence, deferred compensation, Employee Trust, Growth, incentives, rewards, Sustained Results
Posted in Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent, Phantom Stock, Return on Compensation Investment, Uncategorized | No Comments »
November 6th, 2012 by Ken Gibson
That’s a question that is felt at a visceral level by anyone trying to drive growth in a business. Intuitively, most CEOs know they should have a better handle on how much their key producers are being paid and why. They’ve looked at market pay data and thought strategically about the role each person is playing in the company’s growth plans. At the same time, they would be hard pressed to articulate why a given employee group received an increase in compensation this past year and what standards had to be met to merit that improvement.
As this issue is examined in company after company we meet with, we suggest that a ”value matrix” be developed that will articulate the standards each compensation plan must meet to be justified. This exercise should be done in conjunction with the development or evaluation of the company’s written compensation philosophy statement that articulates what the company believes it should “pay for.” We recommend the value matrix incorporate and define the following components. Down the vertical axis, each piece of the compensation package is listed: salary, annual bonus, qualified retirement plan, long-term incentive plan, group benefits, executive benefits, etc. Across the horizontal axis, the following standards should be defined for each plan:
- Purpose–This is a brief statement that should answer the question: “Why do we have this plan; what outcome is it intended to drive?” For example, the purpose statement for a short-term incentive plan might say something like: Enhance current cash payments to executives for achieving top and bottom line annual goals.
- Standard--Here we want to define what measure will be used to define how the plan value will be targeted. For example, the salary standard might be articulated as the 50th percentile of market pay. A standard for a long-term incentive plan might be defined as 20 to 30% of salary. Even if something like Phantom Stock is being used, it should be quantified other than by just the number of shares being distributed. Group benefits would typically be stated in terms of a percentile of market standards, as salary is.
- Investment–This figure is a dollar amount the company anticipates investing in the pay program on either a per employee basis or for the group as a whole (that is to be included) and the period being evaluated. Each form of compensation needs to be calculated and the company commitment quantified. To come up with this figure, the company will need to make assumptions about the level of results it anticipates will be achieved to trigger incentive payments in particular. It may decide to tie the assumed dollar volume to a base, targeted or superior level of business performance.
- ROI–This is a standard that identifies performance thresholds the company needs to be achieving to merit the pay investment that has been allocated. Salary levels, for example, may be tied to an ROA target the business needs to achieve while short-term incentives might be based on a combination of revenue growth and margin (or other key performance indicators).
When a company goes through this kind of analysis, it is forcing itself to think about compensation as an investment that is being allocated rather than merely an expense to be contained. It creates a standard against which it’s pay allocation can be measured. If companies want to get serious about growth, their leaders must think about compensation in these terms and understand the extent to which this deployment of capital is contributing to growth. Pay for performance in this context is not just a fancy term for having a bonus plan. It’s a strategic approach to the decision making process that impacts what, for most companies, is the largest budget item on their financial statement.
To learn more about where compensation will be headed in the future, tune in to our webinar on December 4 entitled, “The Future of Compensation: What’s Next and Why?”
B8VVKUVES2EF
Tags: compensation, compensation and the recession, compensation philosophy and strategy, Culture of Confidence, Growth, incentives, Pay for performance, profitability, Sustained Results
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Return on Compensation Investment, Uncategorized | 1 Comment »
October 26th, 2012 by Ken Gibson
Where is compensation headed in the future and why? It’s a compelling subject for a number of reasons, not the least of which is that pay programs represent the largest budget item most business leaders have to manage. And the trends so far have American companies paying attention to this issue probably more than they ever have before. Why is that? Well…much of it has to do with the economic environment of the past three plus years that has fundamentally altered the way business leaders, employees (or potential employees) and the public (through the eyes of the media) look at financial rewards within the business. Owners and CEOs are worried about locking key producers into high salaried positions. Talent that has been sitting on the sidelines is concerned about coming back into the labor force and getting locked into a salary that is far below what it earned at its peak. And the public (the media) is concerned about “fairness.” So this leaves everyone looking for effective solutions and asking where this is all headed from here.
To understand where compensation is headed, we must first understand where business is headed; specifically, what kind of people are businesses going to want and need to attract to remain competitive. The key word in this regard is innovation. The focus on creative energy within organizations both large and small is bigger than it has ever been–and it will only increase in the future. Pick up any business publication these days and you would be hard pressed to find one that doesn’t have multiple articles on innovation–how it happens, who is most innovative or how to breed greater levels of this quality within a company. So how does this relate, first of all, to the kind of talent businesses are looking to attract? Consider this insight offered by Scott D. Anthony in the September issue of Harvard Business Review. Mr. Anthony is the managing director of Innosight Asia-Pacific and the author of The Little Black Book of Innovation (Harvard Business Review Press, 2012):
“It’s early days still, but the evidence is compelling that we are entering a new era of innovation, in which entrepreneurial individuals, or ‘catalysts,’ within big companies are using those companies’ resources, scale, and growing agility to develop solutions to global challenges in ways that few others can…These companies have pushed into territory that was once the province of entrepreneurs, NGOs, and governments—from delivering health care technology, clean water, and new agricultural capabilities in developing countries to managing energy, traffic, public transit, and crime in the world’s major cities.” (“The New Corporate Garage”, Harvard Business Review, September 2012, Scott D. Anthony)
The trend that this article and others point out has to do with the focus businesses have adopted on hiring entrepreneurial individuals (catalysts) that can leverage the company’s resources to create and innovate. And the article goes on to point out that “Whereas the inventions that characterized the first three eras [of innovation development in American companies] were typically (but not always) technological breakthroughs, fourth-era innovations are likely to involve business models. One analysis shows that from 1997 to 2007 more than half of the companies that made it onto the Fortune 500 before their 25th birthdays—including Amazon, Starbucks, and AutoNation—were business model innovators.”
If you take just these two elements–catalysts and business models–it becomes clear where compensation needs to go if it is going to support the need for businesses to innovate. Pay strategies need to attract people with entrepreneur capabilities and reward them for leveraging the ability of the company to expand, magnify or otherwise accelerate the virtuous cycles of the company’s business model. Intuition will tell you that this need is not going to be addressed by simply paying competitive salaries or even generous bonuses. Catalysts are going to seek a compensation structure that will reflect the entrepreneurial experience they are seeking within the business. They want a stake in the value they help create. For some, this may mean–at least initially–that they will ask for equity in the business. And in a certain number of cases, sharing stock might be appropriate. However, there are multiple ways to share value without sharing equity–and companies will become more and more interested in understanding how that can be done. At a recent CEO2CEO conference that I attended on innovation, more than one business leader talked about how their companies had developed a venture pool within the business that is awarded to producers that ignite relevant, profitable innovation that further fuels or enhances the business model. Phantom stock, profit pools, SARs, Performance Unit Plans and their variations will also play a larger and larger role in shaping the total value proposition that a “catalyst” employee is offered and will demand.
In short, the compensation of the future will not necessarily involve only new pay “schemes” that have never been used before, although some such plans are emerging (e.g. the internal venture capital fund just mentioned). Rather, it will be a matter of companies paying more attention to the range of pay elements they combine to create a financial opportunity that matches what the innovators of the future will seek. It will become both a question of how much those individuals are paid and how that compensation comes to them.
To learn more about the compensation trends for the future, tune into our webinar on December 4 entitled “The Future of Compensation: What’s Next and Why?”
Tags: breakthrough success, compensation and the recession, compensation philosophy and strategy, Culture of Confidence, employee stock, employee stock owenership, Employee Trust, Growth, incentives, key people, Pay for performance, phantom shares, phantom stock, profitability, rewards, Sustained Results
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent, Phantom Stock, Recession Strategies, Uncategorized | No Comments »
October 10th, 2012 by Ken Gibson
One of the “filters” through which the effectiveness of a given rewards plan should be evaluated is problem solving. Every strategy should be assessed, in part, in terms of the problem it will help resolve. Too often, compensation solutions that are put in place create behaviors or outcomes that miss the target in solving key barriers a company is facing or, worse yet, create a new problem that didn’t exist before a given pay strategy was implemented. Here are just a few examples of what I mean:
- In an attempt to overcome a lack of stewardship for key initiatives (the problem), a company institutes an annual bonus plan. It later discovers it has created an entitlement mindset and placed the company in the position of paying out incentive income even during periods of distressed economic performance.
- A private business begins sharing stock with key producers as a means of overcoming attrition and the inability to compete for premier talent (the problem). In doing so, the equity position of previous shareholders is diluted and new shareholders have few options for capitalizing on value increases in the business other than a major transition event such as the sale of the business.
- The owner of an enterprise wants to overcome a short-term focus (the problem) and grow her business value in anticipation of a sale. She institutes a phantom stock plan that vests only upon the sale of the businesses–which she anticipates being in approximately 5-7 years. At the five year mark, she gets a second wind and decides not to sell the business for an indefinite amount of time. Employees are left wondering when they will realize the value they helped create. What was intended as a positive, uniting incentive becomes a morale breaker.
Certainly, many more examples of this phenomenon could be illustrated. Hopefully, the ones indicated give you an idea of what happens when inadequate attention is paid to solving the right problem with a compensation solution.
This issue is not solely a function of companies developing pay strategies without clearly identifying the problem they are trying to solve. Instead, they often don’t go quite far enough in thinking through all the relevant implications of a given strategy that’s being considered. They may be focused on the right problem but the solution they are implementing is creating more barriers than it resolves. Such is the case in the illustrations given above. The result is a company that perpetuates a plethora of “unintended (harmful) consequences” instead of (positive) “strategic byproducts.” If companies focus properly on the “right” problem and all of the implications of a considered strategy, the “strategic byproduct” multiple will become self evident and self perpetuating. Here is an example of solving a problem in a way that creates this positive effect while avoiding unintended (harmful) outcomes.
- XYZ Company is in growth mode and needs to attract certain people to fill key positions. The problem is it doesn’t want to lock in high salaries and it is in a highly competitive talent market. The best people have several career options within the industry if they are good at what they do. So, the company decides to peg salaries at the 50th percentile of “market pay” but provide significant upside potential through value sharing. They determine to provide up to 100% of salary in additional, incentive income that will be divided between short-term and long-term value sharing plans. Fifty percent of the incentive will be earned as an annual bonus and the other 50% will be applied to phantom shares, with a value that is tied to a formula built into the plan. The phantom shares vest in three years and pay out value in five. Thresholds and metrics of company, department and individual performance are set for accruing benefits under each plan–both of which ensure that value is only paid out when “sufficient” value has been created. An employee value statement is developed to demonstrate to the key producer what his total value proposition will be with the company over the next five or ten years if a targeted level of performance is achieved. He learns that he is not merely being offered a $160,000 salaried position but a $1.8 million dollar opportunity over five years with the company.
Let’s think about how this approach solved the problem at hand while creating “strategic byproducts” instead of ”unintended consequences.” The company put itself in the position of offering potential recruits a plan that was rich in upside potential while limiting guaranteed income. (Problem solution.) It framed the relationship with the new employee as a partnership with ownership to grow the business. (Strategic byproduct.) It differentiated itself in a competitive talent market without over committing on salaries. (Problem solution.) Additional strategic byproducts of this approach included an ownership mindset on the part of key producers and a more unified financial vision for growing the business. In addition, the business was able to construct a pay approach that significantly drove value for shareholders while still creating rich payouts for employees, due to a “self-financing” approach to the incentives. It created a “wealth multiplier” environment because all stakeholder rewards were tied to unified, business growth components.
In the end, most organizations need help in avoiding the pitfall of unintended consequences with their pay strategies when trying to solve problems. They need individuals or consultants that have experience with multiple options for solving key business barriers and can guide the process in a way the leverages the strategic outcomes that are achieved. The right questions need to be asked and appropriate challenges need to be made to solutions being offered that don’t adequately address the full ramifications of implementation.
This principle can be applied in other aspects of the business as well. For a broader treatment of effective problem solving in an organization see the Dwayne Spradlin article in the September 2012 edition of Harvard Business Review.
To see how phantom stock plans are often used as a strategic tool to solve specific problems within an organization while creating multiple strategic byproducts, tune into our upcoming broadcast entitled, “What is Phantom Stock and Why do I Keep Hearing about It?” Click here to register.
Tags: breakthrough success, compensation, compensation and the recession, compensation philosophy and strategy, Culture of Confidence, key people, long-term shareholder value, Pay for performance, profitability, Sustained Results
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent, Phantom Stock | 1 Comment »
September 27th, 2012 by Robert Rainey
One of the inquiries our firm receives more than almost any other goes something like this: “Can you help us fix our bonus plan?” The question usually stems from the company having tried a number of iterations of a bonus arrangement over the past few years and feeling like it isn’t “working.” Sometimes these plans are largely discretionary, other times they have become a virtual entitlement. And more times than I can count, the company has put itself in the position of paying out value when it isn’t even profitable. Yikes!
With that frame of reference in mind, let me share some steps that should ensure a more effective annual incentive plan arrangement. While each company is different, and you may have metrics and measures that vary according to your circumstances, this planning sequence should help you organize things in a way that protects shareholders while providing a great plan for participants.
Bonus plan design works best if it is approached as follows:
- Determine the eligible group. You may want to begin with primarily executive or management employees and expand later from there.
- Next, assign eligible employees to tiers based on salary, roles and responsibilities. The number of tiers will depend on the size of the eligible group, but there are 3-6 for most companies.
- Determine how profit will be defined for purposes of the new plan.Common measurements include: EBITDA; net operating profit after tax; earnings before taxes; operating income; net free cash flow; etc. Measurements may be expressed as benchmark/budget numbers (e.g., $1 million of EBT) or as a growth in profits approach (e.g., 10% increase in EBT from prior year).
- Establish a minimum threshold of financial performance (as determined in step 3) that must be met before the funding of any incentives. For example, if using a benchmark/budget approach it might be determined that the first $X of profits will not be subject to the incentive plan. With a growth in profits approach, it might be determined that the first 6% of growth will not apply, but any excess will.
- Select the percentage of profits to be credited to the Bonus Pool (“Pool”). This might be a straight percentage (simplest) or a tiered percentage (that rewards higher values for better results).
- Allocate the entire Pool to the different tiers using one of following methods:
- Percentage to different tiers (e.g., 40% to senior management, 20% to middle management, 40% to all other employees)
- Discretion of board/CEO/shareholder(s)/executives/managers
- Allocate each tier’s Pool among the plan participants utilizing one of the following methods:
- Individual performance score (requires internal job appraisal system convertible to scoring result.) Employee evaluations may impact individual participation in the profit award. That is, the evaluation scoring system can influence the amount of the allocation to be received (e.g., a 100% system).
- Discretion of board/CEO/shareholder(s)/executives/managers
- Calculate each employees bonus as a percentage of his salary based on the results in step 7
- Adjust the allocation (entire Pool and/or participant) as needed to reflect relative performance/value of each tier and/or the participants.
- Determine how company would like to express the bonus opportunity to participants. “Your bonus opportunity will range between 20-40% of your salary, depending on the level of profits we attain.” “You will receive approximately y% of all profits in excess of x.”
- Develop management processes to communicate and reinforce the profit-generating capacity of all employees. During performance reviews, goals should be set that are tied to profitable activities. Conversations between management and employees must reflect an understanding of the importance of achieving profitability goals and of each associate’s contribution to the same.
- Apply consistent judgment and evaluation standards. A review committee should oversee the process to assure the highest possible commitment to consistency, fairness and diligence.
These steps, of course, have to be modified to fit the specific needs of each organization. In addition, ideally those building the plan will construct a financial model to test the metrics that are developed for the plan and project its potential impact at various levels of performance such as base, target (budget) and superior.
To learn more about the principles and practices addressed here, check out our webinar entitled, “Creating Effective Measures and Metrics for an Incentive Plan” or our recent blog entitled “Pay the Company First”.
Tags: bonus plan, bonus plans, Incentive Plans
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Incentive Planning | No Comments »
