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Ken Gibson
February 21st, 2013 by Ken Gibson

What is a “Successful” Compensation Plan?

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.

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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 »

Tom Miller
February 8th, 2013 by Tom Miller

High Income Taxes—Should You Change Your Compensation Strategy?

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.

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Posted in Business Growth & Compensation, Compensation Planning, Current Pay Trends and Topics, Key Talent Compensation, Phantom Stock | No Comments »

Ken Gibson
December 12th, 2012 by Ken Gibson

What is a “Fair” Compensation Plan?

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.

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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 »

Ken Gibson
October 26th, 2012 by Ken Gibson

The Future of Compensation

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?”

 

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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 »

Ken Gibson
October 10th, 2012 by Ken Gibson

What Problem does your Compensation Strategy Solve?

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.

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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 »

Ken Gibson
September 4th, 2012 by Ken Gibson

Why You Need a Compensation Strategy, not Just a Plan

You are considering the introduction of a phantom stock plan for your key people. You have decided this is the right concept for your business. You’re a private company and don’t want to give equity away, but you do want your executive or management team adopting more of a stewardship approach to the future of the business. Ideally, you’d like them to think more like you as the CEO or owner.  This led you to speak with the company’s accounting firm and they agreed a phantom stock plan would be a good idea.  So, with all of that logic and the positive momentum you’ve garnered, you have contacted your attorney and asked him to draft a plan agreement. He’s done so and you’re about to meet with your 10 key producers and introduce the plan to them.  STOP!! Please don’t go any further.

Before you proceed, there are a few questions that really should be answered.  Your response to these queries will help you determine whether you’re ready to introduce the plan or not.  They will also help you know whether what you have at this point is a compensation strategy or just a “plan.”

  • What is the plan’s purpose? Why are you implementing it and what outcomes will indicate the plan is “working?”
  • What part of your company’s compensation philosophy does this plan support?
  • Who is eligible for your plan?  How was that list determined–what’s the criteria?
  • What is the formula for valuing shares in your plan?
  • How many shares are you going to make available?
  • How will the amount of shares for which someone is eligible be defined? A percentage of salary? A percentage of total shares?
  • What percentage of owner value are you planning to share? What is that based on?
  • How will shares be distributed and at what frequency?
  • What are the performance requirements for earning shares?  Have they been tested against any company performance standards?
  • Have you projected the potential value of the plan relative to an increase in shareholder value?
  • What is the level of sharing to be done under the plan based on different company performance results, such as base, target and superior?
  • Do you have a financial model to test, measure and manage your plan?

I could go on but hopefully you get the idea.  A legal document is not a compensation strategy.  Before your plan is introduced to anybody, you should consider taking the following steps to ensure that a strategic context is created for its roll-out and each of the questions above is adequately answered.  These will also ensure that both shareholder and employee interests are properly served.

Write a Purpose Statement

This step should answer the question, why are we doing this? It should make clear to company leadership what the plan will help the business achieve. For example:  This plan is designed to share future value of the business in a way that promotes an ownership mindset on the part of key producers. It should build a sense of partnership between ownership and participating employees.  It should improve focus on key leverage points (named specifically if possible)  in our business plan and accelerate our ability to achieve our growth goal of doubling revenue in the next four years.

A purpose statement should be consistent with the company’s pay standards and will be easier to articulate if leadership has developed a clear, written philosophy for compensation.

Draft a Plan Blueprint

The plan blueprint should answer the question, what type of plan will we have and how will it be structured?  It is basically the architectural drawing of the specific rewards program you want to initiate.  It describes what type of plan it will be–phantom stock, SAR, profit pool, PUP, deferred compensation, etc.–and what performance thresholds it will be based upon.  At this stage, a business is determining whether the company wants to tie the reward to the business value or some other financial metric.  You are addressing whether you want to give present value away or only future value, whether the reward will be performance-based (employees must achieve a future result before they will receive shares) or have immediate value, and so forth.  The plan blueprint creates a framework in which the company’s rewards strategy can be manifest.

Develop a Financial Model

With a purpose statement completed and a blueprint in place you now need to answer a critical question: how much value will this plan make available and what will the reward be based on?  Such is the role  of a sound financial model.  Done right, this process projects a future value of the business based upon different performance assumptions–for example, base, target or budget and superior.  It attempts to anticipate what level of additional shareholder value will be achieved under each of those scenarios so the company can determine how much of that increase can or should be shared with those primarily responsible for its creation. This step makes clear that compensation design is an outcome-based endeavor.  You are envisioning a future result and then engaging in a kind of reverse engineering process to determine how that potential value can be communicated in “today’s” terms (percentage of salary, percentage of profits, etc.). It is a “self-financing” approach that allows the company to define appropriate thresholds of performance that must achieved before the plan will either accrue or pay out its value.  It also allows a company to envision how it might be able to pay higher percentages of value to participants if increasing levels of results are achieved.  Done right, this phase of development brings the plan to life.  To get a sense for how this modeling process works, check out the “Picture Your Future Company” tool in our new website, www.phantomstockonline.com.

Document the Plan

Once two to four iterations of the financial model have been worked through, and the metrics for creating plan value have been clearly defined, you are ready to put the final specifications on the plan and document it. This step must produce both a legal document (where applicable) that addresses all of the statutory requirements of the plan, as well as a summary plan description that explains how the plan works to its participants.  The plan specifications must address all of the details of the plan–how benefits are earned, when they will be paid out, how they will be treated in the case of early termination, disability, death, and so forth. The production of these documents requires the ability to understand both the legal guidelines associated with the plan (i.e. ERISA or 409(A) issues) as well as the strategic purpose the new program will serve.

Market the Plan

When a company takes a strategic approach to compensation, it doesn’t just “announce” a new pay program.  Rather, it creates an opportunity to build a sense of partnership with its key people by literally marketing a future to them.  This is more than explaining how the new long-term incentive plan will work.  It involves framing the compensation value proposition in a larger context that links together the vision of the company, its business model and strategy, employee roles and expectations and the rewards for fulfilling those expectations. Although an initial meeting may be held to explain the plan and “roll it out,” that communication is one of many that will occur as the company treats its workforce as a key constituency that needs to be consistently and effectively nurtured.

Each of these steps could be further embellished but hopefully you can begin to see how the building out of a pay strategy differs from just coming up with a plan.  Further, when a company seeks to align compensation with the business model and strategy of the company, it has an opportunity to create greater engagement and execution on the part of its key people.  It essentially makes those individuals stewards of the shareholders’ vision by helping them feel a greater sense of partnership and clarity about the future of the business.

For more information on the strategic role of long-term value sharing arrangements, check out our white paper entitled, “Why Long-Term Value Sharing Matters.”

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Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Phantom Stock, Uncategorized | 1 Comment »

Ken Gibson
May 5th, 2012 by Ken Gibson

Phantom Stock,The Mystery is Over! VisionLink Launches New Website

Over the past several years, interest has been building in “phantom” equity arrangements.  Businesses large and small are intrigued by the idea of sharing value with key employees without giving away actual stock.  That said, while many have heard about the concept, to most phantom stock remains a mystery.  As a result, they’ve taken to the internet seeking answers to their many questions.  What is it? How does it work? Who can participate? What are its tax implications? How do we value shares? And so on. However, in their search for answers, most are coming up short.

Well, the mystery has been solved. We are pleased to announce that VisionLink has just launched a new site that addresses all things phantom stock—www.phantomstockonline.com.  This dynamic, interactive tool will remove the mystery surrounding phantom stock plans within a few mouse clicks. We invite you to go there today and check it out.  On the site, you will find:

  • The Knowledge Center—which is organized as a wiki and will answer virtually every question you could think to ask about this value sharing program.
  • Tools—that will help you determine whether your company is a candidate for a phantom stock program and what other long-term value sharing arrangements you might consider before selecting a plan design.
  • Build a Plan—where you can envision the potential financial value that would be generated for phantom stock plan participants in your company and how it compares with an increase in shareholder value.
  • The Blog—that will keep you up to date on trends in long-term value sharing and how phantom stock is making a difference for companies across the country.

You will find this and much more when you visit www.phantomstock.com.  Please go there today and find out for yourself why this site will become the source for finding information on this increasingly sought after topic.

 

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Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Phantom Stock | No Comments »

Tom Miller
April 26th, 2012 by Tom Miller

Fatal Compensation Mistakes #4 and #5

We’ve explored fatal mistakes one through three. Let’s take a look at four and five.

#4

Most companies have a short-term incentive plan (e.g., an annual bonus plan). This plan is intended to focus employees on short-term success and reward them for positive results.

Yet companies also have long-term goals. Why don’t most have a long-term incentive plan?

Owners have their long-term goals on their minds. Shouldn’t employees as well? True value sharing programs should reward employees for achieving both sets of goals. Here’s a new website that describes the various types of long-term plans and their importance.

#5

Those companies that do use long-term incentive plans tend to make several mistakes. The first is in the creative stage. They often “design by document.” A common impression is that they should get their attorney to put together a stock option plan or a phantom stock plan. This is almost always the wrong first
step. The attorney plays a vital role in the latter stages of planning—particularly in the development of the formal documentation. But they are not wired to think
creatively about how the plan features should be developed to support the intended plan objectives.

The second error is to “design-by-brother-in-law.” This occurs when the decision maker says, “I want the same plan that my brother-in-law put in for his company.” Obviously, his company is different than your company—different goals, different financials, different people, etc. Allow your advisor to teach you
about the various types of plans and their pros and cons.

If you’d like to work through a simple but helpful tool to choose the right type of long-term incentive plan, check this out.

Posted in Business Growth and Rewards, Compensation Planning, Incentive Planning, Phantom Stock, Uncategorized | 2 Comments »

Ken Gibson
March 5th, 2012 by Ken Gibson

WSJ–How to Fix Executive Compensation

Recently, the Wall St. Journal ran an article that provides insight into how a company can tailor executive compensation to better  fit a “pay for performance” rewards architecture.  I found myself agreeing with almost everything the author had to say, so determined I’d quote here from the piece by Alex Edmans and offer my commentary (in parenthesis following each excerpt) on the conclusions he draws.

“The secret to reforming compensation isn’t so much looking at how much bosses get paid—but how they get paid.

“It’s easy to understand why critics focus on the gaudy awards of cash and stock that executives take home. And, yes, it’s hard to deny that some bosses get paid a lot more than they deserve. But the structure of compensation is ultimately a lot more important than its level, because it gets to the heart of how managers run companies and create value for shareholders.”

(This has been a core tenet of VisionLink…well, forever. How you pay someone communicates what the company values and the outcomes that are most critical to the present and future success of the business. The structure used for compensation also gets to the heart of how company leaders create value for all stakeholders, not only shareholders. Even if the goal is to multiply wealth  for all primary producers, a business must take a comprehensive approach to how growth is driven in the business AND how risk is mitigated when it creates rewards programs.)

“An effective way to deter executives from taking excessive risk is to compensate them with debt-based pay as well as equity. However, many compensation packages feature only cash and equity.”

(There are many ways to do this. One way we recommend–and that the article goes on to suggest–is through deferred compensation.  Such plans make participants general creditors of the company in the event of insolvency, forcing business leaders to be cautious about putting the organization at risk through overly ambitious transactions or strategies.  It also encourages the development of “good profits” and discourages those that come at the long-term expense of both customers and shareholders.)

“Another critical change companies should implement is to lengthen the time that executives must wait before they can cash in their shares and options. All too often, stock and options have short vesting periods, sometimes as little as two to three years. This encourages managers to pump up the short-term stock price at the expense of long-run value, since they can sell their holdings before a decline occurs. A CEO can, for instance, write subprime loans to boost short-term revenue and leave before the loans become delinquent, or scrap investment in R&D. This is possible since, in many cases, stock and options immediately vest when the CEO leaves the company.”

(A company doesn’t have to be public for this to be an issue.  Most of our work is done with privately held businesses and the focus there is the same.  In addition to the issues described by the WSJ article, people need to feel a sense of stewardship about the future enterprise.  This is more likely to happen when there is a remuneration component that defines a financial partnership between ownership and key producers in the organization. Companies that focus long-term in their compensation plans build a more unified financial vision for growing the business.  In the private environment, we often recommend phantom stock or stock appreciation rights to mitigate against a short-term focus or manipulated outcomes. Vesting schedules and staggered payout periods can help to solve the problems Edmans articulates in this regard. )

“Be flexible. Change the structure of the compensation package as circumstances change. So, for instance, the CEO gets more stock and less cash after the company shares plummet, restoring the CEO’s incentives to boost the long-term share price.”

(Similarly, in private companies, key people can be compensated with more phantom shares of stock during down periods to encourage the regeneration of company value over the long-term.  Bonus payouts can be replaced with additional shares during times when profits have declined and the organization needs to recalibrate its performance.  Short-term value sharing arrangements such as annual “bonuses” can then be revived when the company’s financials return to a normal or more robust status.  At that point, the longer-term plans can release fewer shares or units.  Once the favorable economics have returned, it will be reflected in the value of the shares issued during the downturn–creating the exact economic outcome that kind of program was intended to produce.)

“If companies employ [these] principles…executives will be aligned with the long-term health of their companies. And that will not only help keep individual companies safe, it will reduce the risk of another financial crisis.”

(I agree.)

 

 

 

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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 | No Comments »

Tom Miller
February 2nd, 2012 by Tom Miller

Don’t Get Stuck Like Facebook Did

By now everyone’s aware that Facebook is preparing to launch its IPO—probably the biggest one ever. Founder Mark Zuckerberg has tried to keep the company private for as long as possible—presumably to preserve its nimbleness.

So why go public now? Obviously there are probably a lot of reasons. But one relates to the complexities of stock-based compensation. In the early stages of Facebook a number of employees received stock options, some of which have been converted to stock. But stock is worthless unless it can be converted to cash. This article summarizes the issue well. And here’s the pertinent quote:

“In 2010, Facebook banned employees from selling their stock, citing legal concerns around insider-trading rules. So, in an odd twist, the only way for early employees to cash out their vested stock options has been to leave the company.”  (Emphasis mine)

Employers are constantly doing this to themselves by not structuring their long-term incentive plans (be they equity or phantom) in the right way. You always want to enable employees to harvest the cash value of their LTIPs.

Phantom stock plans, for example, should have designated pay-out dates and should vest upon other timing events other than separation of employment. LTIPs are an essential part of any balanced compensation strategy. But do it right. Give employees the ability to extract the value from the plan before you discover that the plan is defeating the very purpose for which it was designed–retaining and rewarding premier talent.

Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Phantom Stock | 13 Comments »

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