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Ken Gibson
April 8th, 2013 by Ken Gibson

Setting Compensation Priorities

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:

  1. 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)?
  2. 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?
  3. 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?”
  4. 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.

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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 »

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 »

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
November 6th, 2012 by Ken Gibson

“I’m Paying My Top 5 People $1 Million, What am I Getting for It?”

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

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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, Return on Compensation Investment, Uncategorized | 1 Comment »

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
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
June 22nd, 2012 by Ken Gibson

How to Talk about Compensation

In my experience, most company leaders struggle to find the right way to communicate to their workforce in a manner that is both pragmatic (defines clear expectations) and inspiring (provides a compelling vision).  Most are still steeped in old models of communication that has them talking “to” employees rather than “with” employees.  If this is an issue with general communication, it is only compounded as a CEO, business owner or other leader attempts to explain the latest and greatest compensation strategy that is about to be rolled out.  Usually, such plans are introduced without proper context or linked to a broader picture.  As a result, they often fall flat, are misunderstood or otherwise come up short of their intended purpose.

A recent Harvard Business Review article provides a good template for how corporate leaders should approach communication in general and which, in my view, has particular relevance to discussions of remuneration. In their article entitled Leadership is a Conversation, authors Boris Groysberg and Michael Slind address what they refer to as the four elements of conversation and how a “new model” of communication should treat each of those components:

  • Intimacy–how leaders relate to employees
  • Interactivity–how leaders use communication channels
  • Inclusion–how leaders develop organizational content
  • Intentionality–how leaders convey strategy

The authors offer the following guidance relative to the each of these elements.  Following their insights, I offer my own observations as they relate to the compensation conversation.

  • Intimacy (HBR)–Communication should be personal and direct. Leaders value trust and authenticity.
  • Intimacy (VisionLink)–The compensation discussion is an extension of a larger conversation about how the company’s future depends upon the unique abilities of its key people.  Growth is only possible because of the contributions of the company’s people. Consequently, the rewards conversation must convey a sense of partnership with employees–especially key producers. It should be personal in nature and center on the idea that the company wants to share value with those who create it.  It must be an approach that builds trust and reinforces the commitment company leadership has to those who make a significant contribution.
  • Interactivity (HBR)–Leaders talk with employees, not to them. Organizational culture fosters back and forth, fact-to-face interaction
  • Interactivity (VisionLink)–Business leaders must make themselves continually aware of the “mindset” issues that grow out of the compensation arrangements they set in motion.  Do employees feel more connected to expected results and have a sense of stewardship about them?  Do they feel empowered to achieve the results because the dialogue with management surrounding expectations has been both pragmatic and inspiring? Is the reward meaningful enough to evoke the right level of purpose and passion from employees?  Soliciting feedback through both formal (surveying) and informal (conversation) is critical to finding out the answers to these kinds of questions.
  • Inclusion (HBR)–Leaders relinqush a measure of control over content. Employees actively participate in organizational messaging.
  • Inclusion (VisionLink)–Companies must initiate ongoing mechanisms for employees to be reminded of what they have, how rewards values are maximized and where to go for answers to questions.  In addition, their views must be solicited and measured in a way that allows the company to assess whether a proper link is being forged between vision, business model and strategy, roles and expectations, and rewards.
  • Intentionality (HBR)–A clear agenda informs all communication. Leaders carefully explain the agenda to employees. Strategy emerges from a cross-organizational conversation.
  • Intentionality (VisionLink)–Leadership adds context to any rewards discussion.  They view compensation as a strategic tool to communicate what’s important to the organization and to eliminate “silos” and other barriers to building a promise-based management system–one in which all parts of the organization work together in delivering on the company’s brand promise and value proposition to the marketplace.

When companies begin to adopt this kind of framework for communicating rewards, they find that it becomes almost more important than the nature of the compensation strategy itself.  Companies can have a top-tier rewards program, but if it isn’t communicated and reinforced properly, it will never fulfill it’s purpose.  Many times, this is the biggest  element that keeps a business from achieving breakthrough results and having its pay strategies build a unified financial vision for growing the business.

For more ideas on this subject, view our webinar entitled “Five Success Factors Every Compensation Program Must Fulfill.”

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Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Key Talent Compensation, Managing Talent, Uncategorized | 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
February 20th, 2012 by Ken Gibson

What Deserves to be Rewarded?

Every CEO or business owner has a unique set of  performance factors he or she wants executed which are considered crucial to the achievement of the company’s  growth goals.  However, in my view, more importantly there are  categories of outcomes that every company should have as a  focus regardless of their industry, size or niche.  Most specific key performance indicators that company leaders identify as a priority fall under one of those categories.  By defining  those areas of focus–and communicating (through pay systems and otherwise) why they are so critical to the future of the company–business leaders are better able to engineer rewards programs that will drive the outcomes they are seeking, and build a greater ownership mindset among those responsible for producing those results.

Conversely, if those areas of focus are not clearly defined, employees end up participating in a rewards plan that has little or no context.  They see it as a mechanism for increasing their compensation, but that’s all.  It might even  pay well, but the company will ultimately be frustrated with the results it is realizing if employees can’t connect their rewards to a broader fulfillment that is  being achieved.

Here’s what I mean by defining areas of focus within which individual compensation metrics, measures and plans can be constructed:

  • We reward innovation. Creativity and ingenuity are critical to our growth and so we are willing to share value with those whose innovations leverage our ability to multiply value for all stakeholders.
  • We reward sustained performance. Our growth depends upon the ability of the company to maintain then expand the virtuous cycles connected to our business model. Therefore, we share value with those that help us sustain and improve our revenue producing “engine.”
  • We reward  ”good” profits. Good profits come by delivering real value to the market place and protecting customer or client interests at all levels of interaction.  Bad profits are those that come at the expense of the customer or client relationship and experience or erode owner interests over time. We will share value with those who help create and grow good profits.

The list could go on but hopefully you get the idea. Unless employees are aware of these definitive priorities and outcomes they could technically qualify for a payout under an incentive plan without ever taking stewardship of key results the business needs them to perpetuate.  In the worst case, those same employees could pull the company in a direction that is at odds with the strategic direction it has charted (generating bad profits instead of good profits, for example).

So, as you examine your current pay practices, ask whether your rewards programs help define and fulfill the broader areas of focus your company needs to reinforce if its growth expectations are going to be realized.  If they don’t, you should consider making some serious changes.

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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, Uncategorized | No Comments »

Tom Miller
December 9th, 2011 by Tom Miller

Final Thoughts: Perfecting the Phantom Stock Plan

If you’ve hung in with me the past couple of months you know I’ve sung the praises of phantom stock for private companies. If you’re new here you can start the series here.

Today, some final thoughts (or final for now, anyway).

Phantom stock plans can be, without a doubt, one of the most important steps you ever take in assembling the team of people who will take your company to new heights. However, there’s something more important that getting the right structure. You need to create the right mindset.

If you create a “perfect” plan but don’t establish the right mindset your plan will flop. You’ll wonder what went wrong with the plan. But it won’t be the plan’s fault. It will be yours. Ultimately, it’s your job to see that the employees not only understand the plan but that they are inspired by it.

Mindset relates to the perception of the plan in the minds of participants. When you make Sally a participant in this plan she should feel like she was just made a partner in the company. She should understand that her financial future is tied to yours (and vice versa). She should realize that you trust her to help produce the results that will create value for both of you.

Always position the plan in a positive light. Explore and discover ways to make your plan one of the highlights of your relationship with your key people. You’re investing in them. Make sure they know how much you value their efforts and how much you trust them to generate great results. Your phantom stock plan is a symbol of your commitment to a partnership relationship. They aren’t getting actual stock but they don’t really want those headaches anyway. They want to know that they have a chance to participate in the value they help create. A phantom stock plan, properly designed, can do just that because it sends the right message about the future:

We’re building a great company.

We’ve got the right people.

We’re united as partners in our financial success.

Let’s go make it happen.

If you’d like a copy of the complete series, click here.

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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 | 2 Comments »

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