Building Unified Financial Visions

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Ken Gibson
January 21st, 2011 by Ken Gibson

Does Compensation Support Your Business Model?

Many business leaders we work with don’t draw a distinction (in perception or practice) between their business strategy and their business model.  As a result, they approach decision making differently than they would if they saw these things as related but distinct functions.  Certainly, poor compensation decisions emerge out of environments where rewards aren’t properly connected to the business plan.  Here’s why.

Business models refer to the logic of the company–how it operates and creates and captures value for stake holders in a competitive marketplace.  (See “How to Design a Winning Business Model,” HBR, January-February 2011, Ramon Casadesus-Masanell and Joan E. Ricart)  It defines policy choices, asset choices and governance choices (how the company will address decisions over the other two choice issues).  Strategy, on the other hand,  is a plan that relates to activities the company will engage in to create a unique and valuable position in the marketplace. 

 A key issue, then, is how a company will integrate compensation into the logic of the business model.  The policy choice has to do with the underlying philosophy that will guide the development of all compensation strategies.  The asset choice has to do with how rewards components (salary, sales incentives, performance incentives, growth incentives, etc.) will be applied and assigned to the company’s human resources.  Governance has to do with the ongoing practices and structure that will be used to ensure that pay will continue to reinforce the business model.

Here’s an example of what I mean.  Let’s say a company’s value proposition initiates certain reinforcement cyles that expand its position and secure its customer base.  Wireless phone service is a good example.  By contract, a person has to buy a two-year service and everytime they upgrade to a new phone, they get a discount and have to renew for another two years.  It is a self perpetuating model.  The revenue structure is built on renewing wireless service contracts, sales of hardware, ancillary services (such as data pages) and so on. Certain outcomes, then need to be reinforced in every aspect of the company’s choices.  Compensation must reflect and reinforce the revenue reinforcement model and fully engage employees in a mindset of top-line renewal plus growth.  

In such a framework, leadership needs to look at compensation through two interdependent sets of lenses:

  1. Structure–This facet needs to address the question: “what processes will ensure that every decision made relative to compensation will have the proper impact on strategy, cost and productivity in support of our model?”  Structure gives the company a decision making and implementation framework.
  2. Mindset–The other category poses this query: “what specific pay programs will ensure that our employees take ownership (a stewardhsip) of our  business model and its support strategy?”  This has to do with employee engagement, focus and sustained execution. 

If either of these dimensions of compensation development and management is neglected, certain dangers emerge.  If the structure is not there, then strategy, cost and productivity issues are not addressed.  The danger then is that employees take the company in the wrong direction (at odds with its business model), it spends rewards dollars that don’t necessarily drive value for shareholders and employees, and the company does not produce an “above market” return on its total rewards investment (capital could have been better invested elsewhere).

Likewise, if mindset issues are not properly addressed, the company can develop great pay strategies but the employees don’t understand them, or the rewards programs are disengaged from issues they can impact.  The dangers that emerge in this arena are that employees see incentives as entitlements, no ownership mindset is in evidence,  there is a general lack of clarity about the future of the business and the company is unable to unlock the full passion and focus of its workforce.

Because I see this negative pattern emerge all too fequently, it is my recommendation that any compensation discussion begin with a basic question: “What is our business model?”  Until and unless a business can define that, it will be hard pressed to develop a compensation plan that will drive growth instead of hindering it.

For more insights on this issue, join us at our webinar next Tuesday, January 25 entitled “The Eight Fatal Compensation Mistakes.”

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

Ken Gibson
December 22nd, 2010 by Ken Gibson

The Three Comp and Benefits Essentials

 I would like to make a plea before we close out 2010.  As you examine your compensation and benefit strategies for the new year, please consider three outcomes your approach should (dare I say, must?) include.  I would even go so far as to call these imperatives for any company hoping to have a workforce that drives growth in 2011 and beyond.

  1. Strategy–ask yourself this question: “Do our compensation and benefits strategies drive execution of key strategic initiatives and make the achievement of the company’s growth goals more likely?”  For this to happen, at a minimum there must be alignment between the business plan of the company and rewards.  Your pay and benefits strategies should also reflect a philosophy that creates appropriate ties between pay and performance in a way that nurtures a sense of partnership with the workforce and instills an ownership mindset.
  2. Cost–in this regard, the question to be asked is: “Do we institute practices  that ensure we create greater compensation and benefits efficiencies and lower or eliminate unnecessary expense?”   Here the issue is establishing the means by which a company routinely examines the cost structure of all its plans, introduces appropriate cost sharing arrangements, expands/inplements flexibility of benefits, increases education on fiscal practices and institutes “well-being” initiatives that help lower overall health benefit costs and decrease time away from work.
  3. Productivity–with this final imperative, the critical question to be answered is: “Do we generate a measurable, positive return on the company’s human capital investment?”   To accomplish this, companies should ensure that their approach to incentive planning is self financing,  involves sound metrics and that programs are only implemented once they have been appropriately modeled and tested.  The company must then institute appropropriate measurement tools to track its real return on the compensation and benefit dollars that have been paid out.

As you examine these areas and institute changes accordingly, please share your successes and frustrations in the comments section of this blog so others can benefit from your experience.  You can also email me with your thoughts at kgibson@vladvisors.com.

For more information on how some of these things can be successfully accomplished, please check out the Information and Resources section of our website or the  webinars we have archived on our site.

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Posted in Business Growth & Compensation, Business Growth and Rewards, Current Pay Trends and Topics, Incentive Planning, Uncategorized | No Comments »

Ken Gibson
November 5th, 2010 by Ken Gibson

Compensation and Strategic Alignment: a Critical Relationship

The most recent edition of the Harvard Business Review carries an article that I recommend, particularly at a time most companies are engaged in planning and budgeting for the new year.  Authored by Robert Simons, it is entitled Stress-Test Your Strategy and it poses seven searing questions companies should ask themselves to home in on critical issues to address in this or any economy:

  1. Who is your primary customer?
  2. How do your core values prioritize shareholders, employees and customers?
  3. What critical performance variables are you tracking?
  4. What strategic boundaries have you set?
  5. How are you generating creative tension?
  6. How committed are your employees to helping each other?
  7. What strategic uncertainties keep you awake at night?

The article points out that a stress test is an assessment of how a system functions under severe or unexpected pressure.  Mr. Simons points out, “By asking tough questions about your business, you can identify confusion, inefficiency, and weaknesses in your strategy and its implementation. As Peter Drucker once warned, ‘The most serious mistakes are not made as a result of wrong answers. The truly dangerous thing is asking the wrong questions.’ ”

With that in mind, I would pose one additional question as a capstone to those listed above:

Do your current rewards strategies effectively communicate to your key people what you want to have happen in each of those seven areas?

If your answer to that question is no, there is important work to do.  I’ve linked two of the questions above to articles and webinars we have recently published that will help you think through how to tie these issues together.

Commit to making 2011 the year you get compensation right and you will create a more unified, passionate and engaged workforce.

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Posted in Business Growth & Compensation, Business Growth and Rewards, Current Pay Trends and Topics, Incentive Planning, Recession Strategies, Uncategorized | No Comments »

Ken Gibson
October 29th, 2010 by Ken Gibson

A Cadre of Consumate & Generous Professionals

I lead a management society group that puts on a special conference once a year in the Fall.  Entitled, “The Performance Breakthrough Conference,” this event features a keynote speaker followed by a series of breakout sessions on a range of topics, all led by a cadre of outstanding business professionals.  The event relies on the generosity of some in the business community to donate their time on behalf of people looking for tools, resources and/or inspiration to reach the next performance “breakthrough” in their lives, personally or professionally.

This year’s event was held last month.  It was an extraordinary success primarily because of the efforts of our outstanding presenters, each of whom is a consummate professional with significant value to offer.  As an acknowledgment of their contribution to this year’s conference, I’d like you to be aware of them and their businesses, each of whom I can recommend.

Kevin Hall was our keynote speaker.  Kevin is a business coach and wordsmith that has authored an incredible book entitled Aspire.  The book talks about the power of words to transform our lives and understand our true purpose.  Kevin is a nationally renowned speaker who also coaches executives and other leaders on purpose related issues.

Molly Wendell is President of Executives Network, a unique association for “C” level executives in transition.  Molly helped attendees learn about what “Results Oriented” networking is about and how it’s done effectively.  Check out Molly’s website for information on her book, The New Job Search.

Jason Lavin is CEO of Golden Communications, a firm that does web design, search engine optimization and social networking strategies.  Jason also conducts a seminar series entitled Excel-Your-Business, which helps business leaders learn how to optimize the results they are getting from their websites through search optimization strategies and techniques.  He shared that same information with attendees at our conference.

Rod McDermott is co-founder and Managing Partner of McDermott and Bull, an executive search firm headquartered in Irvine, CA.  Rod helped attendees understand how they can best prepare for the “next” career opportunity they are seeking, whether that is finding a job or upgrading their position.  Most of McDermott and Bull’s work is done representing companies that are looking for premier “C” level talent.

Mark Kohler is a partner in the law firm Kyler, Kohler, Ostermiller and Sorenson, a business and estate planning law firm.  Mark is an attorney and CPA with dynamic presentation skills and an unique ability to help navigate complex legal and tax issues, and develop effective strategies for both.  He is an outstanding speaker in high demand.  He helped attendees learn about the issues they should consider when starting a new business.

Kate Peters is a vocal coach that teaches “C” level executives how to become more powerful communicators by understanding vocal dynamics and how they impact one’s image and message.  She helped attendees learn how to “find their voice” and make it heard more effectively in all of the forums where communication is essential.  Check out Kate’s website for information on her book, Can You Hear Me Now?

Please take a moment to pursue the links to these outstanding professionals.  My thanks goes out to each of them for their contribution to our conference and their generosity in sharing their time and talents.

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Tom Miller
September 21st, 2010 by Tom Miller

Do You Have a ‘Vision-Link’ in Your Company?

Alignment—the adjustment of an object in relation with other objects. In typesetting it’s done with ‘justification’ choice (left, right, centered, etc.). With your car it’s done by adjusting the angles of the wheels. In linguistics they use morphosyntactic alignment to determine something-or-other (I just thought the word was fun to say).

What about in compensation—what needs to be aligned? Actually, lots of things. The compensation philosophy should be aligned with the business plan. The incentive plans should be aligned with the company financial goals. But most importantly, the employee vision should be aligned with the shareholder vision. (In other words, you want to create a vision-link.)

It’s easy to discover if you have a vision-link. First, ask the highest ranking officer in the company (the owner if you can find him/her): “What’s your vision of the company’s future?” Have him be as concrete and specific as possible. Then ask the same question to a handful of employees: “What’s your vision of the company’s future?” And you might ask a follow-up: “Where do you see yourself in that future?” Now compare your two sets of answers.

If you have employees who can clearly state the expected future of the company you have a really good start. But if you have employees who see themselves in that future and find it compelling you have a vision-link. And you’re much more likely to make that future come true.

Give it a try.

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Ken Gibson
August 11th, 2010 by Ken Gibson

Compensation as a “Carrier”

Jack Welch once said: “If you pick the right people and give them the opportunity to spread their wings and put compensation as a carrier behind it you almost don’t have to manage them.”

What did he mean?

Well, I certainly don’t claim any cosmic ability to “channel” Jack Welch.  That said, I think some assumptions can be made about the point he is trying to make.  He means that when you effectively link the roles and expectations of good people to the company’s business plan, compensation–when properly engineered–naturally becomes a key driver of results.  “As a carrier” means this occurs through an unforced yet  strategic process of alignment.  When that happens, a stewardship culture emerges; one in which your best talent takes ownership of outcomes.  This occurs because your people feel like partners in the company’s success; they helped create growth and the compensation system subsequently rewarded them for it.  

This concept is completely consistent with VisionLink’s view of incentives.  They are not tools of manipulation, rather key ingredients of a unified financial vision for growing the business.  They unleash rather than suppress the intrinsic motivators we all possess.

To ensure that your compensation becomes a “carrier,” the following five things must consistent occur once you have created then launched a specific pay program:

  1. Communicate and Promote–don’t assume the plan is understood and remembered. Remind, celebrate, explain and reinforce.
  2. Administer Effectively–so people feel they have ready access to information and it’s clear from whom it can be obtained.
  3. Stay Compliant–so there are no legal or financial surprises for either the participants or the company, especially where ERISA, IRS or other statutory guidelines apply.
  4. Model and Monitor–anticipate ahead of time what the financial commitment will be and then consistently measure actual results against targets; then adjust the plan accordingly.
  5. Measure ”Line of Sight”–so you know whether you’re creating effective links between vision, strategy, roles, expectations and pay.

Follow this pattern and you are on your way to a world-class approach to compensation that is a true “carrier.”

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

Ken Gibson
July 26th, 2010 by Ken Gibson

Sales vs. Performance vs. Growth Incentives

Periodically, we will receive a call from a business leader seeking our help to build a more effective incentive plan.  Often, it takes a while to determine whether what is being sought is a sales plan or a broader performance-based reward.  The difficulty in decifering which kind of approach is needed stems from the fact that many businesses don’t yet know what outcome they are trying to influence through their incentive plan(s).

With that anecdotal evidence in mind, I assume many struggle with this issue.  As a result, I offer here  some general things to consider when thinking about incentives:

  • Sales Incentives–Compensation programs for sales people are typically a distinct “animal.”  Their purpose and form are centered solely on increasing sales.  Although a sales incentive might be in the form of a commission or bonus (or both), it’s focus is strictly on rewarding a certain desired sales result.  They are intended to address the following performance factor: “What the company wants sold, to whom and in what volume.”Those participating in a sales incentive could, conceivably, also receive a performance or growth incentive.  However, it is less likely they will receive the former since their sales incentive rewards short-term performance results .  A long-term incentive, however, creates a different focus and could more commonly be paid to those responsible for sales functions, particularly those whose stewardship it is to accelerate top-line growth. (See Growth Incentives below.)
  • Performance Incentives–Companies that want to create focus on key performance indicators or profitability standards measured in increments of 12 months or less are looking for this type of reward.  Performance incentives seek to communicate the following to participating employees: “This is the outcome we need you to focus on during this period of time and how it will be measured and rewarded.”  Performance incentives help participants understand their role in this year’s strategy, what’s expected of them in that role and how they will be remunerated for fulfilling those expectations.  The overall incentive may reward something for company performance, team or department performance, individual performance or all three.  The “weighting” of those factors may be different for various “tiers” of employees.  Annual, semi-annual or quarterly bonus arrangements are types of performance incentives.As with sales incentives, participants in a performance incentive plan may–and commonly do–participate in a growth incentive as well.
  • Growth Incentives–Organizations that seek to align the company’s reward’s strategy with its business plan should have some kind of growth incentive.  Such a plan communicates where the company is headed in the future (beyond the next 12 months) and how those that help to fuel growth will participate in that increase.  Growth incentives seek to create a unified financial vision for growing the business and send the following message to participants: “You are an important partner in our growth plans and this is how we intend to have you participate in the value you help create.”  Stock, stock options, phantom equity, SAR, Performance Unit Plans and Profit Pools are examples of growth incentives that companies commonly use to fulfill this part of their overall rewards strategy.

Most companies think in terms of specific types of plans instead of the kind of performance they seek to drive as they approach the design of their incentives.  Instead, we recommend you isolate the performance category you are trying to address as indicated above and then begin thinking of the compensation s0lutions that will drive the outcomes you seek.

At a minimum, now if you call us, we will perhaps be speaking the same language!

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Tom Miller
July 19th, 2010 by Tom Miller

The Sole Purpose for Any Compensation Plan

What are the purposes behind your compensation programs? For example, why do you pay salaries? Why do you offer bonuses? How about your retirement program? Does it have a fundamental business purpose?

The obvious answer is that no one will work for you if you don’t offer a competitive package? But let’s dig a little deeper. A lot of trouble goes into determining the right levels of pay (market standards and all that). And a lot of work is put into designing the “right bonus plan.” Every total rewards decision is analyzed and re-analyzed. Why?

We could get lots of different answers to this basic question. Here’s mine: to build a unified vision for growing the business.

This answer assumes a few things. First, the business wants to grow. I take that as a given. In this day and age, all businesses must grow to survive. What’s needed to grow? A solid business plan. Capital. People. A commitment to execution. Customer responsiveness. Creativity and innovation. All these and more. How does a business culture capture and produce all these elements? Answer: a unified vision.

You have a unified vision when every employee (well, virtually every employee) (a) understands the business purpose and finds it compelling, (b) sees a personal role and contribution he or she can make to that purpose, and (c) feels accountable for the results. The rewards program, in this formula, is the capstone to the results. Said differently, positive results lead to profits. Profits indicate the employees delivered, to one extent or another, on the business plan. Responsible companies respond by sharing some of those profits with the people who helped generate them. All forms of compensation ultimately should reflect the belief that the employees contributed to something meaningful.

(Note that I”m not strictly referring to “profit-sharing” bonuses or even exclusively to incentive plans. The entire pay budget is theoretically a reduction in profits. Every piece must contribute to the genertion of same.)

In this formula, the incentive plans are not trying to force behavior. Instead, they reinforce valuable contributions. The more unified employees are in understanding the principles behind the formula, the more committed they just may be to delivering on the vision set forth by senior leadership or shareholders.

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Tom Miller
June 11th, 2010 by Tom Miller

What Think Ye of Phantom Stock? Does it Work?

Twenty years ago very few people were familiar with the concept of ‘phantom stock.’ Today, most business owners are familiar with the term—and many have strong opinions about whether they work or not. Do they?

 For a plan to  ‘work’ it should: (a) provide a meaningful reward for employees if the value of the company goes up over time, and (b) serve as an effective retention tool for key employees.

 I’ve designed a lot of phantom stock plans over the years. And I’ve seen many more that were put into place by others. I’ll offer up, first, some of the biggest mistakes I’ve seen in phantom stock plans. And in my next blog I’ll offer up the most innovative and effective practices that can make a plan, possibly, the most effective compensation plan you’ve ever utilized.

 Here are the top 5 mistakes to make when designing a phantom stock plan (if you really want to do it wrong):

  • Require that the plan valuation be determined by a formal appraisal. Result: significant, unnecessary, periodic expenses for the company.
  • Be sure to use the actual number of company shares for the number of shares in the phantom stock plan. Result: the plan will be very confusing and complicated whenever you try to conduct routine corporate shareholder transactions (redeem shares, issue new shares, etc.).
  • Issue “shares” in a block grant up front. Results: certain regrets later on when you realize you gave too much to some people and you have too few new shares to award to others; also, people will probably vest in all their shares before you really want them to.
  • Pay annual dividends to the “phantom shareholders.” Results: a completely unnecessary drain on company cash.; plus, no alignment or retention purposes whatsoever.
  • Have an attorney help you design the plan. Result: (with apologies to my attorney friends) this results in an overly technical plan without ‘real world’ practical and compelling provisions. (Tip–let the attorney document after the creative discussions have been conducted.)

These 5 steps will insure you years of headaches, regrets and costs. Any you’ll be sure to lower productivity, worsen retention and diminish shareholder value. In my book, that doesn’t ‘work.

 Next blog—best practices tips for plans that really work.

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

Ken Gibson
June 10th, 2010 by Ken Gibson

Is Your Compensation Plan Driving or Hindering Growth?

Ask any CEO or owner that question and chances are you will get a response something like this: “Hmmm. Not sure.”  Ask the same CEO what the largest budget item is on the company’s financial statement and the response will likely be: “Compensation.”  Does anyone see the disconnect here?  How can a company leader not know whether the highest financial investment the company is making is driving or hindering growth?

This happens, of course,  because most companies don’t have mechansims for assessing the impact rewards are having on critical performance indicators and outcomes.  And so they continue to pour millions of dollars into something that isn’t being measured (for results) in the same way other large capital investments are evaluated.  (Sounds like a government entitlement program to me….but that’s for another blog.)

For a business to get its arms around this concept, it must be able to determine both the soft and the hard criteria it will use to measure the relative success of a given compensation strategy.

Soft Results

These outcomes don’t show up on the income statement or balance sheet, but they have a real impact on the financial results of the company.  And they can be measured.  Essentially, these fall into the following categories:

Partnership–Do employees feel like participating partners in the company’s business successes?  If compensation isn’t creating this link in the minds of employees, they aren’t mentally participating in the company in the same way as ownership.

Clarity–Through compensation, does the company effectively communicate and reinforce its organizational standards and the value of the total rewards opportunity?  In other words, do employees make a connection between the financial results of the company and the fulfillment of their own financial objectives–in a non-manipulative fashion?

Engagement–Has the company achieved a crucial level of employee commitment, passion and execution?  Is compensation creating a sense of stewardship that reinforces the intrinsic motivation all employees need to perform at the highest levels?

These areas can be effectively measured through carefully engineered surveys.  VisionLink’s Alignment Appraisal is one such tool for performing an assessment of this type but you may be able to come up with your own.  Regardless of the tool used, if these issues aren’t being measured, you don’t yet really know whether your compensation strategies are driving or hindering growth.

Hard Results

When it comes to  outcomes that have a real dollar impact, the issue becomes one of measuring productivity.  How does the business determine the amount of value that is created through financial capital at work in the company as opposed to the productive output of its people?  To make this contrast, the company should consider performing an analysis such as VisionLink’s ROTRI calulation.  Here are the figures measured and contrasted in such a process:

  1. Determine the total investment currently being made by the company in all rewards programs–salaries, commissions, bonuses, benefits, long-term incentives, etc.
  2.  Identify a capital account for the company–all cash, equipment, inventory, etc.
  3. Assign a cost to that capital account–an amount such as your borrowing rate or a  return you feel shareholders should expect to receive on that working capital (10 to 12% are typical).  We’ll call this your “capital charge.”
  4. Determine the company’s most recent 12-month net operating profit, after tax (NOPAT).
  5. Subtract the capital charge from the NOPAT.  We will call this your “productivity profit”–the amount you will consider attributable to people capital at work as opposed to financial capital at work in your business.
  6. Divide your total rewards investment into the productivity profit.  This becomes your ROTRI percentage.

Once you arrive at your ROTRI figure, you will likely instinctively ask, “is this good or bad?”  Actually, it’s neither.  For now, its just a benchmark–and your ROTRI will be different from another company’s percentage depending on margins and a number of other factors.  The key issue is whether or not your ROTRI improves year to year.  If it does, then you can conclude that productivity is improving.  If productivity is improving, it is easier to conclude that your rewards strategies are having a positive impact on results–therefore they are driving rather than hindering growth.

Don’t Be Caught without an Answer

In summary, if you are leading an organization, you don’t want to be left wondering whether your company’s largest financial investment is draining or fueling  growth.  You need to know.  Hopefully, some of the measures indicated above will help you get a jump start on figuring out what your answer will be going forward.

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