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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 »

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
August 7th, 2012 by Ken Gibson

Bain, Productivity, Capitalism and Compensation

In this election season, much is being made of whether or not Mitt Romney created or destroyed jobs while at Bain.  Most reasonable business people understand that the discussion misses the point entirely and reveals complete ignorance on the part of some in government about how capitalism works, and what its inherent risks are.  However, it does give us an opportunity to reflect on how some basic principles of capitalism apply to our businesses and the innovation cycles that fuel creative destruction.  Wise companies will apply these same principles in their approach to compensation by recognizing what should be rewarded.  I’ll explain, but first let’s set the stage by using Bain as the platform for our discussion.

In a recent Wall St. Journal editorial, Andy Kessler nails the Bain issue and uses it to describe the broader effect of capitalism at work in our modern society:

“Did Mitt Romney and Bain Capital help office-supply retailer Staples create 88,000 jobs? 43,000? 252? Actually, Staples probably destroyed 100,000 jobs while creating millions of new ones.

“Since 1986, Staples has opened 2,000 stores, eliminating the jobs of distributors and brokers who charged nasty markups for paper and office supplies. But it enabled hundreds of thousands of small (and not so small) businesses to stock themselves cheaply and conveniently and expand their operations.

“It’s the same story elsewhere.  Apple employs just 47,000 people, and Google under 25,000. Like Staples, they have destroyed many old jobs, like making paper maps and pink ‘While You Were Out’ notepads. But by lowering the cost of doing business they’ve enabled innumerable entrepreneurs to start new businesses and employ hundreds of thousands, even millions, of workers world-wide—all while capital gets redeployed more effectively.”

That last phrase is key.  The effective deployment of capital in any aspect of business or the economy is what fuels growth.  And people are at the fulcrum of capital deployment. Likewise, they represent human capital at work in a business and financial capital is invested in them.  The question, then, is whether a business is constantly evaluating it’s capital deployment and determining if it is leveraging the company’s ability to grow and keep ahead of the Staples, Apples and others who are mining the creative destruction landscape and determining how they can reinvent the future.  All of this is good for the economy, good for jobs creation and good for businesses. It is a system that rewards productivity and productivity is found at the intersection of effectiveness and efficiency.

Kessler drives the productivity point home this way:

“Economists define productivity as output per worker hour. But ramping up the output of trolleys or 8-track tapes won’t increase living standards. It is not just technical efficiency that matters, it is also effectiveness—that is, producing what the economy really needs and consumers will pay for.

“And so, in a broader sense, productivity is really about doing the right things the right way. Using modern construction equipment, we could build a pyramid on the National Mall in Washington with amazing efficiency, but it would not be effective.

“So how does productivity result in more employment?

“Three ways. First, some new technology comes along that allows something never before possible. Cash from an ATM, stock trading from an airplane’s aisle seat, ads next to Google search results.

“The inventor or entrepreneur who uses the invention benefits from sales and wealth and hires people to produce the good or service. We don’t hear about this. Instead we hear about the layoffs of bank tellers, stockbrokers and media salesmen. So productivity becomes the boogeyman for job losses. And many economic cranks would prefer that we just hire back the tellers and toll collectors.

“This is a big mistake because new, cheaper technology becomes a platform for others to create or expand businesses that never before made economic sense…

“The third way productivity results in more employment is by attracting capital to satisfy new consumer demands. In a competitive economy, productivity—doing more with less—always lowers the cost of products or services: $5,000 computers become $500 tablets. Consumers get to spend the difference elsewhere in the economy, and entrepreneurs will be happy to sell them what they want or create new things they never heard of, but will want. And those with capital will be eager to fund these entrepreneurs. Win, win.

“The mechanism to decide the most effective use for this capital is profits. The stock market bundles profits and is the divining rod of productivity, allocating capital in cycle after cycle toward the economy’s most productive companies and best-compensated jobs. And it does so better than any elite economist or politician picking pork-barrel projects and relabeling them as ‘investments.’ ”

All of this should offer huge clues to business owners, CEOs and others who need to make strategic determinations about how to deploy capital that will be invested in compensation.  The natural cascading logic should look something like this:

  • A business creates value by meeting demands in the marketplace
  • The level of productivity achieved in the value creation process is reflected in profits
  • Business leaders need to reward productivity because it is the most effective and efficient deployment of capital, and results in greater profitability
  • Employees apply their unique abilities towards value creation in the business
  • Compensation, then, must reward productivity by sharing value with those who help create it
  • Companies that take this approach to remuneration become magnets for premier talent and accelerate their ability to create value productively and fuel growth

In the end, compensation strategies must both reflect and reinforce productivity cycles within the business.  If they do, then rewards will become a natural extension of the overall productive deployment of capital in the business.  When this happens, the business wins, employees win, the economy wins and, as a result,  job creation is magnified.

To learn about three “real life” examples of businesses that have taken this approach, tune into our upcoming webinar on June 24 entitled ”Success Stories in Pay for Performance.”

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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 | 3 Comments »

Ken Gibson
July 6th, 2012 by Ken Gibson

Getting People to Accept Change in Compensation

One of the fears many business leaders have about tinkering with compensation is that employees won’t accept the change when they introduce it.  They worry about “push back” when announcing a more structured annual incentive, for example, or if they move in the direction of a pay for performance philosophy.  Most of these concerns emerge from a fundamental assumption that employees will view any change as something being taken away.  This doesn’t have to be the case.

Introducing any kind of structural change in compensation requires a strategic communications effort that will create the right paradigm for moving forward.  As indicated in my last post, choosing the right language will be critical.  Words such as clarity, partnership, value sharing, growth, contribution and increased opportunity will be important ingredients.  However, beyond the choice of words, leadership has to begin a top down education about the future of the company that will create a fertile field in which to plant information about changes in pay philosophy and programs.  The messaging from the CEO and those close to him should address the following:

  • The Future Company.  Tell employees where the business is headed and why that is significant. Build confidence in that future by offering enough data about its potential achievement that the message is credible.  Build anticipation about what it means for the company to achieve that level of success–market acceptance, competitive advantage, sustained growth, etc.
  • A Shared Future. Help employees–particularly key producers–see themselves in the future of the company.  Let them know that their unique abilities are critical to the attainment of the company’s growth goals.  Create a feeling of partnership in growing the future company.
  • Value Creation. Paint a picture for employees about what it means to “create value” and why that is significant to sustaining a profitable organization.  Employees need to envision their role in value creation and understand the “abundance mentality” concept–that there is not a limit to the value that is created and what can be shared as a result.
  • A Wealth Multiplier Organization. The value creation discussion should dovetail with one that demonstrates the intent of the company to become a wealth multiplier.  This means that the goal is for value to be shared with those who help create it–and that when more value is created, more value can be shared.
  • Value Sharing. Explain to employees that wealth multiplier organizations are value sharing organizations.  The pay philosophy of the company will be one of sharing value with those that help create it–and that the intent is that all contributors will benefit from the success of building the future company.
  • Compensation Changes. In the aforementioned framework, the introduction of a restructured bonus or salary structure or long-term incentive plan has a context that properly aligns it with the opportunity an employee has within the organization. It is part of a value sharing approach in which the company intends to multiple wealth for all contributors.

Usually, if dramatic changes in compensation are being introduced, they are phased in over time.  A transition period is established so employees have a chance to see where the changes are headed and prepare for them without feeling panicked about the change.  For example, if the company ultimately wants employee incentives to be 50% short-term and 50% long-term for Tier 1 employees, they might have the split be 75/25 the first year, 70/30 the next, then 60/40 before transitioning fully to a 50/50 split.  This kind of transition communicates to employees the company wants to align it’s compensation structure with building the future company and share value with those who create it while respecting the need for employees to get used to the shift.

While what’s presented here is not comprehensive, hopefully it helps you envision how compensation can be framed in a broader strategic discussion when changes are introduced. While your specific approach might differ, if the intent described here is conveyed, the “right” employees will be more open to change.

For more on this topic, view our webinar entitled “How Do I Create a Competitive Advantage with my Compensation Plans?”

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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 | No Comments »

Ken Gibson
June 29th, 2012 by Ken Gibson

The Compensation Portfolio

Language is important. The words we use to describe efforts, intent, purpose, outcomes and so on create images in the audience’s mind and will either enhance or diminish the ultimate message we mean to send.  That’s why, when talking about compensation issues, language creates a mindset from the top down in an organization about what rewards are all about.

In my view, the best way to talk about compensation is in terms of an investment.  All that we do in business is investment and return related.  Cost is a term that should be reserved for those items that are purchased in the context of a company’s overall investment in its business model and plan. Understood this way, salaries, bonuses, benefit plans and other aspects of a rewards strategy are not costs–even though they might be “expensed” on the company’s P&L. This may seem like a minor issue, but it’s not.  Words matter–and once a mindset settles in an organization it is very difficult to uproot or alter it.  Mindsets determine the trajectory of an organization.  Watch (listen to) the language people use in a business and you’ll know what direction an organization is headed.

So, if all we do in business is investment and return related, then what we really have are a series of “portfolios” we are managing in the business.  We have an innovation portfolio.  We have a product portfolio.  We have an R&D portfolio. And we have a compensation portfolio.

If this is the case, what are the asset classes in our rewards investment portfolio?  It’s an interesting question, isn’t it?  If  our investment in compensation is intended to produce a positive return and contribute to growth, how might we best evaluate our allocation?  We might consider thinking in terms of these three compensation “asset classes”:

The Performance Class

This asset group is designed to maintain the performance engine of the company.  It is focused on sustaining the virtuous cycle of the business model and optimizing what needs to be done to secure the current customer or client base.  This level of compensation is paid for helping the company meet its “budgeted” or targeted level of performance each year and to sustain a hopefully growing revenue stream.  It is also designed to appropriately address the need a superior level of talent requires to maintain confidence in the lifestyle it feels is commensurate with its level of skill, experience and unique abilities.  It seeks to protect the financial environment for key people and help them feel a level of security.  This class includes salaries, short-term value sharing arrangements such as annual bonuses, health and welfare benefits (group medical, dental, disability insurance, etc.) and basic retirement plans.

The Growth Class

Growth is future-based and this asset class is designed to encourage, nurture and reinforce future thinking.  It is intended to protect “good” profits in the organization and reward the fulfillment of the future company vision.  Rewards in this category are paid for helping the company achieve superior levels of performance.  In addition, its intent is to be a magnet for a type of employee that can adopt a stewardship approach to protecting shareholder interests.  This quality of employee is also attracted to the idea of participating in value that he helps create.  He is confident that when his unique abilities are combined with the company’s resources, the future company will be realized.  This asset group includes investments such as stock or stock option plans, phantom equity or SARs, profit pools and supplemental executive retirement plans such as deferred compensation. Companies sometimes invest in other executive benefits for this class such as car allowances, executive disability plans, etc. to secure the financial environment of key producers. Ultimately, this asset class should make employees feel like growth partners in the organization and invested in the future business.

The Transformation Class

Ambitious companies seek to fundamentally alter the course of their industries by creating unique breakthroughs.  Think Apple, Disney, Amazon and other companies that have changed the “universe” so to speak by engineering a different and better consumer experience as well as uniquely great opportunities for their employees.  Businesses don’t achieve this kind of revolutionary change by simply paying competitive salaries and bonuses–or even by offering stock.  They may include many of the elements of the other two classes, but their investment strategy is much more ambitious in all aspects of their business, including compensation.  Companies that work on compensation in their transformation portfolio have a wealth multiplier and not just a wealth creator mindset.  They envision people–both the customers they serve and the workforce they employ–experiencing life in a whole different realm.  As a result, they don’t just create compensation programs.  They market a future to their employees on all levels–product development, market penetration, innovation expectations and yes, rewards–so that company “portfolios” are completely aligned.  Every person in the organization, especially those responsible for driving results, knows the relationship between the company vision, its business model and strategy, roles and expectations, and rewards.  When this is achieved, new horizons of performance are attained that were never thought possible.

Hopefully, in reading some of the language used to describe each of these asset classes, you are persuaded by what I said at the outset.  Language is important.  Words matter. Whether you decide to use the terminology I employ here or something else, don’t expect to see any quantum changes in organizational performance until you transform the way you speak about all investments within the company, including and especially compensation.

If you like the concepts presented in this posting, you should also check out our article 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, Managing Talent | No Comments »

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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Ken Gibson
June 14th, 2012 by Ken Gibson

Pay the Company First

Keith Williams took over leadership of Underwriters Laboratories in Northbrook, Illinois in 2005 at a time the company was not doing well and significant changes needed to be made.  The company was carrying a high amount of debt and it was losing market share to competitors.  In addition, the organization had become “siloed” and different divisions were literally undercutting each other.  Williams made a number of moves to “right the ship.”  What caught my eye in a recent article in Chief Executive Magazine (describing the transformation the new CEO took the company through) was the steps he initiated to “realign” compensation–and the impact those changes had on subsequent company performance.  Quoting from the article, here’s what took place:

“Williams also changed the compensation program to align everyone behind the company’s success. ‘I call it ‘pay the company first,’ he says.  ’Basically, up to the company’s operating profit target, all of the profits go to the company; and only after that target is met, do we start funding the incentive pool.’  For example, if UL’s target is $80 million, 100 percent of the first $80 million in profits goes to the company, the next $20 million to the incentive pool, and from there on, funds are split 50/50 between the company and the incentive pool.  ’A lot of companies think, ‘I’ve got $1 million left in my budget, I should spend it,’ says Williams. ‘What we’re saying is ‘If you really need to spend that $1 million on our future, please do, but if you don’t spend it, half will go into the incentive pool.”

There are so many things right with this approach that it’s important to break them down.  Let’s consider what was accomplished by the approach Williams took to compensation:

  • Shareholder interests were protected
  • The “silo” approach was dismantled (division had to support each other to maximize incentives)
  • The workforce was taught where value sharing comes from–it comes from economic value added
  • Everyone was clear on what the profit target was ($80 million), which means they had to understand when and how the company was profitable

There’s more, but that’s a pretty good list.  And the result?  UL had one hiccup in 2006 when it missed its earnings projections but hasn’t missed one since.  Revenues were at $1.25 billion in 2011.

As I’ve often asserted, compensation is certainly not the only issue that impacts growth and performance in a company.  And I’m not suggesting that is the case here either (nor is Williams).  The point is that without this realignment of compensation, the way people were being paid would have been at odds with the strategic changes the new CEO was trying to initiate. How people were rewarded needed to be aligned with the overall plan to set the company on a different path.

Three cheers for a CEO that gets it.

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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 | 2 Comments »

Ken Gibson
May 29th, 2012 by Ken Gibson

Compensation and Your Brand Promise

Companies that attain a competitive advantage in their market niche are very clear about who they are and how they create value for their customer or clients. The way that value is communicated is through a brand promise. Essentially, a brand promise is what the company says it will do for its customers. At its core, the promise implies that a customer’s “world” will somehow be better because of the product or service that is being offered.

For a brand promise to be realized there needs to be continuity and integrity between what is offered by a company, what is delivered or executed by that business and what is ultimately experienced by the customer or client. As a result, there are at least four stages to the fulfillment of the brand promise.

  • Communication – a promise is conveyed to consumers
  • Scrutiny – the consumer analyzes and considers the promise
  • Acceptance – the consumer chooses to accept the promise
  • Maintenance – the consumer continues to compare the promise with the experience
 
Because of what’s at stake, it is critical that a business build a promise that is realistic, manageable, competitive and adds value. Maintaining that promise is equally essential. Companies that provide a recurring experience consistent with their brand promise will cultivate strong customer loyalty. That loyalty creates a returning customer and a bond that will protect against the forces of competition in the long term.
 
The delivery of the promise is subject to a wide range of environmental disruptions that can be generated by operational conditions, competition, customer perceptions, employee understanding (of the promise) and execution. As a result, it becomes the responsibility of a company’s workforce to ensure that the delivery of the product or service is consistent with the brand promise in the context of its fluid and dynamic market environment.
 
In this framework, compensation becomes a strategic tool a company uses to get and keep employees focused on the behaviors required for the brand promise to be fulfilled. In support of this claim, consider the following insight offered by Larry Bossidy and Ram Charan in their book, Execution:
 

“A business’ culture defines what gets appreciated, respected, and, ultimately, rewarded; those rewards and their linkage to performance are the foundation of changing behavior. If a company rewards and promotes people for execution, its culture will change. However your organization determines rewards, the goal should be the same – your compensation and rewards system must have the right yields. You must reward not simply on strong achievements on numbers, but also on the desirable behaviors that people adopt. Over time, your people will get stronger, as will your financial results.”

Understanding this, a company needs to determine the right philosophy and structure for its rewards systems and how it can most effectively channel its compensation investment towards the achievement of the desired outcomes. With that in mind, among the questions a business really needs to ask and answer are:
 
  • What form should the compensation take?
  • How and at what interval should the compensation be paid out?
  • Who should participate in each rewards program and why?
 
Most companies that perform this kind of internal analysis arrive at the conclusion that their rewards strategies must extend beyond just salary and benefits. In fact, they need an internal value proposition that is compatible with their external value proposition – one that creates the harmony described in this article.  At a minimum, this will usually require that a company institute both a short and long-term incentive plan of some type.
 
In short, the impact of compensation is more far reaching than most companies realize or acknowledge. Ultimately, a company’s brand promise relies, in part, on how effectively that business’s rewards strategies communicate what’s important both internally and externally.
 

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

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