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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 »

Tom Miller
February 8th, 2013 by Tom Miller

High Income Taxes—Should You Change Your Compensation Strategy?

Income taxes are going up dramatically this year for high income earners. Is there a bright side?  No!  But let’s deal with it.

Top earners will now be in a 39.6% marginal bracket. Add state taxes (for most states)—let’s assume 5.05%. (Wouldn’t that be nice Californians and New Yorkers?) Then add the Medicare tax on income over $113,700—2.35%. That would add up to a true marginal rate of 47.0% on the top dollars earned by high achievers. Ugh!

Let’s consider some compensation strategies that will help creative employers offer relief to their top earners. There are a few but let’s look at two examples for now.

First, revisit deferred compensation plans (DCP). These plans allow high earners to voluntarily defer parts of salary or bonuses and postpone taxes to a future date. Deferring to the future offers several immediate benefits:

  • Reduce taxable income below the new top rate threshold ($400k for single filers; $450k for married/joint filers);
  • Reduce MAGI (modified adjusted gross income) below the Medicare tax threshold ($200k/$250k);
  • Reduce AGI below the threshold where personal exemptions and itemized deductions are phased out ($250k/$300k).

In addition, assuming the same tax rates in the future as today, deferred dollars almost always result in larger after-tax values in the future (given the same growth assumptions inside the DCP as in an outside investment account). For more information, you can view a  webinar that I presented in February.

Second, beef up long-term incentives. Employees may be pleased to exchange some of their incremental “53 cents on the dollar compensation” for long-term equity or phantom stock. Or, a smart employer may simply add such a plan to existing promises. Let’s consider phantom stock. Grants received today equal a financial stake in the future company with no current tax! That’s right. You can give me 1%, 5% or 10% of your company “value” through phantom stock and I will incur no taxes today. What happens when the shares are redeemed in the future? Yes, taxes. However, we might be able to move payments into lower tax years, or spread them over time. In other words, we can often find ways to move the reportable income into periods where the employee may fall below the tax maximizing thresholds discussed above.

But here’s my main point: Employers that explore and implement techniques to help high income earners reduce, avoid or delay taxes are offering a benefit that just went up in value thanks to Washington. Don’t let your key employees be lured away because your competitor adopts these ideas before you do.

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

Ken Gibson
January 10th, 2013 by Ken Gibson

Principles that Should Guide Compensation Design

There is no constitution that dictates how compensation should be designed.  Nor is there a “one size fits all” approach to building pay strategies that will help a company succeed.  However, there are what might be considered self-evident principles that businesses should use when they approach the development of rewards strategies.  I call them self-evident because companies that have succeeded in their approach to compensation have applied these principles and seen positive results; the principles have been tested.

So, not in any particular order, here are the guiding principles that any company wishing to develop an effective compensation strategy should follow:

  • Know Your Philosophy. Every company needs to be able to articulate what it believes about pay and value sharing. This should be in writing.
  • Define Outcomes. This means a company knows the results its looking for and how to prioritize those results. All leadership needs to be in agreement about those outcomes and that they are achievable.
  • Envision the Future. A business must be able to effectively model what the future will look like if the defined outcomes are achieved.  It needs to be able to envision what will happen to shareholder value if certain assumed results are achieved.
  • Define Value Creation. This should technically be part of the compensation philosophy. A business must be able to articulate the point at which additional value has been created beyond that attributable to the financial and physical capital at work in the business.
  • Identify Clear Roles.  An organization needs to link outcomes and value creation to people. What functions need to be performed to achieve the results that have been identified? Are the right people filling those roles now?  Are additional or different people needed?
  • Share Value–Especially Long-Term Value. There needs to be a relationship between value created and value shared. Key producers want to know that there’s a mechanism for participating in the growth they help create.
  • Adopt a “Total Rewards” Approach. Financial rewards is only one of four reasons individuals join and then stay with an organization. Pay is a critical component but premier talent also wants to know that the company has a compelling future, that a positive work environment is being nurtured and that there will be opportunities for personal and professional development.
  • Market a Future to Your People.  At a minimum this means a company has to have a clear and compelling means of communicating its value proposition to its people. But it has to more than communicate how a bonus plan works. It has to create “line of site” between vision, strategy, roles, expectations and rewards.  Innovative leaders such as Steve Jobs, Mark Zuckerberg and Jeff Bezos have developed ways of transforming the way both their employees and their customers view the future. Compensation has to be framed in such a context for it to have impact.

Well, there you have it.  Now you’re equipped and should never fail in your development of effective pay strategies. Okay, you should have smaller failings at least.  No one gets it all right at the outset, but if sound principles are being applied, making adjustments will be much easier. Your people will also sense there is a fairness to your approach and will help you get it right.

In the end, growth companies know that if they don’t get rewards right, there is a high likelihood they will fall short of the results that hope to achieve. Correct principles will help make sure you get it “right.”

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Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Key Talent Compensation | 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 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 24th, 2012 by Ken Gibson

Is Your Top Talent Looking Elsewhere?

A recent study reported in the Harvard Business Review reveals that some of today’s most sought after talent is constantly networking and looking for the next “better” opportunity.  What the study’s sponsors found in their data was this:

“We reached these conclusions after conducting face-to-face interviews and analyzing two large international databases created from online surveys of more than 1,200 employees. We found that young high achievers—30 years old, on average, and with strong academic records, degrees from elite institutions, and international internship experience—are antsy. Three-quarters sent out résumés, contacted search firms, and interviewed for jobs at least once a year during their first employment stint. Nearly 95% regularly engaged in related activities such as updating résumés and seeking information on prospective employers. They left their companies, on average, after 28 months.

“And who can blame them? Comparing the peripatetic managers’ salary histories with those of peers who stayed put, we found that each change of employer created a measurable advantage in pay; in fact, a job change was the biggest single determinant of a pay increase.”

These results reinforce something we have preached for a very long time.  When companies look to develop a value proposition for their key people, they must adopt a “total rewards” view of their efforts.  This approach has four equally important components that must be constantly addressed and measured if a business is going to succeed in attracting and retaining top talent.  The four elements are these:

Compelling Vision

Key people must be able to view the future of the company as something they believe in and want to help fulfill. Further, they need to be able to see themselves in that future and believe their unique abilities are necessary for its realization.

Positive Work Environment

People want to enjoy the nature of their roles, get along well with the group of people they work with, have good communication and an ability to solve problems with ownership and top management, and be able to apply their distinctive abilities in a way that “makes a difference.”  They also want praise for superior efforts and constructive feedback about how to best use the resources of the organization in fulfilling their stewardships.

Personal and Professional Development

This means more than just career advancement potential. In addition to a positive work environment, employees want to see that their unique abilities are not only being utilized in the organization, but that they are being improved.  If they are going to stay, they must believe that their skill level will be advanced and magnified in part because of the resources they have to work with within the business. This includes the other people with whom they interact, the tools available to complete their assignments, the level of training they receive, the innovation they are responsible for and the level of capital deployment toward their areas of accountability.

Financial Rewards

Compensation should act as a kind of thread of continuity that pulls these other elements together and creates a sense of partnership between the owners and their key talent.  High producers have confidence in their skill level and want rewards that provide an opportunity to participate in the value they help create. They view this as a trust and fairness issue.  When compensation reflects a ” fair” approach, confidence in the organization is increased and a unified financial vision for growing the business emerges.  Fairness is perceived when compensation addresses the following key issues that most employees care about:

  • Cash Flow and Standard of Living–Beyond what market pay studies suggest, high level talent have an intuitive sense of what their skills and experience should allow them to enjoy in terms of  a standard of living. This is supported primarily by their salary and short-term value sharing arrangements such as annual bonuses.
  • Security–Employees want to know there is at least an adequate if not a superior approach to insuring against health risks and providing for retirement.  Benefit plans should not be overlooked or discounted in their ability to assuage concerns most  carry in this regard.
  • Wealth Accumulation Opportunities–Key producers want to know that if they create value there is a mechanism for them to participate in that wealth multiple. For the most part, particularly younger talent–such as those cited in the study–are looking for a kind of mini-entrepreneurial experience inside the business they work for.  They want a similar opportunity to that which ownership enjoys. This does not necessarily mean equity has to be shared.  There are other ways of addressing that issue. (Click here to learn about alternatives.) What’s important to them is that there be a mechanism in place for building wealth through their affiliation with the business.  This can’t be emphasized enough.

In my view, if the young employees cited in the study were having the total rewards experience described here, the statistics would be very different.  Companies have more power than they think  to attract and retain key talent.  It begins with the adoption of a wealth multiplier mindset–one in which ownership comes to understand that their own personal wealth standard will increase in relation to that which they allow other stakeholders to participate in.  Our experience has been that this is what differentiates wealth multipliers from mere wealth creators.

For more information on this topic, view our webinar entitled What Your Employees are not Telling You about Your Current Rewards Programs.

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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 | 1 Comment »

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
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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