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Ken Gibson
January 24th, 2013 by Ken Gibson

Compensation Tips for 2013

Now that we’re at the start of a new year, many organizations are looking at their compensation strategies and attempting to break new ground in their effort to develop pay programs that will support business growth.  Hopefully, the issues discussed in this space, as well as the webinars, white papers and e-books VisionLink has produced, will give you a “leg up” in your attempt to improve things.  That said, I thought it might be helpful to offer a few tips about steps to consider taking this year if you haven’t already addressed them.  They are in no particular order of importance–just a kind of “brain dump” on compensation issues that should take priority in your pay planning.

  • Plan compensation strategies that will address a high income tax environment.  Everyone, but especially your highly compensated people, are going to face higher tax rates  in 2013 and beyond.  It’s time to consider a strategic deferred compensation plan if you haven’t previously, or shore up the one already in place. (For further insight in this regard, consider watching our February webinar entitled: “Compensation Strategies for a High Income Tax Environment.”)
  • Put more emphasis on value sharing and upside earnings potential and less on guaranteed income. Hopefully your company is committed to innovation and keeping at bay those organizations intent on the “creative destruction” of your business. You will need to recruit talent that has entrepreneurial capacity and inclinations.  They will want a pay program that simulates what they could have if they started their own business. (For more ideas in this regard, check out our December 2012 webinar entitled: “The Future of Compensation: What’s Next and Why.”)
  • Begin measuring the return on your company’s total compensation investment; know your organization’s “productivity profit.” If you’re going to share value you’ll need to get very good at defining value creation for your firm. Incentives (value sharing) should be “self-financing” and come out of the productivity profit of the company. This is the profit that is calculated after an appropriate capital “charge” is assessed against the earnings of the business. The capital charge reflects the amount of return shareholders should expect to receive on the operating capital already at work in the business. (For a more complete understanding of this concept, check out our September 2012 webinar entitled: “Compensation Standards that Both Shareholders and Employees Will Embrace.”)
  • Adopt a “Total Rewards” approach. This means you recognize that financial rewards represent only one of four elements employees will evaluate this year in deciding to either join your company or stay with it.  They will also want to know if the company has a compelling future–and that its fulfillment relies on their unique abilities and contributions as key producers. Premier talent will seek a positive work environment–one in which it enjoys the team of people it works with, the nature of its role in the organization and that it has the ability to get problems solved. Finally, your best people will want to know that there are personal and professional development opportunities.  This is not just training.  This means that their unique abilities are aligned properly with the company’s resources so they get better at what they do because they are part of your organization.
  • Implement an effective rewards reinforcement strategy.  A “B-” plan that is highly promoted and well communicated will have more value than a “A+” plan that employees heard about once in a launch meeting but hasn’t been talked about since.
  • Craft and communicate a  compensation philosophy. Put it in writing.  Make this the year you clearly define what you will “pay for” and how you feel value should be shared in the organization. Define where the company wants to be relative to market pay standards for salary versus total compensation (including value sharing).  Communicate that philosophy as often as you can in team or company-wide meetings and whenever or wherever the vision and strategy of the business is being discussed.

There are certainly more things that could be added , but that’s a pretty good list for now.  If you do the things indicated here, you will see measurable improvement in your ability to recruit and retain the best people and keep them properly focused on the outcomes you want achieved.  You will sense a greater ownership mentality emerging in the organization and a more unified financial vision for growing the business will be apparent.

The proof is in the doing. Try it. Test 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 | 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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Ken Gibson
November 6th, 2012 by Ken Gibson

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

That’s a question that is felt at a visceral level by anyone trying to drive growth in a business. Intuitively, most CEOs know they should have a better handle on how much their key producers are being paid and why.  They’ve looked at market pay data and thought strategically about the role each person is playing in the company’s growth plans.  At the same time, they would be hard pressed to articulate why a given employee group received an increase in compensation this past year and what standards had to be met to merit that improvement.

As this issue is examined in company after company we meet with, we suggest that a  ”value matrix” be developed that will articulate the standards each compensation plan must meet to be justified.  This exercise should be done in conjunction with the development or evaluation of the company’s written compensation philosophy statement that articulates what the company believes it should “pay for.”  We recommend the value matrix incorporate and define the following components.  Down the vertical axis, each piece of the compensation package is listed: salary, annual bonus, qualified retirement plan, long-term incentive plan, group benefits, executive benefits, etc.  Across the horizontal axis, the following standards should be defined for each plan:

  • Purpose–This is a brief statement that should answer the question: “Why do we have this plan; what outcome is it intended to drive?”  For example, the purpose statement for a short-term incentive plan might say something like: Enhance current cash payments to executives for achieving top and bottom line annual goals.
  • Standard--Here we want to define what measure will be used to define how the plan value will be targeted.  For example, the salary standard might be articulated as the 50th percentile of market pay.  A standard for a long-term incentive plan might be defined as 20 to 30% of salary.  Even if something like Phantom Stock is being used, it should be quantified other than by just the number of shares being distributed. Group benefits would typically be stated in terms of a percentile of market standards, as salary is.
  • Investment–This figure is a dollar amount the company anticipates investing in the pay program on either a per employee basis or for the group as a whole (that is to be included) and the period being evaluated.  Each form of compensation  needs to be calculated and the company commitment quantified.  To come up with this figure, the company will need to make assumptions about the level of results it anticipates will be achieved to trigger incentive payments in particular.  It may decide to tie the assumed dollar volume to a base, targeted or superior level of business performance.
  • ROI–This is a standard that identifies performance thresholds the company needs to be achieving to merit the pay investment that has been allocated.  Salary levels, for example, may be tied to an ROA target the business needs to achieve while short-term incentives might be based on a combination of revenue growth and margin (or other key performance indicators).

When a company goes through this kind of analysis, it is forcing itself to think about compensation as an investment that is being allocated rather than merely an expense to be contained.  It creates a standard against which it’s pay allocation can be measured. If companies want to get serious about growth, their leaders must think about compensation in these terms and understand the extent to which this deployment of capital is contributing to growth.  Pay for performance in this context is not just a fancy term for having a bonus plan.  It’s a strategic approach to the decision making process that impacts what, for most companies, is the largest budget item on their  financial statement.

To learn more about where compensation will be headed in the future, tune in to our webinar on December 4 entitled, “The Future of Compensation: What’s Next and Why?”

B8VVKUVES2EF

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

Ken Gibson
October 26th, 2012 by Ken Gibson

The Future of Compensation

Where is compensation headed in the future and why? It’s a compelling subject for a number of reasons, not the least of which is that pay programs represent the largest budget item most business leaders have to manage.  And the trends so far have American companies paying attention to this issue probably more than they ever have before.  Why is that?  Well…much of it has to do with the economic environment of the past three plus years that has fundamentally altered the way business leaders, employees (or potential employees) and the public (through the eyes of the media) look at financial rewards within the business. Owners and CEOs are worried about locking key producers into high salaried positions. Talent that has been sitting on the sidelines is concerned about coming back into the labor force and getting locked into a salary that is far below what it earned at its peak. And the public (the media) is concerned about “fairness.”  So this leaves everyone looking for effective solutions and asking where this is all headed from here.

To understand where compensation is headed, we must first understand where business is headed; specifically, what kind of people are businesses going to want and need to attract to remain competitive.  The key word in this regard is innovation. The focus on creative energy within organizations both large and small is bigger than it has ever been–and it will only increase in the future.  Pick up any business publication these days and you would be hard pressed to find one that doesn’t have multiple articles on innovation–how it happens, who is most innovative or how to breed greater levels of this quality within a company.  So how does this relate, first of all, to the kind of talent businesses are looking to attract?  Consider this insight offered by Scott D. Anthony in the September issue of Harvard Business Review.  Mr. Anthony is the managing director of Innosight Asia-Pacific and the author of The Little Black Book of Innovation (Harvard Business Review Press, 2012):

“It’s early days still, but the evidence is compelling that we are entering a new era of innovation, in which entrepreneurial individuals, or ‘catalysts,’ within big companies are using those companies’ resources, scale, and growing agility to develop solutions to global challenges in ways that few others can…These companies have pushed into territory that was once the province of entrepreneurs, NGOs, and governments—from delivering health care technology, clean water, and new agricultural capabilities in developing countries to managing energy, traffic, public transit, and crime in the world’s major cities.” (“The New Corporate Garage”, Harvard Business Review, September 2012, Scott D. Anthony)

The trend that this article and others point out has to do with the focus businesses have adopted on hiring entrepreneurial individuals (catalysts) that can leverage the company’s resources to create and innovate. And the article goes on to point out that “Whereas the inventions that characterized the first three eras [of innovation development in American companies] were typically (but not always) technological breakthroughs, fourth-era innovations are likely to involve business models. One analysis shows that from 1997 to 2007 more than half of the companies that made it onto the Fortune 500 before their 25th birthdays—including Amazon, Starbucks, and AutoNation—were business model innovators.”

If you take just these two elements–catalysts and business models–it becomes clear where compensation needs to go if it is going to support the need for businesses to innovate.  Pay strategies need to attract people with entrepreneur capabilities and reward them for leveraging the ability of the company to expand, magnify or otherwise accelerate the virtuous cycles of the company’s business model. Intuition will tell you that this need is not going to be addressed by simply paying competitive salaries or even generous bonuses.  Catalysts are going to seek a compensation structure that will reflect the entrepreneurial experience they are seeking within the business.  They want a stake in the value they help create.  For some, this may mean–at least initially–that they will ask for equity in the business.  And in a certain number of cases, sharing stock might be appropriate.  However, there are multiple ways to share value without sharing equity–and companies will become more and more interested in understanding how that can be done.  At a recent CEO2CEO conference that I attended on innovation, more than one business leader talked about how their companies had developed a venture pool within the business that is awarded to producers that ignite relevant, profitable innovation that further fuels or enhances the business model. Phantom stock, profit pools, SARs, Performance Unit Plans and their variations will also play a larger and larger role in shaping the total value proposition that a “catalyst” employee is offered and will demand.

In short, the compensation of the future will not necessarily involve only new pay “schemes”  that have never been used before, although some such plans are emerging (e.g. the internal venture capital fund just mentioned). Rather, it will be a matter of companies paying more attention to the range of pay elements they combine to create a financial opportunity that matches what the innovators of the future will seek.  It will become both a question of how much those individuals are paid and how that compensation comes to them.

To learn more about the compensation trends for the future, tune into our webinar on December 4 entitled “The Future of Compensation: What’s Next and Why?”

 

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

Ken Gibson
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
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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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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Ken Gibson
May 18th, 2012 by Ken Gibson

Facebook and Value Sharing

Core Principle of Compensation Design: Value Sharing Attracts the Best Talent and Magnifies Results

To achieve sustained success, companies must attract and keep talented people that know how to compete and are willing and able to assume a stewardship role in representing shareholder interests towards growth. For such a relationship to be properly fostered, owners and other stakeholders (in this case, key talent) must share both the risks and the rewards associated with value creation.

Those of superior talent are attracted to this idea.  Individuals best equipped to contribute to the future success of the business will see it as an opportunity to have what amounts to a mini-entrepreneurial experience within the construct of someone else’s business model.  As such, they view the company as a mechanism for wealth creation, not just a place to express their passion and talent.  And shareholders should want employees with that perspective representing their interests.

In a recent interview with TV talk show host Charlie Rose, Mark Zuckerberg, founder and CEO of Facebook, said it this way:

I actually think the biggest thing for us is that a big part of being a technology company is getting the best engineers and designers and talented people around the world. And one of the ways that you can do that is you compensate people with equity or options. Right?

So you get people who want to join the company both for the mission because they believe that Facebook is doing this awesome thing and they want to be a part of connecting everyone in the world. But also if the company does well then they get financially rewarded and can be set.

… we`ve made this implicit promise to our investors and to our employees that by compensating them with equity and by giving them equity that at some point we`re going to make that equity worth something publicly and liquidly — in a liquid way. Now, the promise isn`t that we`re going to do it on any kind of short-term time horizon. The promise is that we`re going to build this company so that it`s great over the long term. And that we`re always making these decisions for the long term. (From a transcript of an interview on Charlie Rose, PBS, on November 12, 2011. Emphasis added.)

The point Zuckerberg is making has little to do with whether or not a company plans to share equity or go public.  There’s a larger principle he’s defining. When companies can attract and retain the kind of people that think and perform as he describes, they are in a unique position to sustain results.  This is because a distinct and lasting interdependency emerges between the employees’ skills and the company’s resources that extend those skills (capital, co-workers, suppliers, products, technology, etc.).  Talented contributors soon learn that their skills are not as unique and applicable outside the company (that is providing the laboratory for nurturing and magnifying them) as they are within the enterprise. That’s a good mindset for company talent to have because of the mutual dependency it creates.

Such interdependence is reinforced and validated when long-term value creation is rewarded through value sharing, as Zuckerberg indicates.  When employee skills connect with company resources in the right way, superior results are produced. To be effective, the compensation program should then provide a remunerative link to that outcome which confirms and magnifies the sense of partnership owners wants to convey.  That link “seals the deal,” so to speak, and financially ratifies the interdependent nature of the relationship more completely.

So, whether one decides that  newly available Facebook shares are over priced or under valued,  Zuckerberg’s approach to value sharing with key producers is a sound one.  Long-term value sharing, done right, attracts the “right” people and magnifies results.

 

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Ken Gibson
March 5th, 2012 by Ken Gibson

WSJ–How to Fix Executive Compensation

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

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

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

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

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

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

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

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

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

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

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

(I agree.)

 

 

 

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