October 26th, 2012 by Ken Gibson
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?”
Tags: breakthrough success, compensation and the recession, compensation philosophy and strategy, Culture of Confidence, employee stock, employee stock owenership, Employee Trust, Growth, incentives, key people, Pay for performance, phantom shares, phantom stock, profitability, rewards, Sustained Results
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 »
May 18th, 2012 by Ken Gibson
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.
Tags: breakthrough success, Company stock options, compensation and the recession, compensation philosophy and strategy, Culture of Confidence, employee stock, employee stock owenership, employee stock ownership, Employee Trust, Growth, incentive stock, incentives, key people, long-term shareholder value, Pay for performance, profitability, sharing stock, stock option plan, Sustained Results
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 »
March 5th, 2012 by Ken Gibson
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.)
Tags: Company stock options, compensation and the recession, compensation philosophy and strategy, employee stock, employee stock ownership, key people, long-term shareholder value, Pay for performance, phantom shares, phantom stock, Sustained Results
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 | No Comments »
November 2nd, 2011 by Ken Gibson
Great compensation solutions come to those who ask the right questions. It’s as straight forward as that. And there is a cascading sequence to an effective questioning process as it relates to compensation development and design. Let’s explore what that might include.
Stage One
The first level of inquiry has to do with broad strategic issues. Since compensation is a “strategic” tool, not a “tactical” one, the questions must start here.
- What is the vision of ownership for the “future company?” In what ways will the company be different three years from now than it is today? (Be as specific as possible.)
- What are the potential barriers that could keep that vision from being fulfilled (external and internal)?
- What key opportunities and initiatives have to be seized and effectively implemented if that vision is going to be realized?
- Who are the people that will drive those opportunities and are key to overcoming the barriers described?
- Do you have all the people in place now you will need to realize the vision you have described or will new people be recruited?
Stage Two
With a clear and compelling vision in mind, you are ready to address level two questions.
- What is the business model of the company; the performance engine that keeps revenue flowing and will fuel growth?
- What roles are in place to support that business model and what expectations have been set for those roles? (Presumably these are some of the same people mentioned above.)
- If you implement a compensation strategy that works, how should the outcomes produced by this group be improved or changed?
Stage Three
Now that we have addressed the vision and business model, we’re ready to talk more specifically about compensation related issues.
- What do you believe people should be paid for primarily? Time spent working? Outcomes (if so which?)? Knowledge and experience?
- In what ways are you paying people now that is supportive both of that philosophy and the business model you described in stage two?
- How and to what extent should people be paid for maintaining the present performance engine of the company?
- How and to what extent should people be paid for innovation and contributing to the future growth of the company?
Stage Four
With a working pay philosophy established in stage three, we’re now in a better position to be more granular in our compensation questions.
- Where do we want to set salaries vis a vis market pay?
- Where do we want total compensation to be vis a vis market pay?
- Are those answers the same for each tier of employee in the company?
- Do we want to share equity?
- If we don’t want to share equity, do we want some level of pay to be reflective of company value?
- If we don’t want to tie pay to company value, what financial metrics do we want it tied to?
- What balance should there be between short-term value sharing (performance over 12 months or less) and long-term (performance over 12 months).
Certainly, there are still many more questions to be asked and answered before your compensation strategy will be ready and complete. However, hopefully this list gives you a sense for the train of thought that should inform the compensation discussion in a company that wants to grow and realize ownerships’ vision for the future.
Tags: breakthrough success, compensation philosophy and strategy, employee stock, employee stock owenership, employee stock ownership, Growth, incentive stock, incentives, long-term shareholder value, Pay for performance
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent, Uncategorized | 1 Comment »
September 9th, 2011 by Ken Gibson
You have smart people working for you. For the most part, they believe in the company and where it’s headed. Because they are thoughtful and intelligent, they are willing to learn about the role you want them to play in creating value for the business. The better ones had options when they chose to work for your company. The best ones have other options now.
So, if what I describe above is familiar to you–if you have one or more person like this working for you right now–what would they say to you about compensation if they were honest about their expectations?
In the course of our work with clients, we have interviewed hundreds of just such individuals within successful businesses. In composite terms, I’d now like to share what we’ve heard. I’ll categorize the responses in three groups and then lay out the expectations of those we’ve spoken to in the first person; speaking as if I were that smart, thoughtful employee who did and does have options.
- Sustainable Cash Flow–”I recognize that my experience and skill level merit a certain level of pay. I’m not stupid; I’ve done some research, asked around and I know what most people in my position earn. I’ve built a certain lifestyle around that expectation. Now I just want to know that as long as I perform–and the company continues to do well–I’ll have enough guaranteed and incentive income to keep me and my family in our ‘world’ and still be able to plan for the future. As a result, it would be helpful to know what philosophy the company has going forward for how much of my earnings will be guaranteed and how much upside potential there will be through “value sharing” if I help the company meet its growth targets. To the extent some of my compensation will be ‘at risk,’ I’d like to be clear on the measures being used to determine payouts and know that those metrics are based on something I have control over. I would also favor something that isn’t ‘all or nothing’; if we achieve a superior result, it would be nice to know even more would be available. That would be meaningful to me–and seem fair.”
- Security– “There are certain risks that could change my world pretty quickly. If a member of my family becomes seriously sick or injured, or if I die or become disabled, I need some means of protection. Likewise, I need to be able to plan properly for retirement, education for my kids and so on. I certainly don’t expect the company to foot the bill for every type of risk I’m trying to plan for or protect against. At the same time, I recognize the business is in a unique position to use the size of its workforce as leverage to obtain certain benefits and that’s it’s also in the company’s best interest that its key people not be too vulnerable. So, I hope I can have some flexibility in my benefit options that will allow me to address my circumstances in as customized a manner as possible. I’m willing to share in the cost of doing so–I just want to make sure consideration is being given to the range of issues that could impact both me and the company if proper planning isn’t done. Here are some of the things the ideal arrangement would include:
- Medical Insurance—options for PPO, HMO, catastrophic coverage (dental, vision, long-term care options are a plus and having some options even at my cost would be helpful in this regard)
- Life Insurance—options for additional coverage at a group rate are ideal; some kind of permanent coverage the company pays for while I’m employed is better (I’ve heard of things such as ‘split dollar’ arrangements where the company gets its money back when I leave)
- Disability Coverage—this one worries me the most; so it would be great if there was either a group plan or individual coverage that replaces my income if I’m not able to work; again, I’m willing to share in the cost of this but I also recognize it takes the company off the hook for having to decide what to do if I am out with some kind of long-term condition
- Retirement Plan—a 401(k) is great, I’d just like to make sure you’re looking out for me in the investment options I’m given and that you are making sure hidden costs are being squeezed out so I can maximize my benefit. If the company makes a contribution to the plan, it tells me they value a long-term relationship with me and want to help me plan for my future
- Supplemental Retirement Plan—it’s a bummer that the government restricts my contributions to the 401(k) plan; what I put in is based on what people earning less than me put in. As a result, having a supplemental plan to allow me to set aside more for the future and on a tax favored basis would be ideal. I know many companies provide this through some kind of deferred compensation arrangement”
- Wealth Accumulation—“It’s nice having a retirement plan, but it’s not what I mean by having a wealth accumulation opportunity. I’m talking about having the means to share in the ‘wealth’ I help create in the business. If my commitment of time and talent means the company achieves something it wouldn’t have achieved without that contribution, is it not fair to want to participate in the value I help generate? It seems like a win/win to me if it’s set up properly. I don’t care whether I get equity or not—I just want to know that there is a long-term mechanism in place that makes the achievement of the owners’ vision a financially meaningful event for me. I’d be motivated by that and it would seem like more of a partnership arrangement if I can participate in something like that.”
So, there you have it. That’s what your best employees are thinking and what they’d like to say if given the chance. Now you know. You’re welcome.
For more information on this topic, view our webinar entitled: “What Your Employees are not Telling You about your Current Rewards Programs.”
Tags: compensation, compensation philosophy and strategy, Culture of Confidence, employee stock, employee stock owenership, Employee Trust, Growth, incentives, Pay for performance, Sustained Results
Posted in Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent | 1 Comment »
August 31st, 2011 by Tom Miller
We’ve looked at restricted stock and stock purchase plans. There’s an even more common way to get stock in the hands of employees.
Of course: stock options. Public companies use them commonly. Why shouldn’t you? This would enable Sally (your national sales director) to get some stock at a fair price and help her get capital gain taxation if you sell the company some day.
Maybe. Maybe not.
First of all we still have a cash-flow concern. Sally will need to come up with enough cash to exercise her option after the vesting period has passed. Let’s say the stock is worth $10 today and you give her 5,000 options to buy the stock at that price. Her three year vesting period passes and Sally scrapes together the $50,000 to exercise her options. Let’s assume the company share price has grown to $18 in the meantime. She now has $40,000 of new equity value (($18-$10) X 5,000). How do the taxes work?
There are two different types of options—nonqualified and qualified (or incentive). This isn’t the place to cover the differences in taxes—except to say that incentive options, generally, produce a better tax result for Sally and a worse tax result for you. Meanwhile, Sally may now be in a position to benefit from a future transaction (i.e., sale of the company or IPO) assuming the event occurs at least a year from the date of the exercise of the options.
However, what if neither event ever occurs? You’re back to our original problems of redemptions, dividends, etc. In my “30 plus” years experience coaching companies on these plans I’ve seen many more situations where the “future transaction” doesn’t happen, than it does happen. As a result the majority owner and the owner-employee face the grind of negotiating a “fair” price for the stock at the time of a future separation of service. How well do you think you’ll enjoy that future conversation with Sally’s attorney?
The bottom line: the financial results of stock or stock option awards can appear to justify the effort—under the perfect circumstances. But reality is never as simple as you expect it to be. The majority of private company owners will regret the move to stock awards for employees. The perceived value of employee ownership is, nine times out of ten, not nearly worth the price.[1]
So what should we do instead. Stay tuned.
[1] The author acknowledges the primary exception to the rule: if your company is on a clearly lit IPO track, stock options offer an excellent and efficient way to reward employees.
Tags: Company stock options, employee stock, employee stock ownership, private company stock, restricted stock, restricted stock units
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation | No Comments »
January 24th, 2011 by Tom Miller
A few months ago I noticed an article in a Washington state newspaper describing a situation wherein employees were terminated from a bank and apparently did not receive payments owed under their phantom stock plan. The reporter states that the employer simply told the employees the bank “didn’t have the funds.”
So how safe is phantom stock?
First of all these plans are forms of deferred compensation and, as such, are subject to creditors of the corporation. If a plan sponsor goes bankrupt, chances of payment are very small. But this bank apparently did not go bankrupt. They simply terminated the services of the employees without making payment on the plan obligation. Assuming we’ve been told the whole story (perhaps a big assumption) this would appear to be a clear violation of the terms of a typical phantom stock agreement. The employees are suing and may have a pretty good case.
Nonetheless, any employee invited to participate in a phantom stock plan needs to be aware that they are not in a secured position. The plan promise is only as strong as the company behind it.
That said, careful companies play it smart. They “fund” their phantom stock plans. This means they set aside designated funds on the company’s books to be “earmarked” for payment of plan liabilities. These funds cannot be secured from creditors. And they can even be used for other company purposes. But they watch the funds carefully and manage them to assure (within reason) adequate liquidity for the plan.
If you have or consider a phantom stock plan (or any form of deferred compensation) informal funding is the wise choice. It’s prudent, cost effective and practical. And it may save you from a future lawsuit and bad press.
Tags: Company stock options, employee stock, employee stock ownership, phantom shares, phantom stock, restricted stock, restricted stock units
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Phantom Stock | 1 Comment »
January 13th, 2011 by Tom Miller
What do I mean by better? Phantom stock better aligns with shareholder goals. Wait! How can a cash-based plan (such as phantom stock) align better than actual stock? Shareholders hold actual stock. If employees own actual stock don’t we have perfect alignment? Typically not.
First of all most companies don’t usually grant stock, they grant stock options. Stock options pay off if the value of the stock increases but they don’t result in a reduction of value if the stock declines in value (from the initial strike price). Shareholders have an interest in preserving value, not just in increasing value. Thus, if the officers of a company own options they are not perfectly aligned with shareholders who, obviously, own actual stock. Shareholders are thinking “preserve and grow.” Managers are thinking “grow!”
Secondly, in a public environment stock prices are influenced by more than actual performance. They are influenced by what the market believes about future performance. If I own stock in your company I of course want people to believe the future value will be higher (especially if I want to sell the stock soon). However, over time, actual performance will tell the tale.
A phantom stock plan (properly designed) would not normally tie to market performance. It would tie to true performance indicators (typically some kind of profit multiple). Thus, true growth in profits over time would result in value for the phantom stock unit-holders.
By the way, it’s fine to structure the phantom stock as an “appreciation” plan (like with stock options) as long as it’s tied to true profit growth. Again, those results must be real, not just anticipated. That said, a “best practice” model would include both full-value phantom stock and appreciation rights held in a well-balanced structure.
Unfortunately, the accounting rules generally favor options over phantom stock rights. But, in my book, alignment trumps accounting any day.
Tags: Company stock options, employee stock, employee stock ownership, incentive stock, phantom shares, phantom stock, restricted stock, restricted stock units, stock option plan
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Phantom Stock | No Comments »
June 28th, 2010 by Tom Miller
In my last blog I described the 5 biggest mistakes made by companies that adopt phantom stock plans. Today—the 5 best innovations that can make your plan a driver of performance and value.
- Determine how much value you want to share with employees before you begin to design the plan. To do this, you need to model company growth under reasonable scenarios and see how much new value would be created for shareholders. Then, and only then, can you begin to consider how much of that new added value should go to your key employees. For most companies this would range between 5% and 20%.
- Now that you have a “budget” for the plan you can back into annual awards. But first you’ll have to set a phantom value. Do this by creating a Formula Value (FV) for the company. The FV might be a reasonable multiple of earnings (or EBITDA, whatever you prefer). You’ll probably want to subtract long-term debt. Then pick a hypothetical number of phantom shares, e.g., 1,000,000. Divide your shares into your FV and, voila, you’ve got a share price.
- Now pick your participants (and allow for some future ones). Begin to place some number of phantom shares into their account annually (we’re still doing this in a model spreadsheet—not for real yet). There are a number of good techniques for doing this—but not enough space to discuss here). Work the numbers until the values seem right—and you’re within your budget.
- As you see how the shares grow in value you’ll realize that you need to determine when they’ll be redeemed (paid in cash to the participants). We typically recommend payouts starting 5-7 years from the year of grant. Don’t wait until “retirement” as employees will learn the only way they can get cash is to quit.
- When you complete and document your plan you’re ready for a roll-out. Make that meeting meaningful. Help the employees see that you’re trusting them with the creation of your future company and that you plan to reward them well for making it happen.
Don’t be stingy. If your key management team creates millions for you, the least you can do is make them feel like shareholders—at least financially. Every company that expects to be bigger in the future than they are today needs some type of long-term incentive plan. A phantom stock plan just might be the key to tying your leadership team to the creation of that future company.
Of course there are a number of other things to do to make a phantom stock plan work. But these five will get you off to a good start.
Tags: Company stock options, employee stock, employee stock owenership, incentive stock, phantom shares, phantom stock, private company stock plan, stock option plan, stock plan for private company
Posted in Business Growth & Compensation, Business Growth and Rewards, Current Pay Trends and Topics, Incentive Planning | No Comments »
