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 »

Robert Rainey
September 27th, 2012 by Robert Rainey

Making Bonus Plans More Effective

One of the inquiries our firm receives more than almost any other goes something like this: “Can you help us fix our bonus plan?”  The question usually stems from the company having tried a number of iterations of a bonus arrangement over the past few years and feeling like it isn’t “working.”  Sometimes these plans are largely discretionary, other times they have become a virtual entitlement. And more times than I can count, the company has put itself in the position of paying out value when it isn’t even profitable.  Yikes!

With that frame of reference in mind, let me share some steps that should ensure a more effective annual incentive plan arrangement.  While each company is different, and you may have metrics and measures that vary according to your circumstances, this planning sequence should help you organize things in a way that protects shareholders while providing a great plan for participants.

Bonus plan design works best if it is approached as follows:

  1. Determine the eligible group.  You may want to begin with primarily executive or management employees and expand later from there.

  2. Next, assign eligible employees to tiers based on salary, roles and responsibilities. The number of tiers will depend on the size of the eligible group, but there are 3-6 for most companies.

  3. Determine how profit will be defined for purposes of the new plan.Common measurements include: EBITDA; net operating profit after tax; earnings before taxes; operating income; net free cash flow; etc. Measurements may be expressed as benchmark/budget numbers (e.g., $1 million of EBT) or as a growth in profits approach (e.g., 10% increase in EBT from prior year).

  4. Establish a minimum threshold of financial performance (as determined in step 3) that must be met before the funding of any incentives. For example, if using a benchmark/budget approach it might be determined that the first $X of profits will not be subject to the incentive plan. With a growth in profits approach, it might be determined that the first 6% of growth will not apply, but any excess will.

  5. Select the percentage of profits to be credited to the Bonus Pool (“Pool”). This might be a straight percentage (simplest) or a tiered percentage (that rewards higher values for better results).

  6. Allocate the entire Pool to the different tiers using one of following methods:
    1. Percentage to different tiers (e.g., 40% to senior management, 20% to middle management, 40% to all other employees)
    2. Discretion of board/CEO/shareholder(s)/executives/managers
  7. Allocate each tier’s Pool among the plan participants utilizing one of the following methods:
    1. Individual performance score (requires internal job appraisal system convertible to scoring result.) Employee evaluations may impact individual participation in the profit award. That is, the evaluation scoring system can influence the amount of the allocation to be received (e.g., a 100% system).
    2. Discretion of board/CEO/shareholder(s)/executives/managers
  8. Calculate each employees bonus as a percentage of his salary based on the results in step 7

  9. Adjust the allocation (entire Pool and/or participant) as needed to reflect relative performance/value of each tier and/or the participants.

  10. Determine how company would like to express the bonus opportunity to participants. “Your bonus opportunity will range between 20-40% of your salary, depending on the level of profits we attain.” “You will receive approximately y% of all profits in excess of x.”

  11. Develop management processes to communicate and reinforce the profit-generating capacity of all employees. During performance reviews, goals should be set that are tied to profitable activities. Conversations between management and employees must reflect an understanding of the importance of achieving profitability goals and of each associate’s contribution to the same.

  12. Apply consistent judgment and evaluation standards. A review committee should oversee the process to assure the highest possible commitment to consistency, fairness and diligence.

These steps, of course, have to be modified to fit the specific needs of each organization.  In addition, ideally those building the plan will construct a financial model to test the metrics that are developed for the plan and project its potential impact at various levels of performance such as base, target (budget) and superior.

To learn more about the principles and practices addressed here, check out our webinar entitled, “Creating Effective Measures and Metrics for an Incentive Plan” or our recent blog entitled “Pay the Company First”.

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Rebecca Napier
August 6th, 2012 by Rebecca Napier

The 4 Essentials of Effective Incentive Plan Management

Often, many view the introduction of a newly introduced program or other completed initiative as the end of something – another project to check off a “to do” list. This can certainly be true with the launch of a new incentive program and a long-term plan in particular. In reality, when it comes to introducing any new compensation strategy, the most important work begins once the plan is rolled out. Without a strategy for the ongoing maintenance and promotion of the plan, it can quickly become a vague memory to all involved as administrators and participants alike get engrossed in their day-to-day activities.

Our firm has been designing short and long-term value sharing plans for many years. I have been responsible for servicing the plans we’ve helped our clients develop and making sure they are meeting the outcomes they are intended to realize. Based on my experience in that role, I have identified four areas of plan management that must be effectively addressed if a rewards program is to be successful:

  1. Promote (Don’t Just Communicate) – Certainly, it’s important to communicate the “what, when and how” of any plan a company introduces. However, beyond just announcing a plan, it must be effectively promoted. This can be challenging with long-term plans because often the value is only measured once per year. It can be difficult to find a valid reason to discuss it when there isn’t anything new to report. However, businesses that have had the most success have found a way to keep the plan in the forefront of their employees’ minds on a regular basis. At regularly scheduled meetings throughout the year, they remind the workforce of the company’s objectives, what each employee’s role is in their achievement and how fulfilling those stewardships will increase the value of their incentive plan.
  2. Ensure Legal Compliance – We recommend that plan documentation be reviewed annually to ensure that nothing is missing (e.g., an amendment that was drafted but never executed) and to determine if there are any new laws or rulings that might warrant a plan amendment.
  3. Monitor Financial Impact – During the design phase, the company makes certain assumptions about future performance to help determine how the plan should be structured. It’s important to monitor and re-cast the financial projections regularly (we typically recommend annually) to plan accordingly for future payments and determine if amounts that have been set aside to fund the obligation are sufficient.
  4. Perform Annual “Line of Sight” Review – The “Line of Sight” review rolls items 1 -3 into a high level view of the plan intended to help assess whether key managers share the company’s vision and determine if the incentive plan appropriately supports that vision and rewards those who help achieve it. This is typically done by surveying the participants to assess how much they understand, value and believe in the plan. Survey results should lead to recommended actions for the coming year. To be most effective, the conclusions and action items should be shared with the CEO or members of the Board. Periodic updates on compliance and financial issues that are critical to the plans’ success should also be communicated to those responsible for making adjustments in the plan. This can be done most effectively when a company forms a compensation committee that includes the CEO and others responsible for the strategic direction of the company.

By focusing on these four areas, a company can ensure that its incentive plan remains a relevant and integral part of achieving the company’s overall growth goals.

To learn more about how these four areas impact a plan’s success, view a webinar on this subject: http://www.vladvisors.com/business-growth-strategies/event-details.aspx?ID=63

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Posted in Compensation Planning, Incentive Planning | 1 Comment »