November 21st, 2011 by Ken Gibson
Complexity can kill any value sharing arrangement. Some reading that sentence are nodding their heads knowingly right now. They’ve experienced that complexity and watched failure overcome what seemed in the beginning like just the right solution to plan design.
Companies run into the complexity problem most commonly when they try to manage behavior through the incentive plan. They construct metrics and measures that are intended to focus the employee on specific business drivers. By the time they construct those metrics for every category and tier in the company, they have a monster on their hands. It’s usually about that time that our phone rings.
As you approach incentive plan design, keeping it simple has to be an overarching aim that guides the process. To accomplish this, think in terms of deciding between two basic plan types and three basic measurement categories. Then plan to “weight” the measurement categories by tier of employee to address the variance in impact at each level of the workforce. Here’s what I mean.
Two Plan Types
When building a short-term incentive, a company will need to decide whether they want to use a profit-based allocation model or a targeted KPI approach. In simple terms, a profit-based approach will focus everyone in the workforce on the profitability of the company and a pool will be used to generate payouts once a certain threshhold of profitability is achieved. The KPI approach focuses the attention of an individual or team on defined performance indicators or intiatives which, if achieved, will drive greater profitability, revenue, EBITDA or whatever other key outcome you measure.
Each of these approaches are discussed more thoroughly in an article and/or webinar on our website. I will refer you there for greater detail.
Three Measurement Categories
Most plan types can be managed well by “weighting” how much of an incentive will be tied to company performance, how much to team or department performance and how much should be based on individual performance. The weighting each of these is given depends on the sphere of influence of the participating employee. For example, tier one employees (executive level) might have a weighting something like the following: 75% company, 0% team, 25% individual. A second tier (directors) might be allocated as follows: 25% company, 50% team, 25% individual. And so on through the tiers.
The three measurements approach allows you to have one plan while making room for adjustments to be made by category of employee based on its ability to impact company, department or individual outcomes.
Long-Term Incentives
Just a word about long-term value sharing. The approach described above can apply to LTIPs as well, but is most commonly used for short-term incentive plan design (payouts for performance in a period of 12 months or less). To effectively design a long-term value sharing arrangement, you will need an additional planning tool; a decision tree process that helps you ask the right questions and arrive at a suitable plan model. Ultimately, there are about nine different long-term value sharing approaches you could adopt. Questions such as “are you willing to share equity?” lead to one conclusion or another about which plan type will be most suitable for your organization. To learn more about the decision tree process access the VisionLink article entitled: “Long-Term Incentive Plans–Which is Right for your Company?”
Once a long-term plan design is determined, a “simple” approach should still be applied. The three measurement categories approach will help you do that.
In the world of compensation design, as in so many other things, “less” is often “more.” Keep it simple.
Tags: compensation, compensation philosophy and strategy, Growth, incentives, key people, profitability, rewards, Sustained Results
Posted in Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Uncategorized | 2 Comments »
November 11th, 2011 by Ken Gibson
The heart of a competitive advantage in an organization is a culture of confidence. Such an culture emerges in companies that have developed success patterns to a point of such sustainability that the “flywheel effect” has kicked in, as Jim Collins describes in his book Good to Great. There is momentum and your people know it; they know it because they are in the midst of it–in fact, they are the ones making it happen. Such a business has a competitive advantage because a culture of confidence is not “copyable.” It is an outgrowth of having all the human elements working in a unified, passionate fashion within a company. Think Disney. Think Apple. Think any great company.
The best word to describe the mindset of the workforce within organizations that have developed such a culture is stewardship. The dictionary describes a steward as “a person who acts as the surrogate of another or others.” In business, it implies that employees act in the best interest of owners; more than that, they do the things ownership would do because they think like owners. They think like owners, in part, because they are treated like owners–not because they necessarily own stock but because they have some kind of stake in the company’s success and a shared value system.
Organizations that adopt a stewardship approach to managing their people nurture trust and confidence in their employees by focusing more on desired outcomes and results than methods and behaviors. They communicate standards and values, vision and strategy, roles and expectations. Then they communicate a sense of partnership in the way they share value with those that create value.
Such businesses inherently understand that they can’t use incentives as a tool to manipulate behavior or to reinforce methodology. It’s not that they ignore those things, rather they recognize that pay is not the way to enforce the spirit of stewardship they want to engender. To use incentives to “force” certain behaviors is the ultimate act of mistrust. It undercuts the core sense of personal responsibility and accountability that a workforce must achieve if the “flywheel effect” is going to be realized. Mistrust erodes a culture of confidence and pay, done improperly, creates mistrust.
To take it one step further, companies that have a culture of confidence don’t even think in terms of rewards as incentives. Instead, they set up short and long-term value sharing agreements with their associates and consider their relationship to be a partnership, not employee or employer. Value sharing is about reinforcing outcomes, not forcing behavior. It’s about recognizing the contribution of all stakeholders in an organization’s success through effectively crafted pay programs. It’s about stewardship not just employment.
So, as you consider where you are in your journey towards a future company that is not just good but great, avoid eroding your culture of confidence through any act of mistrust–especially as you build rewards strategies. Instead, use them to reinforce the line of sight you want to create between vision, strategy, roles, expectations and pay.
To learn more about a specific type of value sharing program that will encourage the stewardship mindset just discussed, tune into our next webinar broadcast entitled: What Think Ye of Phantom Stock–Does it Work?
Tags: breakthrough success, compensation philosophy and strategy, Culture of Confidence, employee stock owenership, employee stock ownership, Employee Trust, Growth, incentives, Pay for performance, 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, Uncategorized | 1 Comment »
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 »
October 21st, 2011 by Ken Gibson
Let’s face it, business life is accelerating in its complexity. Denial won’t help us overcome it; we must embrace it and learn to manage it. As some organizations attempt to “rein it in,” they find themselves making things worse rather than better. A recent Harvard Business Review article makes the point this way:
“In and of itself, this complexity is not a bad thing—it brings opportunities as well as challenges. The problem is the way companies attempt to respond to it. To reconcile their many conflicting goals, managers redesign the organization’s structure, performance measures, and incentives, trying to align employees’ behavior with shifting external challenges. More layers get added, more procedures imposed. Then, to smooth the implementation of those ‘hard’ changes, companies introduce a variety of ‘soft’ initiatives designed to infuse work with positive emotions and create a workplace where interpersonal relationships and collaboration will flourish.”
Our experience has been similar when we are engaged to help companies design incentive plans. Value sharing arrangements such as bonus programs, phantom stock, profit pools, performance unit plans, etc. should bring greater clarity not complexity. Too often, business leaders want their rewards programs to achieve more than they are designed to and become a substitute for performance management. As a result, they add layers of metrics and measures that are intended to micro manage the results the company wants employees to achieve.
If a value sharing program is going to offer more clarity than complexity, what is that it should make clear? Here’s our list:
- It should make clear that the company considers the employee a key partner in the achievement of its growth goals.
- It should reinforce the company’s business model and the strategy employed to roll it out to the marketplace.
- It should help clarify the role of a given employee in the business model and strategy.
- It should make clear the outcomes the employee is responsible for within that role.
- It should create line of sight between the employee’s personal financial vision and the company’s growth goals and vision.
If a company will use compensation as a clarifier and reinforcer of “what’s important,” it will take a big step towards better managing the complexity that inevitably will continue to grow.
Tags: compensation philosophy and strategy, Employee Trust, Growth, incentives, Pay for performance, phantom stock, Sustained Results
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Managing Talent | 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 meaningul 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:
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- 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 10th, 2011 by Ken Gibson
Pay can either be an asset or a liability to a company. Stated another way, it can either drive growth or hinder it– fuel performance or diminish it. Is that placing too big a burden on compensation to produce results? I don’t think so. In fact, my experience and observation has been that most businesses don’t set high enough expectations for their rewards programs. The evidence is they don’t invole compensation in other strategic discussions. The result is there is little to no link established between pay and the key success measures the company needs to reach.
To change this outcome a company must alter how it makes compensation decisions. Here I would like to suggest five of the key issues a business must include and successfully address in its decision making process if it wants to drive better results in the execution, productivity and performance of its people. Here are the five presented in the form of questions to be answered:
- How can we reinforce our business model through the way we pay our people? Implied in this decision is a company’s ability to clearly articulate its business model and distinguish it from it’s business strategy. (For more information on this distinction, view our recent webinar entitled: Compensation Strategy and Business Strategy, An Interdependent Relationship.) Walmart and Four Seasons Hotels have very different business models, so their approach to pay would need to reflect that difference. Presumably, your business will be equally distinct. So in this category two essential issues need to be addressed: A)What outcomes reinforce the core virtuous cycles of your business model? B)What kind of pay strategies will best reinforce those outcomes?
- What kind of value-sharing approach best reflects the kind of partnership we want to have with our employees? I prefer the term value sharing to incentives because the latter implies that someone needs a carrot to become motivated. Value sharing, on the other hand, implies all stakeholders deserve to participate in the value they help create. Company leaders must think in these terms as they approach the building of short and long-term rewards programs. Such programs must be self-financing (no dollars paid unless results are produced at a sufficiently high level) on the one hand and yet meaningful to participants (employees want to see them achieved because the payout helps them fulfill their personal financial needs and goals) on the other.
- What pay components will best foster a unified financial vision for growing the business? This issue has to do with how employees will be paid as opposed to how much. Addressing this issue forces a company to develop a basic rewards philosophy. Where do you want to be vis a vis market pay for salaries? How about for total compensation? It asks a company to think about the elements of pay that will best foster an ownership mentality throughout the organization, so employees are empowered in their decision making and more instinctively act in the long-term interests of shareholders and all other stake holders.
- What structure do we need to maintain to ensure our compensation strategies produce the desired results? Structure has to do with organization and process. A company needs to have a systemitized means of assessing performance and productivity and then “pivoting” in a different direction if necessary. The structure continues to keep strategy front and center with a constant eye on cost and productivity. For most companies, this means there should be a compensation committee established with a regular meeting schedule (no less than twice a year) to review and make decisions about these issues.
- How can we communicate our rewards strategies in a way that best impacts the mindset of our employees? If effective, a strategic approach to building rewards programs should result in more engaged employees. This does not come by simply rolling out a great compensation plan. Engagement is built over time through a reinforcement process that integrates the discussion about pay into an overall strategy and business plan review to which all stake holders are exposed. As employees come to work each day, there should be a clear connection in their minds between the following: A) The vision of the company–where it’s headed; B) The business model and strategy of the company–how it’s vision will be fulfilled; C) The role and expectations of the employee within that model and strategy–defining the stewardship, and; D) How the employee will be rewarded if he or she meets the expectations–including the range of pay potential.
Certainly, more could be added to that list. However, if a company attempts to address even one of the five decisions summarized here they will naturally be lead to the other four. You will see that they are really interdependent in nature. Likewise, other core decisions will emerge such has what balance should there be between short and long-term value sharing plans, and what type of long-term rewards ”incentive” should a company adopt (equity sharing, profit pool, phantom stock, stock appreciation rights, etc.)? Most will need help answering all of the questions that will emerge, but it must start with a foundational commitment to becoming more strategic in your approach to rewards development.
The promise is that, if incorporated, this list of five core decisions will help ensure that compensation will become an asset rather than a liability in your organization.
Tags: compensation philosophy and strategy, Employee Trust, Growth, incentives, long-term shareholder value, Pay for performance, Sustained Results
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation | No Comments »
July 31st, 2011 by Ken Gibson
The full title of this article should really read, “Why a Long-Term Incentive Plan Matters…MORE than Other Types of Incentive Plans.” However, I didn’t want you worn out before even starting the article–so forgive the abbreviated headline.
I recognize that’s quite a claim, but hear me out. My premise is based, in part, on what recent HBR authors Paul Adler, Charles Hecksher and Laurence Prusak have discovered about institutions that have sustained records of both efficiency and innovation. Among other things, these organizations excel at achieving the following three things:
- A Shared Purpose. An effective shared purpose, the authors indicate, “articulates how a group will position itself in relation to competitors and partners–and what key contributions to customers and society will define its success.”
- An Ethic of Contribution. Collaboratives communities generate accelerated results. Such organizations instill a bias towards contribution which in turn ”accords the highest value to people who look beyond their specific roles and advance the common purpose,” according to Adler, Hecksher and Prusak.
- Interdependent Processes. In their article, the HBR authors quote a project manager from Computer Science Corporation as follow: “People support what they create…As a project manager, you’re too far away from the technical work to define the [processes] yourself…It’s only by involving your key people that you can be confident you have good [procedures] that have credibility in the eyes of their peers.”
At this point you may be saying to yourself, “This is all very interesting, but what does it have to do with long-term incentive plans..and why they matter more than any other rewards plan within our business?” In a word, everything.
For a business to grow, it depends upon the collaborative efforts of a workforce that shares in the purposes and ends to which the company is working. By nature, organizations are made up of interdependent teams and individuals whose motivation for building cooperative processes depends upon buying into a shared ethic of contribution. In an ideal environment, employees recognize the value that grows out of a sense of partnership with those to whom they are “tethered” in the work that fulfills the shared purpose. When this can be harnessed and perpetuated, there is a magnified fulfillment experienced by everyone collectively and individually.
The role, then, of the Long-Term Incentive Plan is to define the financial nature and benefit of engaging in the three elements outlined above. Said another way, if all I experience from a pay program is a salary and annual bonus, there is no financial mechanism fostering in me the role of a shared purpose, the ethic of contribution and the interdependent processes that must be sustained for growth to emerge and then be sustained. While it isn’t the only piece of the equation that allows these things to take root, if a long-term component isn’t there, it is difficult for people to trust that a true partnership has been entered into with those who control the financial future of the business.
This is one of the primary reasons we tell our clients that they must make it a priority to introduce the long-term component in their rewards gameplan. When coupled with the short-term incentive, it balances the focus of participants between generating results right now with building and protecting long-term value .
For more information on the role long-term incentives can play in your company, check out our webinar entitled: How to Build Long-Term Value for Key Producers.
Tags: compensation philosophy and strategy, Culture of Confidence, Growth, incentives, key people, long-term shareholder value, Pay for performance, Sustained Results
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Uncategorized | 1 Comment »
July 15th, 2011 by Ken Gibson
Many of the business leaders we work with struggle to find the right metrics for measuring acceptable growth in their companies. In a recent article at Strategy+Business entitled “Total Shareholder Returns”, authors Ken Favaro and Greg Rotz offer some great insights in this regard. Although the article addresses issues primarily relevant to public companies, the principles discussed have broad application. It’s worth the read so check it out.
Towards the end of the article, the authors make this point as it relates to managing strategy and execution towards improving Total Shareholder Returns:
“Only two factors determine the value creation path of any company: the distinctiveness of its strategies and the execution of those strategies. We often hear statements such as, ‘A great strategy is worth nothing without great execution’ or ‘I’d rather have great execution with a mediocre strategy than the other way around.’ The reality is that strategy and execution are two sides of one coin. Is Southwest Airlines or Tesco or Wells Fargo the product of great execution or of great strategies? Yes. Both are needed to produce consistently superior shareholder returns.
“What, then, will enable your company to have and sustain distinctive strategies and execution? In our experience, this achievement requires proficiency in both the formal and the informal aspects of a company’s management. On the formal side are corporate strategy, business strategies, strategic planning, resource allocation, performance management, incentive compensation, organizational design, and role of the corporate center. On the informal side are leadership behaviors, peer-to-peer networks, teaming norms and skills, nonfinancial motivators, pride, and a strong sense of the business’s purpose.”
As it relates to VisionLink’s approach to compensation, we refer to the formal and informal aspects as the “structural” and “mindset” impact of pay decisions. Much of what this article discusses helps identify the kind of structural issues that need to be properly defined if a strong rewards strategy is going to be tied to them. If the structure is not properly built, it will be difficult for employees to understand that to which they are devoting their minds and hearts, and how it will be measured.
For more help on this topic, check out our webinar recording entitled: “How Shareholders Should View Compensation.”
Tags: breakthrough success, compensation and the recession, compensation philosophy and strategy, Culture of Confidence, incentives, long-term shareholder value, Pay for performance, profitability, Sustained Results
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Recession Strategies | No Comments »
July 8th, 2011 by Ken Gibson
Such is the question posed in the lead editorial of the July/August 2011 edition of Harvard Business Review. It comes on the heels of a report by Equilar, an organization that tracks executive compensation, total pay packages for CEOs at S&P 500 companies. According to its data, CEO pay rose 28% in 2010, to a median of $9 million. This brings it back to pre-recession levels.
HBR Editor in Chief, Adi Ignatius, offers some interesting observations in response to this report. Here, in part, is what he says:
“It’s hard to know exactly how to take this news. On the one hand, it’s a positive economic indicator of sorts, in that a CEO’s compensation tends to be linked to the company’s stock price. The markets saw a strong recovery in 2010; the S&P 500 index, for example, rose 13%. On the other hand, there’s something unsettling about this development. In the immediate wake of the financial crisis, nearly everyone agreed that we had gotten into trouble partly because tying compensation to short-term performance had enriched individuals while putting institutions—and the overall system—at risk. In an interview that begins on page 112, Disney CEO Robert Iger addresses the problem. He made $28 million last year in salary, bonus, and stock options. But Iger concedes that there is too much emphasis, in his and other CEOs’ pay packages, on short-term stock results, and he urges compensation committees to rethink their approach.”
I tend to agree with Ignatius’s thinking on this issue. The 2010 results certainly reveal that executive pay is a kind of double-edged sword in what it reflects. At a minimum they demonstrate that any executive pay strategy that doesn’t take a balanced approach to compensation (tempering short-term earnings capacity for key people by placing some long-term compensation at risk) can ultimately be considered “unfair” by some constituency. Public companies have a harder time with this than private organizations, primarily because of the need to focus on quarterly results. Meeting the expectations of the analysts is almost their sole focus.
Both public and private companies need a compensation philosophy and strategy that is consistent with building both short and long-term value. As I have discussed previously in these blog pages, such an approach keeps a business focused on good profits instead of bad profits. The latter are earnings that come at the ultimate expense of both the customer and shareholders. Good profits sustain value and multiply wealth for all stakeholders.
In our approach to compensation design, we recommend companies place a substantial amount of executive pay “at risk” through well designed incentives. We encourage growth oriented-organizations to offer top tier employees as much as 80 to 100% of salary in incentive earning capacity. The key is to have approximately half of that amount paid out in short-term incentives (pay for results generated in 12 months or less) and the other half in long-term incentives (pay for results generated past the one year mark, and usually three years or more later). Salaries should be modest by market standards–usually between the 40th and 50th percentile of market pay.
Such an approach creates a truer sense of partnership between company ownership, key employees, customers and the market in general. When each of those stakeholders’ interests are represented in the way employees are compensated, greater balance is realized and the compensation wars can subside if not be eliminated.
For more information on the role of compensation in driving shareholder value, view our webinar entitled: “Does Your Compensation Strategy Drive or Hinder Growth?”
Tags: breakthrough success, compensation and the recession, compensation philosophy and strategy, Growth, incentives, key people, Pay for performance, 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, Recession Strategies | No Comments »
June 29th, 2011 by Ken Gibson
It’s summer and we’re all ready for simple solutions to things. Easy meals to fix. Inexpensive ways to entertain our kids. Fastest routes out of town for long weekends. And so on. In that same spirit, here are a few suggestions to simplify your company’s compensation life this season and have significant impact in the process.
- Form a Compensation Committee. Include members of the leadership team best positioned to impact decisions related to compensation. Make sure it is headed by the CEO of the company. Establish as its charter to treat compensation as both an investment that generates a measurable return and a strategic tool that impacts company growth. Establish a regular meeting schedule.
- Create and Publish a Rewards Philosophy Statement. You don’t have to be able to fulfill the philosophy with concrete programs yet, but it will communicate the direction you plan to go and get you moving in the right direction. Consider having a philosophy statement that commits the company to being at somewhere between the 40th and 50th percentile in terms of guaranteed compensation (salaries) but perhaps at the 70th percentile or above in total compensation. In other words, commit to a philosophy that will begin putting a larger amount of compensation at risk.
- Innumerate 4 to 5 Results Your Company is Seeking to Realize. These might be divided between short-term (12 months or less) and long-term (over 12 months). They could be revenue or sales goals, profit or margin targets, new product development, market expansion or any number of key performance factors your company is seeking to improve. Ask the committee to consider how, if at all, any of the present compensation strategies of the company are reinforcing those results as priorities to employees right now.
- Identify the Individuals or Groups Best Positioned to Impact those Results. As you examine that list, begin formulating in your mind the “type” of compensation that will best communicate to employees their role in achieving those results. Think in terms of how much of their compensation should be tied to those outcomes and how much should be short-term versus long-term.
- Make a List of the Obvious Missing Pieces in Your Comp Strategy. The previous four steps should make this apparent. For example, if you determine one of the key results you are seeking is to double revenue in the next three years, but your compensation package includes only salary and a quarterly bonus, then a long-term incentive plan is an obvious missing component at this stage.
Now, going through this exercise will not (yet) alter your overall rewards approach. What it will do, however, is transform your thought process. And changing the way you think about pay is the first step in transforming compensation in your organization.
If you can engage in these simple steps over the course of the summer, by the fall you will be positioned to begin developing specific strategies that will bring your rewards philosophy to life and fulfill the results your company seeks to realize. Compensation will then become a strategic tool helping to drive growth rather than an impediment to the sustained success you desire.
Here’s to a simplified summer.
For more information on this topic, view our webinar broadcast entitled “How Do I Create a Competitive Advantage with Our Compensation Programs.”
Tags: Compensation Committees, compensation philosophy and strategy, Culture of Confidence, Growth, incentives, long-term shareholder value, Pay for performance, profitability, rewards, Sustained Results
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