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Ken Gibson
April 8th, 2013 by Ken Gibson

Setting Compensation Priorities

Determining what’s most important “right now” can be difficult in any context. The issue can take on an additional layer of complexity when trying to address which compensation program should get most of your attention at a given point in time.  Should you perform some kind of salary study to see if you are competitive with the market?  Is it time to revise the annual bonus plan?  How are you going to address the promises made to key people that they will participate in company growth through some kind of  long-term value-sharing arrangement?  Is it time to begin sharing stock with employees?  Is there an alternative to stock you should be considering? And so on.  The list of issues can be endless–and every item on that list is important.

Unfortunately, there is no silver bullet solution for setting compensation priorities.  And I don’t know that I can,  in a short blog post, define the best answer for the myriad circumstances businesses might be experiencing. That would be like asking a doctor to tell all potential patients what health measure is the most critical for them to address right now. It’s impossible.  That said, there are some logical questions that can be posed to help guide you in setting pay priorities.  Here are a few to consider:

  1. Compensation Philosophy Statement. Do you have a written compensation philosophy statement? Does it clearly articulate what the company will pay for and how it plans to share value? Does it define where the company wants to be relative to market pay standards for salaries and total compensation?  Does it establish a balance between guaranteed and incentive pay?  What about between short-term and long-term incentives (or what VisionLink refers to as value-sharing)?
  2. Pay Grades. Have you established clear pay grades? Are you satisfied your organization is competitive with market pay standards for the most critical positions in your company? Are your salary levels consistent with your compensation philosophy?
  3. Incentives. What is most critical to your organization right now–sales growth, short-term performance (12 months or less) or long-term performance (12 months or longer)?  I know they’re all important, but which is crucial right now?  Do you have an incentive plan that addresses that need? Is it clear?  Is it “working?”
  4. Growth.  Does your company plan to grow?  Does it have a clear business model and strategy? (The model defines how the company generates and grows revenue; the strategy focuses on how the business will compete in the marketplace.)  Have you identified a compensation strategy that reinforces your growth plan?  Is it tied to specific roles and clear performance expectations?

I suppose the list of questions could be longer, but this offers some pretty good categories and issues to examine as you consider what pay programs might be most important “right now” for your company.  I would also submit they are organized in a pretty logical order. First, define your philosophy. Be very clear and comprehensive. Next, make sure your pay grades and associated salaries are well defined and competitive–as well as consistent with your philosophy statement. Then, define what kind of performance you most need employees to focus on right now. Force yourself to be clear about that issue.  (This isn’t to suggest all three elements summarized above won’t need to be ultimately addressed, if not right now.) Finally, be clear about your growth plans and how compensation can be used as a strategic tool to support that effort.  Don’t fall into the trap of ignoring this priority because you think today and tomorrow are all you can worry about “right now.”  The way you pay your people is a powerful communication tool. It tells them what you consider to be important. If growth is important to you, don’t pay your workforce  in a way that communicates it isn’t.

In the end, sorting through these priorities is an important skill for any company that wishes to develop a value proposition that is a competitive advantage in recruiting and retaining premier talent.

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Posted in Business Growth & Compensation, Business Growth and Rewards, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent, Return on Compensation Investment, Uncategorized | No Comments »

Ken Gibson
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
October 10th, 2012 by Ken Gibson

What Problem does your Compensation Strategy Solve?

One of the “filters” through which the effectiveness of a given rewards plan should be evaluated is problem solving.  Every strategy should be assessed, in part, in terms of the problem it will help resolve. Too often,  compensation solutions that are put in place create behaviors or outcomes that miss the target in solving key barriers a company is facing or, worse yet, create a new problem that didn’t exist before a given pay strategy was implemented.  Here are just a few examples of what I mean:

  • In an attempt to overcome a lack of stewardship for key initiatives (the problem), a company institutes an annual bonus plan.  It later discovers it has created an entitlement mindset and placed the company in the position of paying out incentive income even during periods of distressed economic performance.
  • A private business begins sharing stock with key producers as a means of overcoming attrition and the inability to compete for premier talent (the problem). In doing so, the equity position of previous shareholders is diluted and new shareholders have few options for capitalizing on value increases in the business other than a major transition event such as the sale of the business.
  • The owner of an enterprise wants to overcome a short-term focus (the problem) and grow her business value in anticipation of a sale. She institutes a phantom stock plan that vests only upon the sale of the businesses–which she anticipates being in approximately 5-7 years.  At the five year mark, she gets a second wind and decides not to sell the business for an indefinite amount of time. Employees are left wondering when they will realize the value they helped create. What was intended as a positive, uniting incentive becomes a morale breaker.

Certainly, many more examples of this phenomenon could be illustrated. Hopefully, the ones indicated give you an idea of what happens when inadequate attention is paid to solving the right problem with a compensation solution.

This issue is not solely a function of companies developing pay strategies without clearly identifying the problem they are trying to solve. Instead,  they often don’t go quite far enough in thinking through all the relevant implications of a given strategy that’s being considered.  They may be focused on the right problem but the solution they are implementing is creating more barriers than it resolves. Such is the case in the illustrations given above.  The result is a company that perpetuates a plethora of “unintended (harmful) consequences” instead of (positive) “strategic byproducts.”  If companies focus properly on the “right” problem and all of the implications of a considered strategy, the “strategic byproduct” multiple will become self evident and self perpetuating.  Here is an example of solving a problem in a way that creates this positive effect while avoiding unintended (harmful) outcomes.

  • XYZ Company is in growth mode and needs to attract certain people to fill key positions. The problem is it doesn’t want to lock in high salaries and it is in a highly competitive talent market. The best people have several career options within the industry if they are good at what they do.  So, the company decides to peg salaries at the 50th percentile of “market pay” but provide significant upside potential through value sharing.  They determine to provide up to 100% of salary in additional, incentive income that will be divided between short-term and long-term value sharing plans.  Fifty percent of the incentive will be earned as an annual bonus and the other 50% will be applied to phantom shares, with a value that is tied to a formula built into the plan. The phantom shares vest in three years and pay out value in five.  Thresholds and metrics of company, department and individual performance are set for accruing benefits under each plan–both of which ensure that value is only paid out when “sufficient” value has been created.  An employee value statement is developed to demonstrate to the key producer what his total value proposition will be with the company over the next five or ten years if a targeted level of performance is achieved.  He learns that he is not merely being offered a $160,000 salaried position but a $1.8 million dollar opportunity over five years with the company.

Let’s think about how this approach solved the problem at hand while creating “strategic byproducts” instead of  ”unintended consequences.”  The company put itself in the position of offering potential recruits a plan that was rich in upside potential while limiting guaranteed income. (Problem solution.) It framed the relationship with the new employee as a partnership with ownership to grow the business. (Strategic byproduct.) It differentiated itself in a competitive talent market without over committing on salaries. (Problem solution.)  Additional strategic byproducts of this approach included an ownership mindset on the part of key producers and a more unified financial vision for growing the business. In addition, the business was able to construct a pay approach that significantly drove value for shareholders while still creating rich payouts for employees, due to a “self-financing” approach to the incentives. It created a “wealth multiplier” environment because all stakeholder rewards were tied to unified, business growth components.

In the end, most organizations need help in avoiding the pitfall of unintended consequences with their pay strategies when trying to solve problems.  They need individuals or consultants that have experience with multiple options for solving key business barriers and can guide the process in a way the leverages the strategic outcomes that are achieved.  The right questions need to be asked and appropriate challenges need to be made to solutions being offered that don’t adequately address the full ramifications of implementation.

This principle can be applied in other aspects of the business as well. For a broader treatment of effective problem solving in an organization see the Dwayne Spradlin article in the September 2012 edition of Harvard Business Review.

To see how phantom stock plans are often used as a strategic tool to solve specific problems within an organization while creating multiple strategic byproducts, tune into our upcoming broadcast entitled, “What is Phantom Stock and Why do I Keep Hearing about It?”  Click here to register.

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Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent, Phantom Stock | 1 Comment »

Ken Gibson
September 4th, 2012 by Ken Gibson

Why You Need a Compensation Strategy, not Just a Plan

You are considering the introduction of a phantom stock plan for your key people. You have decided this is the right concept for your business. You’re a private company and don’t want to give equity away, but you do want your executive or management team adopting more of a stewardship approach to the future of the business. Ideally, you’d like them to think more like you as the CEO or owner.  This led you to speak with the company’s accounting firm and they agreed a phantom stock plan would be a good idea.  So, with all of that logic and the positive momentum you’ve garnered, you have contacted your attorney and asked him to draft a plan agreement. He’s done so and you’re about to meet with your 10 key producers and introduce the plan to them.  STOP!! Please don’t go any further.

Before you proceed, there are a few questions that really should be answered.  Your response to these queries will help you determine whether you’re ready to introduce the plan or not.  They will also help you know whether what you have at this point is a compensation strategy or just a “plan.”

  • What is the plan’s purpose? Why are you implementing it and what outcomes will indicate the plan is “working?”
  • What part of your company’s compensation philosophy does this plan support?
  • Who is eligible for your plan?  How was that list determined–what’s the criteria?
  • What is the formula for valuing shares in your plan?
  • How many shares are you going to make available?
  • How will the amount of shares for which someone is eligible be defined? A percentage of salary? A percentage of total shares?
  • What percentage of owner value are you planning to share? What is that based on?
  • How will shares be distributed and at what frequency?
  • What are the performance requirements for earning shares?  Have they been tested against any company performance standards?
  • Have you projected the potential value of the plan relative to an increase in shareholder value?
  • What is the level of sharing to be done under the plan based on different company performance results, such as base, target and superior?
  • Do you have a financial model to test, measure and manage your plan?

I could go on but hopefully you get the idea.  A legal document is not a compensation strategy.  Before your plan is introduced to anybody, you should consider taking the following steps to ensure that a strategic context is created for its roll-out and each of the questions above is adequately answered.  These will also ensure that both shareholder and employee interests are properly served.

Write a Purpose Statement

This step should answer the question, why are we doing this? It should make clear to company leadership what the plan will help the business achieve. For example:  This plan is designed to share future value of the business in a way that promotes an ownership mindset on the part of key producers. It should build a sense of partnership between ownership and participating employees.  It should improve focus on key leverage points (named specifically if possible)  in our business plan and accelerate our ability to achieve our growth goal of doubling revenue in the next four years.

A purpose statement should be consistent with the company’s pay standards and will be easier to articulate if leadership has developed a clear, written philosophy for compensation.

Draft a Plan Blueprint

The plan blueprint should answer the question, what type of plan will we have and how will it be structured?  It is basically the architectural drawing of the specific rewards program you want to initiate.  It describes what type of plan it will be–phantom stock, SAR, profit pool, PUP, deferred compensation, etc.–and what performance thresholds it will be based upon.  At this stage, a business is determining whether the company wants to tie the reward to the business value or some other financial metric.  You are addressing whether you want to give present value away or only future value, whether the reward will be performance-based (employees must achieve a future result before they will receive shares) or have immediate value, and so forth.  The plan blueprint creates a framework in which the company’s rewards strategy can be manifest.

Develop a Financial Model

With a purpose statement completed and a blueprint in place you now need to answer a critical question: how much value will this plan make available and what will the reward be based on?  Such is the role  of a sound financial model.  Done right, this process projects a future value of the business based upon different performance assumptions–for example, base, target or budget and superior.  It attempts to anticipate what level of additional shareholder value will be achieved under each of those scenarios so the company can determine how much of that increase can or should be shared with those primarily responsible for its creation. This step makes clear that compensation design is an outcome-based endeavor.  You are envisioning a future result and then engaging in a kind of reverse engineering process to determine how that potential value can be communicated in “today’s” terms (percentage of salary, percentage of profits, etc.). It is a “self-financing” approach that allows the company to define appropriate thresholds of performance that must achieved before the plan will either accrue or pay out its value.  It also allows a company to envision how it might be able to pay higher percentages of value to participants if increasing levels of results are achieved.  Done right, this phase of development brings the plan to life.  To get a sense for how this modeling process works, check out the “Picture Your Future Company” tool in our new website, www.phantomstockonline.com.

Document the Plan

Once two to four iterations of the financial model have been worked through, and the metrics for creating plan value have been clearly defined, you are ready to put the final specifications on the plan and document it. This step must produce both a legal document (where applicable) that addresses all of the statutory requirements of the plan, as well as a summary plan description that explains how the plan works to its participants.  The plan specifications must address all of the details of the plan–how benefits are earned, when they will be paid out, how they will be treated in the case of early termination, disability, death, and so forth. The production of these documents requires the ability to understand both the legal guidelines associated with the plan (i.e. ERISA or 409(A) issues) as well as the strategic purpose the new program will serve.

Market the Plan

When a company takes a strategic approach to compensation, it doesn’t just “announce” a new pay program.  Rather, it creates an opportunity to build a sense of partnership with its key people by literally marketing a future to them.  This is more than explaining how the new long-term incentive plan will work.  It involves framing the compensation value proposition in a larger context that links together the vision of the company, its business model and strategy, employee roles and expectations and the rewards for fulfilling those expectations. Although an initial meeting may be held to explain the plan and “roll it out,” that communication is one of many that will occur as the company treats its workforce as a key constituency that needs to be consistently and effectively nurtured.

Each of these steps could be further embellished but hopefully you can begin to see how the building out of a pay strategy differs from just coming up with a plan.  Further, when a company seeks to align compensation with the business model and strategy of the company, it has an opportunity to create greater engagement and execution on the part of its key people.  It essentially makes those individuals stewards of the shareholders’ vision by helping them feel a greater sense of partnership and clarity about the future of the business.

For more information on the strategic role of long-term value sharing arrangements, check out our white paper entitled, “Why Long-Term Value Sharing Matters.”

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

Ken Gibson
August 7th, 2012 by Ken Gibson

Bain, Productivity, Capitalism and Compensation

In this election season, much is being made of whether or not Mitt Romney created or destroyed jobs while at Bain.  Most reasonable business people understand that the discussion misses the point entirely and reveals complete ignorance on the part of some in government about how capitalism works, and what its inherent risks are.  However, it does give us an opportunity to reflect on how some basic principles of capitalism apply to our businesses and the innovation cycles that fuel creative destruction.  Wise companies will apply these same principles in their approach to compensation by recognizing what should be rewarded.  I’ll explain, but first let’s set the stage by using Bain as the platform for our discussion.

In a recent Wall St. Journal editorial, Andy Kessler nails the Bain issue and uses it to describe the broader effect of capitalism at work in our modern society:

“Did Mitt Romney and Bain Capital help office-supply retailer Staples create 88,000 jobs? 43,000? 252? Actually, Staples probably destroyed 100,000 jobs while creating millions of new ones.

“Since 1986, Staples has opened 2,000 stores, eliminating the jobs of distributors and brokers who charged nasty markups for paper and office supplies. But it enabled hundreds of thousands of small (and not so small) businesses to stock themselves cheaply and conveniently and expand their operations.

“It’s the same story elsewhere.  Apple employs just 47,000 people, and Google under 25,000. Like Staples, they have destroyed many old jobs, like making paper maps and pink ‘While You Were Out’ notepads. But by lowering the cost of doing business they’ve enabled innumerable entrepreneurs to start new businesses and employ hundreds of thousands, even millions, of workers world-wide—all while capital gets redeployed more effectively.”

That last phrase is key.  The effective deployment of capital in any aspect of business or the economy is what fuels growth.  And people are at the fulcrum of capital deployment. Likewise, they represent human capital at work in a business and financial capital is invested in them.  The question, then, is whether a business is constantly evaluating it’s capital deployment and determining if it is leveraging the company’s ability to grow and keep ahead of the Staples, Apples and others who are mining the creative destruction landscape and determining how they can reinvent the future.  All of this is good for the economy, good for jobs creation and good for businesses. It is a system that rewards productivity and productivity is found at the intersection of effectiveness and efficiency.

Kessler drives the productivity point home this way:

“Economists define productivity as output per worker hour. But ramping up the output of trolleys or 8-track tapes won’t increase living standards. It is not just technical efficiency that matters, it is also effectiveness—that is, producing what the economy really needs and consumers will pay for.

“And so, in a broader sense, productivity is really about doing the right things the right way. Using modern construction equipment, we could build a pyramid on the National Mall in Washington with amazing efficiency, but it would not be effective.

“So how does productivity result in more employment?

“Three ways. First, some new technology comes along that allows something never before possible. Cash from an ATM, stock trading from an airplane’s aisle seat, ads next to Google search results.

“The inventor or entrepreneur who uses the invention benefits from sales and wealth and hires people to produce the good or service. We don’t hear about this. Instead we hear about the layoffs of bank tellers, stockbrokers and media salesmen. So productivity becomes the boogeyman for job losses. And many economic cranks would prefer that we just hire back the tellers and toll collectors.

“This is a big mistake because new, cheaper technology becomes a platform for others to create or expand businesses that never before made economic sense…

“The third way productivity results in more employment is by attracting capital to satisfy new consumer demands. In a competitive economy, productivity—doing more with less—always lowers the cost of products or services: $5,000 computers become $500 tablets. Consumers get to spend the difference elsewhere in the economy, and entrepreneurs will be happy to sell them what they want or create new things they never heard of, but will want. And those with capital will be eager to fund these entrepreneurs. Win, win.

“The mechanism to decide the most effective use for this capital is profits. The stock market bundles profits and is the divining rod of productivity, allocating capital in cycle after cycle toward the economy’s most productive companies and best-compensated jobs. And it does so better than any elite economist or politician picking pork-barrel projects and relabeling them as ‘investments.’ ”

All of this should offer huge clues to business owners, CEOs and others who need to make strategic determinations about how to deploy capital that will be invested in compensation.  The natural cascading logic should look something like this:

  • A business creates value by meeting demands in the marketplace
  • The level of productivity achieved in the value creation process is reflected in profits
  • Business leaders need to reward productivity because it is the most effective and efficient deployment of capital, and results in greater profitability
  • Employees apply their unique abilities towards value creation in the business
  • Compensation, then, must reward productivity by sharing value with those who help create it
  • Companies that take this approach to remuneration become magnets for premier talent and accelerate their ability to create value productively and fuel growth

In the end, compensation strategies must both reflect and reinforce productivity cycles within the business.  If they do, then rewards will become a natural extension of the overall productive deployment of capital in the business.  When this happens, the business wins, employees win, the economy wins and, as a result,  job creation is magnified.

To learn about three “real life” examples of businesses that have taken this approach, tune into our upcoming webinar on June 24 entitled ”Success Stories in Pay for Performance.”

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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 | 3 Comments »

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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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
June 29th, 2012 by Ken Gibson

The Compensation Portfolio

Language is important. The words we use to describe efforts, intent, purpose, outcomes and so on create images in the audience’s mind and will either enhance or diminish the ultimate message we mean to send.  That’s why, when talking about compensation issues, language creates a mindset from the top down in an organization about what rewards are all about.

In my view, the best way to talk about compensation is in terms of an investment.  All that we do in business is investment and return related.  Cost is a term that should be reserved for those items that are purchased in the context of a company’s overall investment in its business model and plan. Understood this way, salaries, bonuses, benefit plans and other aspects of a rewards strategy are not costs–even though they might be “expensed” on the company’s P&L. This may seem like a minor issue, but it’s not.  Words matter–and once a mindset settles in an organization it is very difficult to uproot or alter it.  Mindsets determine the trajectory of an organization.  Watch (listen to) the language people use in a business and you’ll know what direction an organization is headed.

So, if all we do in business is investment and return related, then what we really have are a series of “portfolios” we are managing in the business.  We have an innovation portfolio.  We have a product portfolio.  We have an R&D portfolio. And we have a compensation portfolio.

If this is the case, what are the asset classes in our rewards investment portfolio?  It’s an interesting question, isn’t it?  If  our investment in compensation is intended to produce a positive return and contribute to growth, how might we best evaluate our allocation?  We might consider thinking in terms of these three compensation “asset classes”:

The Performance Class

This asset group is designed to maintain the performance engine of the company.  It is focused on sustaining the virtuous cycle of the business model and optimizing what needs to be done to secure the current customer or client base.  This level of compensation is paid for helping the company meet its “budgeted” or targeted level of performance each year and to sustain a hopefully growing revenue stream.  It is also designed to appropriately address the need a superior level of talent requires to maintain confidence in the lifestyle it feels is commensurate with its level of skill, experience and unique abilities.  It seeks to protect the financial environment for key people and help them feel a level of security.  This class includes salaries, short-term value sharing arrangements such as annual bonuses, health and welfare benefits (group medical, dental, disability insurance, etc.) and basic retirement plans.

The Growth Class

Growth is future-based and this asset class is designed to encourage, nurture and reinforce future thinking.  It is intended to protect “good” profits in the organization and reward the fulfillment of the future company vision.  Rewards in this category are paid for helping the company achieve superior levels of performance.  In addition, its intent is to be a magnet for a type of employee that can adopt a stewardship approach to protecting shareholder interests.  This quality of employee is also attracted to the idea of participating in value that he helps create.  He is confident that when his unique abilities are combined with the company’s resources, the future company will be realized.  This asset group includes investments such as stock or stock option plans, phantom equity or SARs, profit pools and supplemental executive retirement plans such as deferred compensation. Companies sometimes invest in other executive benefits for this class such as car allowances, executive disability plans, etc. to secure the financial environment of key producers. Ultimately, this asset class should make employees feel like growth partners in the organization and invested in the future business.

The Transformation Class

Ambitious companies seek to fundamentally alter the course of their industries by creating unique breakthroughs.  Think Apple, Disney, Amazon and other companies that have changed the “universe” so to speak by engineering a different and better consumer experience as well as uniquely great opportunities for their employees.  Businesses don’t achieve this kind of revolutionary change by simply paying competitive salaries and bonuses–or even by offering stock.  They may include many of the elements of the other two classes, but their investment strategy is much more ambitious in all aspects of their business, including compensation.  Companies that work on compensation in their transformation portfolio have a wealth multiplier and not just a wealth creator mindset.  They envision people–both the customers they serve and the workforce they employ–experiencing life in a whole different realm.  As a result, they don’t just create compensation programs.  They market a future to their employees on all levels–product development, market penetration, innovation expectations and yes, rewards–so that company “portfolios” are completely aligned.  Every person in the organization, especially those responsible for driving results, knows the relationship between the company vision, its business model and strategy, roles and expectations, and rewards.  When this is achieved, new horizons of performance are attained that were never thought possible.

Hopefully, in reading some of the language used to describe each of these asset classes, you are persuaded by what I said at the outset.  Language is important.  Words matter. Whether you decide to use the terminology I employ here or something else, don’t expect to see any quantum changes in organizational performance until you transform the way you speak about all investments within the company, including and especially compensation.

If you like the concepts presented in this posting, you should also check out our article entitled “Why Long-Term Value Sharing Matters.”

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

Ken Gibson
June 14th, 2012 by Ken Gibson

Pay the Company First

Keith Williams took over leadership of Underwriters Laboratories in Northbrook, Illinois in 2005 at a time the company was not doing well and significant changes needed to be made.  The company was carrying a high amount of debt and it was losing market share to competitors.  In addition, the organization had become “siloed” and different divisions were literally undercutting each other.  Williams made a number of moves to “right the ship.”  What caught my eye in a recent article in Chief Executive Magazine (describing the transformation the new CEO took the company through) was the steps he initiated to “realign” compensation–and the impact those changes had on subsequent company performance.  Quoting from the article, here’s what took place:

“Williams also changed the compensation program to align everyone behind the company’s success. ‘I call it ‘pay the company first,’ he says.  ’Basically, up to the company’s operating profit target, all of the profits go to the company; and only after that target is met, do we start funding the incentive pool.’  For example, if UL’s target is $80 million, 100 percent of the first $80 million in profits goes to the company, the next $20 million to the incentive pool, and from there on, funds are split 50/50 between the company and the incentive pool.  ’A lot of companies think, ‘I’ve got $1 million left in my budget, I should spend it,’ says Williams. ‘What we’re saying is ‘If you really need to spend that $1 million on our future, please do, but if you don’t spend it, half will go into the incentive pool.”

There are so many things right with this approach that it’s important to break them down.  Let’s consider what was accomplished by the approach Williams took to compensation:

  • Shareholder interests were protected
  • The “silo” approach was dismantled (division had to support each other to maximize incentives)
  • The workforce was taught where value sharing comes from–it comes from economic value added
  • Everyone was clear on what the profit target was ($80 million), which means they had to understand when and how the company was profitable

There’s more, but that’s a pretty good list.  And the result?  UL had one hiccup in 2006 when it missed its earnings projections but hasn’t missed one since.  Revenues were at $1.25 billion in 2011.

As I’ve often asserted, compensation is certainly not the only issue that impacts growth and performance in a company.  And I’m not suggesting that is the case here either (nor is Williams).  The point is that without this realignment of compensation, the way people were being paid would have been at odds with the strategic changes the new CEO was trying to initiate. How people were rewarded needed to be aligned with the overall plan to set the company on a different path.

Three cheers for a CEO that gets 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 | 2 Comments »

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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