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Ken Gibson
February 21st, 2013 by Ken Gibson

What is a “Successful” Compensation Plan?

It’s not uncommon for a prospective client to inquire about the kinds of results companies  have achieved through the compensation plans we’ve helped them implement.  It seems like a valid question but in truth it misses the mark.  What really needs to be answered is how the success of  a given compensation plan should be measured.  What determines a successful pay plan?  Let me explain the distinction.

If we install, say, a phantom stock plan for a client and that company goes on to double revenues over the next three years, should we credit that success to the new compensation strategy?  Probably not. After all, there are many factors that potentially impacted the organization’s performance over that period.  It may have introduced a new product, made a key acquisition, saw a competitor leave the marketplace or caught some phenomenon in the economy at just the right time.  Would the company have had that success without the phantom stock plan?  Possibly.  Conversely, if the company’s revenues remained flat over that same period, does it mean the phantom stock plan was a flop?  Also, probably not.  Confused? Are you asking, “So why bother implementing any pay plan if there’s no way of knowing its impact on company results?” Well, not so fast. I’m not saying there’s no impact.  It’s just more subtle than that. Here’s why.

Compensation plans are strategic tools that wield only so much power.  They are primarily intended to communicate to employees “what’s important” to the organization.  They give proportion and timelines to priorities and place a value on their fulfillment. If effectively designed, pay plans should introduce then promote a consistent and unified financial vision for building the future company.  They should also reinforce a person’s role  in the business model of the company and what their financial stake is in meeting the expectations associated with that role. While the metrics associated with some specific pay plans might be tied to company performance, it isn’t the compensation plan’s job to achieve that result.  It is a simply a mechanism for defining the financial partnership that exists between the company and the employee when roles are fulfilled. And here’s the key, it is also (or should be) a gatekeeper that protects shareholders from paying out value if it hasn’t been created.

So, if that’s the appropriate role of  a pay strategy, how do you measure a compensation plan’s success?  Well, the measure should be whether or not it is fulfilling its role. To determine that, here are some questions that should be answered.

  • Before designing the plan, did the company clearly define what value creation is? Does the plan include metrics consistent with that definition?  Does value sharing occur out of productivity profit–the threshold at which shareholders have already received an appropriate return on their capital account?  If the answer is yes to these questions, then it means the plan is only paying out value when value has been created–it’s self financing.  This also suggests that during periods of economic decline or stagnation, the plan is self-restricting in its payouts. That’s a successful approach.
  • Does the company have a clear philosophy statement?   Is the pay philosophy communicated effectively to employees? Are the company’s compensation strategies consistent with the pay philosophy?  If you answered affirmatively to each of those questions, then the company is being clear about what is willing to “pay for” and is implementing plans that follow that rule. This again must be considered a successful approach.
  • Does the company compare its pay strategies to market pay standards? Does it’s philosophy statement define where the company wants to be relative to market pay and total compensation? Do those in charge of evaluating these standards also perform an “internal equity analysis” to compare the data with the value the company places on given roles and positions? If this is the approach being adopted, then the company is using some outside metrics to determine if it is over or underpaying for certain functions to be fulfilled in the organization–particularly relative to salaries.  When such is the case, it knows that it is not making itself noncompetitive in trying to attract and retain the best talent. If it likewise offers significant upside potential relative to the market, but within the parameters defined in the first bullet point, then it knows it has a competitive advantage in attracting key producers.  That’s also a successful approach to pay.
  • Does the company market a future to employees?  Is there a compelling vision?  Is there a positive work environment? Are there opportunities for personal and professional development? Is the financial partnership with employees clearly defined?  These questions point to what is what is known as a “total rewards” approach to building a value proposition for employees. If a company adopts this framework, it is not expecting remuneration to be the sole issue upon which attracting and retaining key producers is based.  If it pays attention to each of those questions, and works hard to ensure evaluation and implementation in all categories, it will become more successful at becoming a magnet for the “right talent.” And companies that get great people usually get great results. Hence, a total rewards approach is a successful one.
If your company feels good about its answers to these questions, then my position is that you have a successful compensation strategy in place.  It is successful because it is based on a sound definition of value creation and a clear philosophy about value sharing.  It is successful because it protects shareholders.  It is successful because there is a clear basis for the pay levels that have been set.  It is successful because it effectively defines the financial partnership between employees and ownership.  It is successful because it markets a future that attracts the best talent.
So, here’s to your success.

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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, Uncategorized | No Comments »

Ken Gibson
January 10th, 2013 by Ken Gibson

Principles that Should Guide Compensation Design

There is no constitution that dictates how compensation should be designed.  Nor is there a “one size fits all” approach to building pay strategies that will help a company succeed.  However, there are what might be considered self-evident principles that businesses should use when they approach the development of rewards strategies.  I call them self-evident because companies that have succeeded in their approach to compensation have applied these principles and seen positive results; the principles have been tested.

So, not in any particular order, here are the guiding principles that any company wishing to develop an effective compensation strategy should follow:

  • Know Your Philosophy. Every company needs to be able to articulate what it believes about pay and value sharing. This should be in writing.
  • Define Outcomes. This means a company knows the results its looking for and how to prioritize those results. All leadership needs to be in agreement about those outcomes and that they are achievable.
  • Envision the Future. A business must be able to effectively model what the future will look like if the defined outcomes are achieved.  It needs to be able to envision what will happen to shareholder value if certain assumed results are achieved.
  • Define Value Creation. This should technically be part of the compensation philosophy. A business must be able to articulate the point at which additional value has been created beyond that attributable to the financial and physical capital at work in the business.
  • Identify Clear Roles.  An organization needs to link outcomes and value creation to people. What functions need to be performed to achieve the results that have been identified? Are the right people filling those roles now?  Are additional or different people needed?
  • Share Value–Especially Long-Term Value. There needs to be a relationship between value created and value shared. Key producers want to know that there’s a mechanism for participating in the growth they help create.
  • Adopt a “Total Rewards” Approach. Financial rewards is only one of four reasons individuals join and then stay with an organization. Pay is a critical component but premier talent also wants to know that the company has a compelling future, that a positive work environment is being nurtured and that there will be opportunities for personal and professional development.
  • Market a Future to Your People.  At a minimum this means a company has to have a clear and compelling means of communicating its value proposition to its people. But it has to more than communicate how a bonus plan works. It has to create “line of site” between vision, strategy, roles, expectations and rewards.  Innovative leaders such as Steve Jobs, Mark Zuckerberg and Jeff Bezos have developed ways of transforming the way both their employees and their customers view the future. Compensation has to be framed in such a context for it to have impact.

Well, there you have it.  Now you’re equipped and should never fail in your development of effective pay strategies. Okay, you should have smaller failings at least.  No one gets it all right at the outset, but if sound principles are being applied, making adjustments will be much easier. Your people will also sense there is a fairness to your approach and will help you get it right.

In the end, growth companies know that if they don’t get rewards right, there is a high likelihood they will fall short of the results that hope to achieve. Correct principles will help make sure you get it “right.”

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

Ken Gibson
November 6th, 2012 by Ken Gibson

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

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

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

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

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

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

B8VVKUVES2EF

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

Ken Gibson
October 26th, 2012 by Ken Gibson

The Future of Compensation

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

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

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

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

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

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

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

 

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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
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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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
February 20th, 2012 by Ken Gibson

What Deserves to be Rewarded?

Every CEO or business owner has a unique set of  performance factors he or she wants executed which are considered crucial to the achievement of the company’s  growth goals.  However, in my view, more importantly there are  categories of outcomes that every company should have as a  focus regardless of their industry, size or niche.  Most specific key performance indicators that company leaders identify as a priority fall under one of those categories.  By defining  those areas of focus–and communicating (through pay systems and otherwise) why they are so critical to the future of the company–business leaders are better able to engineer rewards programs that will drive the outcomes they are seeking, and build a greater ownership mindset among those responsible for producing those results.

Conversely, if those areas of focus are not clearly defined, employees end up participating in a rewards plan that has little or no context.  They see it as a mechanism for increasing their compensation, but that’s all.  It might even  pay well, but the company will ultimately be frustrated with the results it is realizing if employees can’t connect their rewards to a broader fulfillment that is  being achieved.

Here’s what I mean by defining areas of focus within which individual compensation metrics, measures and plans can be constructed:

  • We reward innovation. Creativity and ingenuity are critical to our growth and so we are willing to share value with those whose innovations leverage our ability to multiply value for all stakeholders.
  • We reward sustained performance. Our growth depends upon the ability of the company to maintain then expand the virtuous cycles connected to our business model. Therefore, we share value with those that help us sustain and improve our revenue producing “engine.”
  • We reward  ”good” profits. Good profits come by delivering real value to the market place and protecting customer or client interests at all levels of interaction.  Bad profits are those that come at the expense of the customer or client relationship and experience or erode owner interests over time. We will share value with those who help create and grow good profits.

The list could go on but hopefully you get the idea. Unless employees are aware of these definitive priorities and outcomes they could technically qualify for a payout under an incentive plan without ever taking stewardship of key results the business needs them to perpetuate.  In the worst case, those same employees could pull the company in a direction that is at odds with the strategic direction it has charted (generating bad profits instead of good profits, for example).

So, as you examine your current pay practices, ask whether your rewards programs help define and fulfill the broader areas of focus your company needs to reinforce if its growth expectations are going to be realized.  If they don’t, you should consider making some serious changes.

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Ken Gibson
January 31st, 2012 by Ken Gibson

Why Long-Term ‘Value Sharing’ Matters

The following post is an excerpt from a White Paper (with the same title) that VisionLink recently published.  To access the full article, click here.

Value sharing is an issue that, sooner or later, every enterprise leader must confront.  For example, many responsible for driving business growth wonder whether some kind of long-term incentive will enable higher performance; and if so, which approach is best—stock, performance units, phantom equity or some other value sharing plan.  This article offers five compelling reasons why long-term value sharing is critical for any company seeking breakthrough growth.

It is not the intent of this article to make a judgment about which long-term plan is most effective or to describe the advantages and disadvantages of different value sharing approaches.  Instead, we want to consider why such plans matter and how they make companies more productive while multiplying wealth for all stakeholders.

With that understanding as a “jumping off point,” let’s now move on to why long-term value sharing matters.

#1: 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.

#2: Effectively designed long-term value sharing plans reinforce the company’s business model

A sustainable business model depends, in large part, on a culture that is committed to and, ideally, “invested in” that model’s reinforcement and success. As a result, having key members of a workforce aligned financially with the business model makes both common and strategic sense.  The importance of this concept stems from the nature of the virtuous cycles (revenue perpetuation) the model is intended to produce.

Four Seasons, Verizon and Amazon each have distinct business models and, by extension, unique virtuous cycles.  So, it only stands to reason that their compensation strategies will be equally distinct.  The metrics and measures that stand as gate keepers to payouts (or earned shares, as the case may be) in each organization must reflect and reinforce the virtuous cycles relevant to that business.

# 3: Value Sharing Protects against Bad Profits and Promotes Good Profits

In his book The Ultimate Question, Fred Reichheld, a Bain Fellow and founder of Bain & Company’s Loyalty Practice, offers the following on the subject of profits:

“Whenever a customer feels misled, mistreated, ignored, or coerced, then profits from that customer are bad…Bad profits are about extracting value from customers, not creating value.” (The Ultimate Question, Fred Reichheld, Harvard Business School Publishing Corporation, 2006, 3-4.)

Long-term value sharing arrangements, if designed properly, become a self-enforcing means of perpetuating good profits.  Everyone has an interest in good profits if everyone’s wealth multiplier rises or falls on the ability of the company to sustain the right kind of profitability.

#4: Long-term value sharing promotes an ownership mindset

Businesses need employees in leadership roles that understand “what’s important.”  Such individuals must be able to embrace a stewardship role in aligning their focus with that of shareholders. They need to define what’s important in the same terms as ownership when they go about fulfilling their responsibilities.  For most companies, a list of “what’s important” would include, but not be limited to, the following:

  • Drive growth (revenue, net income, EBIDTA or other measures)
  • Improve margins/profits
  • Manage costs

Each of those areas of emphasis has long-term implications.  In that context, value sharing plays a key role in communicating “what’s important” and aligns key producers with ownership thinking.

#5: Value Sharing Builds Trust and Trust Accelerates Results

At its core, value sharing is about turning a company’s workforce into partners in building the future company.  A culture of confidence is rooted in an environment of trust.  Value sharing communicates and builds trust because, in part, it is a fair approach to rewarding those responsible for value creation—and trust is the key to accelerating results.  In his book The Speed of Trust, author Stephen M. R. Covey makes the case this way:

“Whether it’s high or low, trust is the “hidden variable” in the formula for organizational success.

“ …A company can have an excellent strategy and a strong ability to execute; but the net result can be torpedoed by a low-trust tax or multiplied by a high-trust dividend.  This makes a powerful business case for trust, assuring that it is not a soft, ‘nice to have’ quality.”  (The Speed of Trust, Stephen M. R. Covey, Free Press, February 2008)

When you pay people in a way that communicates you want them as partners in building the future business, you are, in essence, saying: “I have confidence in you and trust your ability to get results.  To prove it, I’m willing to share the value you help create.”

Start with a Clear Philosophy

Before considering which plan is “right,” wise leaders will begin with the development of a compensation philosophy that addresses how the company will nurture a culture of confidence through its approach to rewards. Such a philosophy should address the balance the company will maintain between short and long-term value sharing, and guaranteed versus at risk compensation.  Determining the plan that will best reflect that philosophy then becomes much easier.

 

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