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Ken Gibson
December 12th, 2012 by Ken Gibson

What is a “Fair” Compensation Plan?

Who doesn’t want to be called fair, right?  A desire to be considered fair is in our bones and to be called unfair is one of life’s ultimate insults. (Unless of course it’s your teenager claiming something is unfair; in which case you know you’re on the right track. But I digress.)  Likewise, we instinctively sense unfairness when we experience it.

Fairness in compensation, however, is a topic almost no one seems to want to think about.  How can we objectively determine if a pay plan is fair and do we even want to “go there?”  Well, I think we can (determine it) and should (go there).  Here’s a list of questions I think a company should consider to determine if their compensation package is “fair.”

  • Compensation Philosophy Statement. Has your company put in writing it’s philosophy about compensation and what it is willing “pay for”?  Does your company communicate that philosophy to its employees?
  • Market Pay. Do your current salary levels comport with market pay standards?  Are they consistent with where your compensation philosophy statement says you want to be in this regard?  (E.g. 50th percentile of market pay.)
  • Value Sharing. Does your company define value creation for its employees and have a mechanism for sharing value that is created–both short-term and long-term (particularly for key producers)?  Is it consistent with your compensation philosophy statement about sharing value?
  • Benefits. Does your benefit’s package offer employees an “adequate” if not superior opportunity to insure against risks that could impact their financial future and allow them a mechanism for retirement planning?  Does it recognize the potential  ”reverse discrimination” impact of qualified retirement plan restrictions for high income earners and allow the latter opportunities to offset those limitations (i.e. 401(k) mirror plans or other supplemental executive retirement plans)?  Is there adequate choice and flexibility in your benefit plan?
  • Line of Sight.  Do your compensation philosophy and its associated plans create a clear link between the vision of the company, it’s business model and strategy, roles inherent in that strategy and expectations associated with those roles, and how individuals will be rewarded for fulfilling those expectations?

I suppose other questions and categories could be added to that list, but that’s a pretty good start.  I believe most companies have more control over the sense of fairness employees feel about compensation than they sometimes allow.  For example, many are confronted by employees who have looked at market pay data online and concluded they are under paid for their positions.  Never mind that there is a range of variables in evaluating such data, and that employees who are overpaid will never make that known to their employer.  The overriding issue is that most companies don’t have a philosophy driving their pay strategies.  They are not armed with a cohesive approach, so they are left sensing that such employees feel the company is “unfair” when it comes to pay–regardless of the logical explanations that are offered in response to their challenges. Such business leaders need an approach to rewards that will allow them to respond in such situations with something like the following:

“Our company’s philosophy about compensation is that we will pay salaries at the 45 percentile of what market pay data indicates for the positions in our organization.  (By the way, our last check of that data indicates you are at the 47% for your position, based on an average of four surveys we evaluated.) However, we also believe in providing significant upside potential through the two value-sharing plans you are eligible for.  Our annual bonus plan allows you to earn an additional 25% plus of salary if you and the company meet the performance standards we have set and communicated. Likewise, you participate in a phantom stock plan that allows you to earn an additional 30% of your salary in phantom shares of stock which, if we continue to meet our targets, will grow in value and be paid out to you in five years.  You also are part of our company’s deferred compensation plan which has a performance match of up to 25% of your contributions.  That is not counting the match we give all employees on their 401(k) program contributions. All told, your pay package has a value of $1.7 million over the next five years.”

I think most people would not only would consider such an approach “fair” but would likely find it a compelling reason to join and or stay with such an organization.  And by the way, the “self-financing” approach to the value sharing described here makes CEOs and shareholders happy to write incentive payout checks. Value is being paid out of superior value created–and nothing is paid if certain performance thresholds aren’t met.  So it is not only a fair approach for employees but for the business as well.

Companies that give this much thought to their approach to pay communicate the value they place in the relationship with their people and a respect for the unique contributions individual members of the workforce make. That sense of partnership makes fairness self evident.

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Posted in Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent, Phantom Stock, Return on Compensation Investment, Uncategorized | No Comments »

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
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 22nd, 2012 by Ken Gibson

How to Talk about Compensation

In my experience, most company leaders struggle to find the right way to communicate to their workforce in a manner that is both pragmatic (defines clear expectations) and inspiring (provides a compelling vision).  Most are still steeped in old models of communication that has them talking “to” employees rather than “with” employees.  If this is an issue with general communication, it is only compounded as a CEO, business owner or other leader attempts to explain the latest and greatest compensation strategy that is about to be rolled out.  Usually, such plans are introduced without proper context or linked to a broader picture.  As a result, they often fall flat, are misunderstood or otherwise come up short of their intended purpose.

A recent Harvard Business Review article provides a good template for how corporate leaders should approach communication in general and which, in my view, has particular relevance to discussions of remuneration. In their article entitled Leadership is a Conversation, authors Boris Groysberg and Michael Slind address what they refer to as the four elements of conversation and how a “new model” of communication should treat each of those components:

  • Intimacy–how leaders relate to employees
  • Interactivity–how leaders use communication channels
  • Inclusion–how leaders develop organizational content
  • Intentionality–how leaders convey strategy

The authors offer the following guidance relative to the each of these elements.  Following their insights, I offer my own observations as they relate to the compensation conversation.

  • Intimacy (HBR)–Communication should be personal and direct. Leaders value trust and authenticity.
  • Intimacy (VisionLink)–The compensation discussion is an extension of a larger conversation about how the company’s future depends upon the unique abilities of its key people.  Growth is only possible because of the contributions of the company’s people. Consequently, the rewards conversation must convey a sense of partnership with employees–especially key producers. It should be personal in nature and center on the idea that the company wants to share value with those who create it.  It must be an approach that builds trust and reinforces the commitment company leadership has to those who make a significant contribution.
  • Interactivity (HBR)–Leaders talk with employees, not to them. Organizational culture fosters back and forth, fact-to-face interaction
  • Interactivity (VisionLink)–Business leaders must make themselves continually aware of the “mindset” issues that grow out of the compensation arrangements they set in motion.  Do employees feel more connected to expected results and have a sense of stewardship about them?  Do they feel empowered to achieve the results because the dialogue with management surrounding expectations has been both pragmatic and inspiring? Is the reward meaningful enough to evoke the right level of purpose and passion from employees?  Soliciting feedback through both formal (surveying) and informal (conversation) is critical to finding out the answers to these kinds of questions.
  • Inclusion (HBR)–Leaders relinqush a measure of control over content. Employees actively participate in organizational messaging.
  • Inclusion (VisionLink)–Companies must initiate ongoing mechanisms for employees to be reminded of what they have, how rewards values are maximized and where to go for answers to questions.  In addition, their views must be solicited and measured in a way that allows the company to assess whether a proper link is being forged between vision, business model and strategy, roles and expectations, and rewards.
  • Intentionality (HBR)–A clear agenda informs all communication. Leaders carefully explain the agenda to employees. Strategy emerges from a cross-organizational conversation.
  • Intentionality (VisionLink)–Leadership adds context to any rewards discussion.  They view compensation as a strategic tool to communicate what’s important to the organization and to eliminate “silos” and other barriers to building a promise-based management system–one in which all parts of the organization work together in delivering on the company’s brand promise and value proposition to the marketplace.

When companies begin to adopt this kind of framework for communicating rewards, they find that it becomes almost more important than the nature of the compensation strategy itself.  Companies can have a top-tier rewards program, but if it isn’t communicated and reinforced properly, it will never fulfill it’s purpose.  Many times, this is the biggest  element that keeps a business from achieving breakthrough results and having its pay strategies build a unified financial vision for growing the business.

For more ideas on this subject, view our webinar entitled “Five Success Factors Every Compensation Program Must Fulfill.”

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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 29th, 2012 by Ken Gibson

Compensation and Your Brand Promise

Companies that attain a competitive advantage in their market niche are very clear about who they are and how they create value for their customer or clients. The way that value is communicated is through a brand promise. Essentially, a brand promise is what the company says it will do for its customers. At its core, the promise implies that a customer’s “world” will somehow be better because of the product or service that is being offered.

For a brand promise to be realized there needs to be continuity and integrity between what is offered by a company, what is delivered or executed by that business and what is ultimately experienced by the customer or client. As a result, there are at least four stages to the fulfillment of the brand promise.

  • Communication – a promise is conveyed to consumers
  • Scrutiny – the consumer analyzes and considers the promise
  • Acceptance – the consumer chooses to accept the promise
  • Maintenance – the consumer continues to compare the promise with the experience
 
Because of what’s at stake, it is critical that a business build a promise that is realistic, manageable, competitive and adds value. Maintaining that promise is equally essential. Companies that provide a recurring experience consistent with their brand promise will cultivate strong customer loyalty. That loyalty creates a returning customer and a bond that will protect against the forces of competition in the long term.
 
The delivery of the promise is subject to a wide range of environmental disruptions that can be generated by operational conditions, competition, customer perceptions, employee understanding (of the promise) and execution. As a result, it becomes the responsibility of a company’s workforce to ensure that the delivery of the product or service is consistent with the brand promise in the context of its fluid and dynamic market environment.
 
In this framework, compensation becomes a strategic tool a company uses to get and keep employees focused on the behaviors required for the brand promise to be fulfilled. In support of this claim, consider the following insight offered by Larry Bossidy and Ram Charan in their book, Execution:
 

“A business’ culture defines what gets appreciated, respected, and, ultimately, rewarded; those rewards and their linkage to performance are the foundation of changing behavior. If a company rewards and promotes people for execution, its culture will change. However your organization determines rewards, the goal should be the same – your compensation and rewards system must have the right yields. You must reward not simply on strong achievements on numbers, but also on the desirable behaviors that people adopt. Over time, your people will get stronger, as will your financial results.”

Understanding this, a company needs to determine the right philosophy and structure for its rewards systems and how it can most effectively channel its compensation investment towards the achievement of the desired outcomes. With that in mind, among the questions a business really needs to ask and answer are:
 
  • What form should the compensation take?
  • How and at what interval should the compensation be paid out?
  • Who should participate in each rewards program and why?
 
Most companies that perform this kind of internal analysis arrive at the conclusion that their rewards strategies must extend beyond just salary and benefits. In fact, they need an internal value proposition that is compatible with their external value proposition – one that creates the harmony described in this article.  At a minimum, this will usually require that a company institute both a short and long-term incentive plan of some type.
 
In short, the impact of compensation is more far reaching than most companies realize or acknowledge. Ultimately, a company’s brand promise relies, in part, on how effectively that business’s rewards strategies communicate what’s important both internally and externally.
 

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

Ken Gibson
May 5th, 2012 by Ken Gibson

Phantom Stock,The Mystery is Over! VisionLink Launches New Website

Over the past several years, interest has been building in “phantom” equity arrangements.  Businesses large and small are intrigued by the idea of sharing value with key employees without giving away actual stock.  That said, while many have heard about the concept, to most phantom stock remains a mystery.  As a result, they’ve taken to the internet seeking answers to their many questions.  What is it? How does it work? Who can participate? What are its tax implications? How do we value shares? And so on. However, in their search for answers, most are coming up short.

Well, the mystery has been solved. We are pleased to announce that VisionLink has just launched a new site that addresses all things phantom stock—www.phantomstockonline.com.  This dynamic, interactive tool will remove the mystery surrounding phantom stock plans within a few mouse clicks. We invite you to go there today and check it out.  On the site, you will find:

  • The Knowledge Center—which is organized as a wiki and will answer virtually every question you could think to ask about this value sharing program.
  • Tools—that will help you determine whether your company is a candidate for a phantom stock program and what other long-term value sharing arrangements you might consider before selecting a plan design.
  • Build a Plan—where you can envision the potential financial value that would be generated for phantom stock plan participants in your company and how it compares with an increase in shareholder value.
  • The Blog—that will keep you up to date on trends in long-term value sharing and how phantom stock is making a difference for companies across the country.

You will find this and much more when you visit www.phantomstock.com.  Please go there today and find out for yourself why this site will become the source for finding information on this increasingly sought after topic.

 

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Ken Gibson
April 18th, 2012 by Ken Gibson

Improving Your Management Thinking will Enhance Your Compensation Planning

Compensation design needs context.  It grows out of a larger process of thinking about the business– how it will innovate, who its primary competition is, how it will manage change, what kind of culture it needs to nurture, where it’s customers want to “go” next, and so on.  Without that broader framework in mind, its hard to see compensation–especially value sharing arrangements–as anything more than an expense to be managed and contained.  Compensation is an investment not an expense and its allocation needs to be driven by the outcomes company leadership seeks to fulfill.

If that’s the case, every business leader should ask himself what and whom is influencing his thinking. Is your thought process mostly reactionary?  If so, what practices do you engage in to prevent it from remaining such?  What are you reading? Who is offering you direction?  What is the “well” you’re drawing from to remain fresh and at the forefront of current trends and practices?

With those questions in mind, I’d like to offer four sources of thought leadership  that I recommend to clients.  You will often see me quote from these sources in my columns. Certainly, there are more than these that provide great information.  However, these sources will expose you to many other “wells” of innovative thinking that will help you achieve success in leading your company.

The Harvard Business Journal

HBR provides current, relevant, in-depth insight into practices, case studies, research and the latest business management thinking globally.  It will likewise lead you to individuals, books, technology, groups, associations and thought leadership sources that are having impact on the most successful businesses around the world.  If you only receive the print edition of HBR, I would recommend you also become a member of its online edition. www.hbr.com.  There you will find a number of other great resources such as blogs and videos that will expand your experience. As a starting point, check out HBR’s list of the 50 most influential business management gurus. The list includes a host of reading recommendations by these thought leaders as well.

Fast Company

I like this publication because it emphasizes  thought leadership from business, technology, entertainment and the arts. It’s focus on innovation is particularly helpful and allows you to see what’s happening “right now,” particularly in entrepreneurial oriented environments.  Check out the publication’s recent article on wunderkind  Mark Zuckerberg.

Strategy + Business

This publication is put out both in print and online (www.strategy-business.com) by Booz & Company, a leading global management consulting firm.  This information this resource provides essentially for free is mind boggling.  It’s resources are deep and organized into categories that make it easy to find information that is relevant and current.  Although it’s target audience is larger, multi-national companies, the thought leadership it provides has application to businesses of just about any size and industry.  For example, check out the article on How Aha! Really Happens.

Chief Executive Magazine

If you lead a company, you are likely already aware of this publication and probably subscribe. However, if you aren’t likewise participating in the forums and conferences this organization sponsors, you are missing an opportunity to connect with chief executives from around the country that are trying  to successfully navigate  the very challenges and opportunities you also face. The publication can be accessed online (www.chiefexecutive.net) or in print.  Check out its recent article on The Limits of Monetary Incentives.

As indicated, certainly more resources could be added to that list.  But these are some that I have found to be particularly useful in addressing issues that are relevant to what business leaders are facing today.  Regardless of the source used, what’s critical is that those who make decisions about pay ensure they are constantly exposing themselves to the best thinking; ideas that will help them achieve the “next” level in their company’s progress. Doing so will lead to the development of  rewards strategies that drive rather than hinder that success.

 

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Ken Gibson
November 21st, 2011 by Ken Gibson

Keep Incentive Plan Design Simple

Complexity can kill any value sharing arrangement.  Some reading that sentence are nodding their heads knowingly right now.  They’ve experienced that complexity and watched failure overcome what seemed in the beginning like just the right solution to plan design.

Companies run into the complexity problem most commonly when they try to manage behavior through the incentive plan.  They construct metrics and measures that are intended to focus the employee on specific business drivers.  By the time they construct those metrics for every category and tier in the company, they have a monster on their hands.  It’s usually about that time that our phone rings.

As you approach incentive plan design, keeping it simple has to be an overarching aim that guides the process.  To accomplish this, think in terms of deciding between two basic plan types and three basic measurement categories.  Then plan to “weight” the measurement categories by tier of employee to address the variance in impact at each level of the workforce.  Here’s what I mean.

Two Plan Types

When building a short-term incentive, a company will need to decide whether they want to use a profit-based allocation model or a targeted KPI approach.   In simple terms, a profit-based approach will focus everyone in the workforce on the profitability of the company and a pool will be used to generate payouts once a certain threshhold of profitability is achieved.  The KPI approach focuses the attention of an individual or team on defined performance indicators or intiatives which, if achieved, will drive greater profitability, revenue, EBITDA or whatever other key outcome you measure.

Each of these approaches are discussed more thoroughly in an article and/or webinar on our website.  I will refer you there for greater detail.

Three Measurement Categories

Most plan types can be managed well by “weighting” how much of an incentive will be tied to company performance, how much to team or department performance and how much should be based on individual performance.  The weighting each of these is given depends on the sphere of influence of the participating employee.  For example, tier one employees (executive level) might have a weighting something like the following: 75% company, 0% team, 25% individual.  A second tier (directors) might be allocated as follows: 25% company, 50% team, 25% individual. And so on through the tiers.

The three measurements approach allows you to have one plan while making room for adjustments to be made by category of employee based on its ability to impact company, department or individual outcomes.

Long-Term Incentives

Just a word about long-term value sharing.  The approach described above can apply to LTIPs as well, but is most commonly used for short-term incentive plan design (payouts for performance in a period of 12 months or less).  To effectively design a long-term value sharing arrangement, you will need an additional planning tool; a decision tree process that helps you ask the right questions and arrive at a suitable plan model. Ultimately, there are about nine different long-term value sharing approaches you could adopt.  Questions such as “are you willing to share equity?” lead to one conclusion or another about which plan type will be most suitable for your organization. To learn more about the decision tree process access the VisionLink article entitled: “Long-Term Incentive Plans–Which is Right for your Company?”

Once a long-term plan design is determined, a “simple” approach should still be applied.  The three measurement categories approach will help you do that.

In the world of compensation design, as in so many other things, “less” is often “more.”  Keep it simple.

 

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Posted in Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Uncategorized | 3 Comments »

Ken Gibson
June 29th, 2011 by Ken Gibson

5 Simple Ways to Transform Your Rewards Strategy

It’s summer and we’re all ready for simple solutions to things.  Easy meals to fix. Inexpensive ways to entertain our kids.  Fastest routes out of town for long weekends. And so on.  In that same spirit, here are a few suggestions to simplify your company’s compensation life this season and have significant impact in the process.

  1. Form a Compensation Committee. Include members of the leadership team best positioned to impact decisions related to compensation. Make sure it is headed by the CEO of the company.  Establish as its charter to treat compensation as both an investment that generates a measurable return and a strategic tool that  impacts company growth.  Establish a regular meeting schedule.
  2. Create and Publish a Rewards Philosophy Statement. You don’t have to be able to fulfill the philosophy with concrete programs yet, but it will communicate the direction you plan to go and get you moving in the right direction.  Consider having a philosophy statement that commits the company to being at somewhere between the 40th and 50th percentile in terms of guaranteed compensation (salaries) but perhaps at the 70th percentile or above in total compensation.  In other words, commit to a philosophy that will begin putting a larger amount of compensation at risk.
  3. Innumerate 4 to 5 Results Your Company is Seeking to Realize. These might be divided between short-term (12 months or less) and long-term (over 12 months).  They could be revenue or sales goals, profit or margin targets, new product development, market expansion or any number of key performance factors your company is seeking to improve.  Ask the committee to consider how, if at all, any of the present compensation strategies of the company are reinforcing those results as priorities to employees right now.
  4. Identify the Individuals or Groups Best Positioned to Impact those Results. As you examine that list, begin formulating in your mind the “type” of compensation that will best communicate to employees their role in achieving those results.  Think in terms of how much of their compensation should be tied to those outcomes and how much should be short-term versus long-term.
  5. Make a List of the Obvious Missing Pieces in Your Comp Strategy. The previous four steps should make this apparent.  For example, if you determine one of the key results you are seeking is to double revenue in the next three years, but your compensation package includes only salary and a quarterly bonus, then a long-term incentive plan is an obvious missing component at this stage.

Now, going through this exercise will not (yet) alter your overall rewards approach.  What it will do, however, is transform your thought process. And changing the way you think about pay is the first step in transforming compensation in your organization.

If you can engage in these simple steps over the course of the summer, by the fall you will be positioned to begin developing specific strategies that will bring your rewards philosophy to life and fulfill the results your company seeks to realize.  Compensation will then become a strategic tool helping to drive growth rather than an impediment to the sustained success you desire.

Here’s to a simplified summer.

For more information on this topic, view our webinar broadcast entitled “How Do I Create a Competitive Advantage with Our Compensation Programs.”

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

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