In our work with new clients at VisionLink, the most common request we receive is for guidance on choosing an appropriate long-term incentive plan (LTIP). Most of our engagements are with CEOs of private businesses who want to effectively reward those who help create value for the business over an extended period of time. And because they lead companies that are not public, they are often looking for ways to do that without sharing equity. With that need in mind, VisionLink has just produced a new guide that describes nine different types of long-term value-sharing plans and how to determine which one might be right for your company.
If you lead an enterprise, it is likely that you view your primary responsibility to be business growth. And you want others in your organization to share and invest in your vision of the future company. Essentially, you want to create a unified financial vision for growing the business. That will be nearly impossible to accomplish if you do not have a compensation strategy that aligns your key performers with your growth goals. Although that would seem intuitive, you would be surprised how many chief executives of private companies have not made that connection.
Here is a case in point. A few years ago I had a first meeting with the CEO of a $100 million business in Southern California who was considering engaging VisionLink to help construct a new annual incentive plan for his workforce. When I arrived, I was ushered into a conference room to wait for the company leader. As I sat there, I noticed that the whiteboard had what appeared to be revenue growth projections charted out over the next three to five years. Other specifics about profit improvement were also itemized.
After the chief executive had arrived and we had exchanged pleasantries, our discussion turned to the compensation issues he was facing. He talked about the company’s bonus plan and how inadequate he felt it was. After a few minutes of discussion, I turned his attention to the white board. “Can you tell me what those numbers represent ?” I asked. “Oh,” he said, “Those are the growth projections our executive team came up with during our last strategic planning meeting. Those are targets we expect to hit over the next three years.”
“That’s what I suspected,” I responded. “I know I’m here to talk about your annual incentive plan, but tell me, what part of your compensation strategy communicates to your key people that that is your goal?” After a moment of awkwardness and obvious confusion on his part, he replied, “I’m not sure what you mean.” (Red flag.) “Well,” I explained, “if I worked as an executive in your organization, and you showed me your company’s financial value proposition for someone in my position, what part of it would compel me to fully invest in that growth goal for the business (pointing at the board)? ”
I assume you have figured out where this is going. He didn’t have an answer. As a result, we spent the rest of our time talking about the need for a long-term value-sharing plan. We discussed the importance of such a plan in securing a balanced focus on the part of his people between short and long-term performance. We talked about how premier performers want to know there is a means for them to participate in the value they help create. They view their role in the organization as a growth partner—not in a formal or legal sense, but in the commitment they feel to make a contribution to the purpose and vision of the company. I told him he was making it harder for his people to invest in his vision of the future if he did not have some means of rewarding long-term value creation.
Needless to say, it was an “aha” moment for him. He got it and we moved in that direction in our planning.
In truth, every organization really should look at value-sharing as one comprehensive component of their pay strategy that has two dimensions to it—a part that rewards short-term performance and one that rewards long-term success. The two combine to create alignment between employee roles and the vision, business model and business strategy of the organization. A comprehensive value-sharing approach ensures key contributors stay focused on driving the revenue engine of the company while maintaining an eye on the future. This ensures the company continues to produce good profits instead of bad profits.
The Value-Sharing Options
Once you are convinced that having an LTIP is important, the challenge becomes learning what your options are and how to decide which alternative is best for your organization. Essentially there are three categories of plans and three options in each of those groups.
Stock. Here your alternatives are restricted stock, performance shares and stock options.
Phantom Stock. In this category, you can choose between full value phantom stock, performance phantom equity and a phantom stock option plan.
Non-Business Value Plans. Organizations that do not want to tie the value of their LTIP to business growth can choose plans based on other financial metrics. These include profit pools, performance unit plans and strategic deferred compensation.
VisionLink’s new report describes each of these plans and their application. It then introduces you to a decision tree process that can assist you in determining which plan is best for your company.
In today’s environment of high competition for premier talent, it is hard to imagine a company CEO being able to recruit the people he wants if the value proposition his company offers does not include a long-term incentive plan. If you do not yet have a plan, our guide is a good starting point to begin exploring your options. If you have a plan but are not satisfied with it, our LTIP report will help you determine what a better alternative might be.
Don’t come up “short.” Make it a priority to develop a “long-term” value-sharing approach that makes it easy for your employees to invest in your vision of the future.