Philosophers probably have a difficult time with our definition of “philosophy.” Most resources will tell you that a compensation philosophy is a statement explaining the company’s position about pay. For most of the companies who take the time to write a philosophy, the result tends to look something like this:
“Our compensation program is intended to attract, motivate and retain talent employees. Our goal is to target base pay at the 50th percentile for employees who meet expectations. We offer various incentive and recognition programs that are designed to provide compensation for the achievement of company, team and individual objectives. Our principles include striving for internal and external equity, focus on stated corporate objectives, alignment with investor interests and maintaining or building our position in the marketplace.”
What if I told you that a philosophy was not a statement, but an activity?
Last week esteemed fellow Comp Café writer, Stephanie Thomas, Ph.D., wrote an article asking, “Should You Scrap Your Long-Term Incentive Plans?” I commented that LTI programs are for more likely to be used improperly than correctly. But the real question is, why?
Why do we continue to design and implement programs that are ineffective? More important, why do plans at so many companies look almost exactly like the plans at very different companies? It’s kind of like watching your competitor’s ship sink and deciding to build Continue reading →
We’ve all heard some version of Hans Christian Andersen’s “The Ugly Duckling“ at some point in our lives. For the record, the original is sadder and more intense than I remember. The summary is this. A bird is hatched. It is ugly and misunderstood. Others ostracize it without even knowing what it is. It doesn’t fit well anywhere and often has to make its way. Later it grows into a beautiful swan, and everyone admires it. The end.
Welcome to the world of Employee Stock Purchase Plans (ESPPs). If you are at a company that is not publicly traded or is unlikely to ever have an IPO, this post may be Continue reading →
Executive compensation is always in the spotlight. The pay levels for the highest paid executive can truly be astounding to “regular” people. In truth, they are often astounding to executive compensation professionals, including the consultants who make the recommendations. In general, most pay packages can be justified as being competitive in the market, or a small percentage of the value of the company or based mainly on the performance of the individual and/or company. This type of justification often rings hollow.
What if we applied some of the current “best practices” to nontraditional professions such as entertainment and sports? Dwayne “The Rock” Johnson is the Continue reading →
We seem to love to get granular with incentive plans. So many compensation professionals are tasked with not missing anything, they include darn near everything in their incentive plans. Increase revenue? CHECK! Manage safety? CHECK! Grow new clients? CHECK! Maintain old clients? CHECK! Focus on the newest product? CHECK! Sell through the old inventory? CHECK? Improve your Net Promoter Score? CHECK! Keep aligned with long-term objectives? CHECK? Meet this month’s sales goal? CHECK! Dang! What was that first one again?
With so many objectives it can be hard for people to focus on what is important. If they focus on the highest priority, they must keep track of Continue reading →
The pay ratios between CEOs and average employees are once again in the news. This is partly because proxy season always raises this issue and partly because there is a move in some circles to do away with the new pay ratio disclose rule that is part of Dodd-Frank. This year’s ratios will likely be bigger than last. The same will likely be true for most years in the foreseeable future. Here’s why.
The average annual increase for the average employee has been between 2.6% and 3.2% for several years. The use of equity compensation and other long-term compensation tools went down over at least the past decade. At the same time, executive base pay has increased between 5% and 8% most years over most of the past decade. During this period, the use of Continue reading →
Are we really doing anything? We create salary structures and write job descriptions. We organization our data and provide reports up and down the organization. We do a lot, but how much of it is making us competitive in a tight talent market?
The “annual Increase.” Sometimes we even call it a merit increase. According to one study, at the beginning of 2016 companies predicted their pay budgets would increase 3% and at the end of the year they reported the actual increase was 2.6%. Similar reports from several prior years had Continue reading →
At the end of 2013, Dan Walter was asked to predict what compensation would look like over the next 10 years. The first year of his predictions, 2017, is happening right now. Amazingly the news about executive compensation today reflects his predictions from 3 years ago.
Regarding executive pay
“…more leverage will be put on internal metrics and external metrics” (rather than TSR).
Regarding broad-base pay
“…far more of the budget will be dedicated to strong performers. Weaker performers will, unfortunately, be left further and further behind.”
Dan also made predictions for 2019 and 2023. Take a look at the full post from 2013 to see the future.
Do you want to get ahead of the compensation trends? Are looking for better ways to be competitive in a tight job market filled with companies paying almost exactly the same way? Perhaps it’s time to contact Performensation and create an approach to compensation that is future-proof.
Dan is the President and CEO of Performensation, a total rewards consulting firm that is dedicated to aligning pay with corporate strategy and culture. For more than a decade Performensation has been helping companies be successful by beating their competition. Call us today to start planning your future.
It feels odd to be wrapping up this series on Startup Equity. I started the series almost six-months ago, and although I have written around 10,000 words, I still have nearly endless things that we can discuss.
My goal was to provide some insight into the variations, complexity, power and hurdles that come along with equity compensation focused specifically on startups and other private companies. The information available is often too unreliable, too high level and too inconsistent to be useful. I hope this series has given readers multiple different perspectives and can provide the start for better conversations, better plan designs, and more successful companies. I am going to follow through on the suggestions from readers and colleagues that I turn the series into an ebook. If you are interested in getting a copy of the ebook, please shoot me an email (firstname.lastname@example.org).
You should know that determining grant size can be a challenge and that traditional techniques used for cash compensation do not translate well to the more variable nature of equity compensation. Using more refined methods can create much better results. 1
You should know that NO ONE agrees on the value of equity compensation. Not ever. But, that’s OK as long as each party communicates the reasoning for their valuation. 2
I hope you a have better understanding of the concerns of Venture Capital firms and similar early investors. Also, that you can better explain your case for equity and how it can drive their goals as well as yours. 3
You should have a better understanding of how to use equity as your currency. You must also be willing to embrace your equity uniqueness, and why you shouldn’t put too much focus on comparisons to other companies (especially publicly traded) 4
You may be able to evaluate better when you can accomplish your equity compensation goals with only a synthetic instrument. Sometimes polyester can outperform silk. Knowing when and how is the key. 5
You should have a better grasp of when it makes sense to give additional equity grants and when it may be a recipe for failure. Most importantly, you should be clear that other companies’, entrepreneurs’, or thought-leaders’ formulaic methods or proven processes are unlikely to work perfectly for your company.6
You should be fully aware of the MOST COMMON MISTAKE startups make when using equity compensation. 7
You should be confident that your employees don’t understand their equity compensation any better than politicians understand the Internet. 8
You should know that the variables that have the most impact at startups are Vesting, Termination Rules and Change in Control provisions. If you get these right for your goals and timeline, you are more than halfway to success. 9
Performance-based equity shouldn’t be that scary to you. Yes, there is more to it than time-based equity, but it can be far more effective at getting you to your destination. 10
Staying private and using equity compensation in a world obsessed with IPOs should no longer seem crazy. Equity compensation is very a useful tool and can even offer significant design advantages if you are willing to explore the possibilities. 11
Hopefully, you know more about the evolution of cash pay and equity compensation levels over the past decade or two. Equity may no longer give you the savings that it once did, but that can offset by its long-term competitiveness. 12
You may better understand more technical issues like Rights of First Refusal, Tag Along Rights and Drag Along Rights. Not everyone goes public, and not everyone stays at your company forever. Proper planning and documentation can lead to less stress and angst. 13
You will notice that I have touched on some of the more commonly covered topics like accounting and taxation issues. I have barely talked about things like ISOs and NonQuals. And, I haven’t gotten into the final 12-18 months in the run-up to IPO. There are at least one hundred other topics that tend to only come up in very specific conversations, but I think the foundation has been laid and hope that you will share any other specific topics that you may want me to cover in the future. Thanks, and I hope you will come back and read my future articles whether or not they cover startup issues.