The Beowulf of Compensation

Stickman BeowulfMost of you know of the poem Beowulf. Legend has it that it was passed down through oral performances for nearly 1,000 years before it was formally documented in Old English. The poem is long and provides details that most people skim through, if they read it at all. But, it is documented and any literate person can look it up and read if they are interested. The more ambitious can (and do) even memorize it and perform it live.

Let’s first state the obvious. No compensation plan, Continue reading

How Often Do/Should Start-up Employees Get Raises?

Dan Walter’s Answer from Quora

Raises at start-ups are an interesting phenomena.

First. If a company can afford annual raises to at least stay current with cost of living, they should do so.
Second. Start-ups often consider cash to be a basic foundation with all incentives coming in the form of an increase in value of equity compensation (stock options, etc…).
Third. Raises are given for three common reasons, 1. Cost of Living Adjustments (COLA) increase in the cost of just being a living human being (see the first comment above) 2. Merit. Better pay related to better performance, skills, etc.  3. Promotion. You have new responsibilities, title etc that drive a new level of pay.
Merit increases may not happen at most start-ups.  This is mostly because people are just expected to perform well.
While most public companies give promotional raises as they occur, start-ups may give them infrequently or never. But, the cool thing about a start-up is that they don’t need to  follow “the rules”.  They can give a raise to someone in advance of a promotion.  They can more easily give a far bigger promotion (skipping multiple levels) if it is warranted.
Mostly people at start-ups need to be prepared to ask for, and defend the need for, raises.  If you cannot define a reason better than “but I can make more someplace else”, you really aren’t trying hard enough.

New Book on Communicating Compensation Plans!

Everything You Do in Compensation is Communication: 3/8 of the Compensation Cafe Publishes a Book! …. $10 discount through September 30, 2014! (use code “8steps”)ewdic book cover w quote

About three years ago, a trio of cheeky compensation bloggers joined forces around an idea.  The insight that started it all – that everything (and we mean everything) we do in compensation is, in fact, communication.  When we talk and when we stay silent.  When we share details about how plans work and how awards are earned and when we keep it all under wraps.  The reality is that we are sending messages — inadvertently and often unintentionally — with every step of the compensation design, implementation and management process.

If this is true — and we believe it is — then why not get ahead of this communication process, take control and use it to make our compensation work better and more impactful?  And to increase our own influence and career success along the way?

Compensation Cafe cohorts Margaret O’Hanlon, Dan Walter and Ann Bares are pleased to announce the publication of our book.

Dreaming about ways that you can have more influence and impact in your work? To learn more and to order your own copy, please go here and get your copy today.

 

First Do No Harm

Stickman First Do No HarmPrimum non nocere. The Hippocratic Oath is one of the foundational elements of any doctor’s career. As it says on Wikipedia:

“Another way to state it is that, “given an existing problem, it may be better not to do something, or even to do nothing, than to risk causing more harm than good.” It reminds the health care provider that must consider the possible harm that any intervention might do. It is invoked when debating the use of an intervention that carries an obvious risk of harm but a less certain chance of benefit.”

Imagine if this was part of an oath that compensation professionals had to take in order to work in this industry. What would it mean to you? In the name of limited time, limited experience or just a feeling of resignation, some of us may make this a lower priority than we should.

Imagine if your heart surgeon or your child’s asthma specialist, simply stopped at “good enough.” Would you support them?

Like much in the world of medicine, compensation is part science and part art. Like a scientist, we must use the data we have available and make resolute decisions that are memorialized and can remain effective for a long time. Also like a scientist, we must be willing to accept new observations, data and change our decisions as needed.

Like an artist, we must be able to see what others may not and turn that into something tangible that can be appreciated by many. Also, like a successful artist, we must know when to stop fiddling and declare our work complete.

I was reminded of this recently while working with a client who does so much so right. When speaking to the CEO, my colleagues and I made it clear that an important objective of our project was not breaking anything that already worked well. But, the company is growing and its industry is rapidly evolving. Because they are the type of company so many people love to work for, they are planning for the future before it gets here. What a thought. Even better, what an action!

When looking at solving a problem using compensation, we must be fully aware of the potential impact any new program or change to a legacy approach may have on current successes. As a consultant, I often see new “solutions” that conflict with current practices or the company’s compensation philosophy.

Since we seldom fully analyze whether pay is actually doing what was intended, we often don’t have any idea what is or isn’t working. Without this knowledge, we are like a blindfolded doctor. Our skills and expertise may be up to the task, but we don’t give ourselves a chance to succeed.

We are often challenged and sometimes pressured into implementing changes where we have either limited supporting data or worse, no confidence in the program accomplishing its goals. Imagine if your doctor agreed to do surgery before they had ran tests. What if you were given medication before being thoroughly diagnosed?

Next time you are asked (told) to make a change to pay or roll out an entirely new compensation plan, make it clear what you need to do it before you confidentally proceed. Be aware of how the change will affect other components of HR, pay and overall management of your staff. Understand the potential downsides to any program that has fantastic upside. In other words: first do no harm.

Do compensation consultants help price CEO compensation more accurately or worsen it?

This is a great question. The truth is the compensation consultants do some of both.

The form of this question seems to presuppose that “accurate” and “worse” are different outcomes. In the world of compensation they often are the same thing.

If a company determines that it must pay their CEO in the 75th percentile in order to get the quality of executive that will best serve the needs of their shareholders then they will look to market data from peer companies (easily accessible for public companies) and determine the 75th percentile.  This sets the basic pay level.  Easy peasy except for a few little things…

If everyone decides they need an executive in the 75th percentile and everyone is looking at the same data and the data is updated every year, then the 75th percentile will also rise every year.  Perfectly accurate and inarguably worse.

If the peer groups selected are just 10% better than a “real” peer group of similarly performing, sized, etc. companies then the compounding factor above is made even worse.  Still totally accurate, but not any better.

If the stock market drive upward at a rate faster than initial predicted the compounding factor can be even worse (You Get 2 Shares and You Get 4 Shares and So on and So on…).

But, if you take a look from another perspective you may see a different picture. Investors are all about making money. If I told you you could make $1000 by paying someone $500, or you could make $400 by paying someone $300, you would probably choose to pay $500 and get the bigger payoff. In this case (and this perspective) the higher pay is better. It is also accurate.

All of that being said there is some academic research on this topic.  A good start is here.  Page on northwestern.edu

Tipping Points – 5 for Pay Professionals

stickman Pay Tipping Point“The moment of critical mass, the threshold, the boiling point.1” This is how Malcolm Gladwell describes the tipping point. It is the moment when things truly change and return to the prior state becomes hard, or even impossible. Responding to major changes like these tend to drive evolution or revolution. The results can be more volatile than expected and occur more quickly. There have been many compensation-related changes happening over the past couple of decades. I make the case for five elements that may be nearing a tipping point.

1. Pay for Performance.

Pay for performance is incredibly popular right now. I am one of its biggest proponents. But, as the use of P4P rises, so does the lack of verification of effectiveness, structure and communication for these programs. There is real potential for the abject failure of these programs as a whole. P4P is filled with potential risk. Failure will likely be seen in angry employees and struggling companies.

2. Pay Disparity.

It has been almost one hundred years since we have had wealth disparity in the United States like we are currently experiencing. Not all of the disparity is driven by pay, but as the wealth gap has grown, so has the pay gap. We are already seeing attention from the media, scrutiny from the government and discontentment among employees. While the first two get the most attention, it is the employees who will drive the tipping point. Unless they are given some path to correction, they will find a more volatile way to drive change.

3. Retirement Shortfalls.

The way we currently look at retirement has been around for just about the same amount of time as our oldest citizens. These senior people had a lot of help in preparing for retirement and we still have huge problems with poverty among the elderly. It is expensive to be alive. The shortfall between retirement funds versus needs has been well documented. We have built a society where people live a long time and can do so knowing that they are supported by funds that were designated long ago. As retirement funding changes and social security fails to keep up with the cost of living, will we see new “families” where employees spend as much time and effort supporting their parents as they do their children? Can the two-income work structure we have built support this additional need for time and money?

4. Pay Survey Use.

Pay surveys are useful ingredient in delivering proper pay. But, like sugar, overuse can be unhealthy. The flaws of the data and how we use it have been documented for years. Search on the term “survey” on this site and you will see what I mean. Pay surveys help make our decisions “feel” better. Sometimes at the expense of them actually “being” better. Are we prepared for the moment when the overuse of surveys becomes a rallying cry for those people outside of our profession?

5. Equity Compensation.

Many of you know that I believe equity compensation is an incredibly important element of pay. But, like other forms of pay for performance, it has often been used without a thorough understanding of its impact. The growth of equity compensation easily aligns with the growth in executive / employee pay disparity. Pay disparity is itself nearing a potential tipping point. Without thoughtful planning and better use of equity compensation, we may see it disappear like so many other formerly useful pay programs (defined benefit plans anyone?).

1 The Tipping Point: How Little Things Can Make a Big Difference

 

Beware of Statistic Laden Compensation News

Stickman Beware of Stats and NewsWe love data. In fact, compensation professionals seek out data like artists desire southern exposure in New York or kids crave waterslides in the summer. Data is our friend. It helps guide us and it provides credibility for our decisions. But, we must always beware of prepackaged data. This type of data is our “frenemy”. It gives us hope or makes us feel confident, then pokes us in the eye.

Take for instance the recent announcement that 43% of employees would take a pay cut in return for a better company 401(k) match. The subheadings for these articles cited a report published by Fidelity. Fidelity is a well-respected source of 401(k) data. What could be wrong?

Well, the report was based on more than 1,000 employees who were still working and were actively contributing to their retirement savings. While this does qualify as “more than 1,000 employees” it’s not representative of 1,000 employees at any one company I have ever heard of.  That’s like saying, “We took a survey of 1,000 people and 100% agreed that ice cream was one of the best things ever on a hot day.” While not telling people that you took the survey at the exit door of an ice cream store on a hot, humid August day.

The reports on 401(k) (herehere and here) went on to discuss that the average company match was about $3,540. Average of what companies? Average of which employees’ contributions? The reports do not specify. Most also mention this amount is $1,000 more than 10 years ago without mentioning of “why”. Could it be that people are paid more than a decade ago? Maybe the companies in the survey offer better 401(k)s now, but have cut short-term incentives, long-term incentives or other benefits. We simply cannot tell from the information provided. Only after reading multiple articles do we learn that Fidelity reports that the average employer contribution is currently 4.3% per year vs. 4.0% in 2006. So, no big change there.

But, it’s not just those of us working in compensation that gets caught in this trap. Sometimes it’s the people we pay. A friend who was laid off a couple of months ago has had a difficult time finding work in her chosen field. She sent me a note the other day with a link to an article on AOL that “supported” the incredible lack of full time jobs. Those of you who jumped ahead and opened the article will see that it discusses the fact that only 1.3 billion adults worldwide have full time jobs. Specifically, one in four adults globally had full-time employment last year.

My friend was focused on the fact that 75% of people did not have a full-time job. And, she was part of the growing 75%. No real thought went into how many people in the world are too old or too young to work. What about the demographics of the other continents? And, then there are the rural poverty-stricken parts of India or China that assuredly play into this global statistic.  She gave no consideration into how many of those people lived in places where full time jobs have nothing to do with a “chosen field”. No thought went into that fact that she lives in New York City a place with less than 8% (not 75%) unemployment.

Now you might say that my friend is not the smartest cookie, but would you also say the same about compensation professionals who believed the reports on 401(k) match? Or perhaps, in a world and workplace swimming with data, statistics and ready-made sound bites, do we all get caught in the trap of easy-to-access information? Just remember: If you see percentages, ratios or hard numbers in an article, beware. You might be seeing a journalistic or marketing artist’s surreal masterpiece rather than the facts.

Dan Walter is the President and CEO of Performensation and is committed to aligning pay with corporate strategy and culture. Download the “Equity Compensation Design and Use Matrix.” Dan has co-authored several books including “The Decision Makers Guide to Equity Compensation”“If I’d Only Known That”“GEOnomics 2011” and “Equity Alternatives.” Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

Want a Raise or Promotion? Read Your Proxy Statement

book financialYou’re a hard worker. You’re dedicated and passionate about your job. But, promotions and raises have come slowly. Both require credibility. If you want to be credible at your company, you must understand your company. If you work at a publicly traded company your proxy statement is the place to start.

I have spoken to all types of professional groups over the years. I often ask the audience to raise their hands if they have read their company’s proxy cover to cover. On a really good day, 10% of people will raise their hand.

Proxy statements let you know much of what executives know and most of what investors want to know. They don’t provide every answer, but they give you a great foundation. Familiarity with your proxy’s content allows you to frame discussions in ways that make them important to the leaders of your company. Discussing things from the other person’s perspective is critical to getting people’s attention.

The first proxy I read made be wonder if I should choose a different profession. The second one made me understand how much more I could learn with just a little bit of focus. By the time I head read a few more I was able to understand what was being talked about in board rooms and financial papers and websites. But, much of what is in a proxy is not easily understood to the layperson.

Most proxy statements are between 50 and 80 pages long. Average readers read 50-60 pages per hour. So expect to invest a bit of time, but not an enormous amount of time.

Here are the steps I recommend:

Step 1. Read your own proxy cover to cover. (1-2 hours)

Step 2. Read those of your key peers. (110-150 hours)

Step 3. Identify the patterns and flow of the document. (As you go.)

Step 4. Write down the things that you don’t understand or that simply don’t make sense. (1 hour)

Step 5. Schedule lunch meetings with subject matter experts from any section where you require more information. (Buy them lunch. Ask them to explain. They will be flattered. They will eat lunch. They will happily explain. (As many lunches as it takes.)

Step 6. Build links back to your own responsibilities and accountability. Once you know what is important to shareholders, you will know what is important to management. (Almost no time at all once you understand everything.)

Step 7: Get a promotion and a raise (Fairly quickly.)

Many people have told me they don’t do this because it is time-consuming and boring. Both can be true. These are great excuses, but terrible reasons for sabotaging your future.

Many people tell me that they don’t want to look dumb or uninformed. Once you complete Steps 1-4, you will ask intelligent questions. People LOVE talking about what they do. They want to explain why it’s important. They want you to understand their impact. Ask the question, smile and listen. You will look like a genius!

There are many things that contribute to getting a promotion. If you are a good employee you are already doing most of them. Reading your proxy will set you apart from most of your peers. It will also give you a sense understanding and confidence that can propel you up the ladder. It sounds simple because it is. It isn’t done often because it isn’t very fun. The choice seems easy, a few hours today for better vacations in the future!

(photo: Copyright: <a href=’http://www.123rf.com/profile_nk2549′>nk2549 / 123RF Stock Photo</a>)

4 Links Between Entrepreneurs, College Students and Swimming

Man Swimming in Ocean-squareI spoke to a recent high school graduate who wanted some insight on going to college. He was leaving California for Hawaii where he would be attending Chaminade University of Honolulu. I kept my advice simple. “Don’t Stop.”

I likened his college years to his journey from California to Hawaii. But, in this journey, instead of flying he would be swimming. If you stop swimming you may never be able to complete the journey. As I talked to him, I realized the same is true for entrepreneurs. Running a start-up and being a college student have many similarities, including limited funding and learning as you go. In fact, there are four distinct lessons from swimming that apply to both.

4. You are at your best when the environment isn’t completely comfortable. Elite swimmers like water that is too cold to lounge in. They know they will be working hard and a little discomfort will keep you moving. You have to have the confidence that your own power will heat both you and the environment around you.

3. A crooked path is most effective. When you’re in the water a straight-line always looks like the most effective path to your destination. This is because you cannot always see the currents and tides that will impact your journey. You must pay attention to what is happening at every moment and make adjustments to stay on course. Although counterintuitive, the best strategy to escape a riptide is not to swim faster or harder, but to swim parallel to the beach for a while in order to reach safety. Apply the same rule to your college career and start-up and you will see surprising results.

2. Even resting uses energy. Swimming is so much different than walking. When you are on land you can rest by standing, finding a bench or even just sitting on the ground. If you stop while swimming you must still tread water. At that point, you might as well expend the energy to keep moving forward. Even a small island in the ocean provides only a temporary resting place, as it will be overrun by rising tides quickly.

1. You cannot stop until you succeed. This is the key point. Once you have committed to swimming from one point to another you have only three choices. A) Turn back before you get half way and accept the fact that you may never have the guts to try again; B) Stop somewhere in the middle and exhaust yourself; C) Don’t Stop. Keep swimming. Rest while you are on your back. Think while you stroke forward. Slow if you must and get your bearings, but never ever stop. Stopping means failure so keep on swimming. You will never get this exact chance again. You must keep the vision of your beachside destination in mind and know that only your own power, persistence and determination will get you there.

“If you want to swim across the English Channel from England to France – you have to leave your doubt on the beach in England.” – Lewis Gordon Pugh

Mel Jameson has more than 20 years of experience in financial services, sales and marketing. One of the founder’s of Performensation, an industry leading compensation and human capital consulting firm, she has a proven track record of growing businesses through strategic marketing, business development and sales management. Mel’s passion is assisting women in navigating the challenging waters of business. Mel can be reached at mjameson@performensation.

You Get 2 Shares and You Get 4 Shares and So on and So on…

stickman geometric progressionGeometric progression of pay from one pay grade or level to the next sounds pretty crazy. But, while doing research for a recent presentation on equity compensation, I found more than one source that stated that doubling the equity from one level to the next was a standard rule of thumb.

When we look at the expansion of executive pay versus broad-based pay, we tend to focus on the volatility of stock market as a driver of the spreads between the top and the bottom. Market volatility certainly has an impact, but it is our legacy approach to equity that is likely the biggest contributor to the inequity of equity.

Like any compensation element there are inherently positives and negatives to equity compensation. This makes equity great for some uses and poor for others. Stock options, restricted stock units and employee stock purchase plans are often demonized by shareholders, politicians and the media. Compensation professionals often misunderstand them. Their impact has been distorted due to an oddly, non-compensation approach to their use.

Let’s transfer the practices for equity into cash. Entry level 1 employee is paid $30,000, Level 2 is paid $60,000, Level 3 $120,000, manager $240,000, VP, $480,000, SVP, $960,000, EVP, $1,920,000 and CEO $3,840,000.  I have seen a lot of pay structures, but none that look like this! However, this is how many companies use equity compensation.

And, equity has an additional potential multiplier built in which is the stock price. If the value of each unit, share or option increases during the vesting period, this unsupportable progression is amplified. It isn’t unheard of for values of each share to increase ten-fold or even hundred-fold during the life of an equity grant. In a volatile market (up and down movement), this is even more likely than during periods where prices are only going up.

How did we get to this place? Twenty years ago equity, mostly in the form of stock options, had “no value” at grant. Nearly every equity plan was managed outside of the compensation area. In fact, the majority of these plans are still managed or controlled by legal or finance departments. Add in the general lack of understanding by compensation professionals and an effort to “keep things simple” and you have a recipe for explosive differentiation.

Since the decision makers at the top are benefiting nicely from this structure and no one is spending much time and effort educating them on a better approach it is unlikely this will change. The graphic below shows the volatility of the stock market from 1913-2013 aligned with CEO pay ratios from 1960-2012 overlaid. Given the information above it should be no surprise that pay spreads have mimicked the volatility of the stock market. While I have seen no specific data to support it, I would hazard a guess that the spread between each level below CEO and the average employee is unequal in halving proportions.  This is due simply to our approach to using equity compensation.

Perhaps the real future revolution in equity compensation isn’t better performance metrics and linkage, but a better approach to determining grants sizes. Maybe we can call this new, more balanced, approach the “rule of the opposable thumb.” Does your company have a great way to determine equity compensation amounts for each level of staff?  Golden decade ceo pay ratio