8 Ways the Minneapolis Skyway is Like Incentive Compensation

untitledThose of you who regularly read my articles know I often view the world from a different perspective. This is one of those posts. WorldatWork is the main professional association for total reward professionals. Each year they put on an excellent conference and this year was no exception. The theme for the event was “Grow.” The setting was Minneapolis, MN. The weather, as one might expect, was capricious. The conference had tons of great sessions and speakers, but the most important lesson I learned was from Minneapolis’ famous Skyway.

If you have ever been to Minneapolis, the Skyway is sort of a hamster “Habitrail” for humans. It is a system of above ground tunnels that provide shelter from the extreme weather conditions that residents call “seasons.”

After using the Skyway to get from my hotel to the conference site, I realized that the system was exactly like incentive compensation. Continue reading

The Best Performance Goals Are D.U.M.B.

untitledAnyone who has taken a class or performed a Google-search on performance goals has learned about the concept of “SMART” goals. The most common breakdown seems to be: S – Specific, M – Measureable, A – Attainable, R – Relevant, and T – Time-bound. We all seem to know this and yet many still seem to have problems creating successful pay for performance programs. I would like to propose a new D.U.M.B. approach that celebrates the spirit of insanity.  Insanity is being defined as the repetition of doing the same thing, again and again, with the expectation of different results. If SMART goals aren’t working for you, why not try DUMB goals?

D.U.M.B Goals are: Continue reading

8 Things You’ve Gotta Know about Equity Compensation

untitledpEquity compensation continues to be a confusing topic for compensation professionals and with good reason. Equity compensation is not just variable compensation. It’s variable, variable, variable, variable compensation. There’s the variable of stock price. There are variable numbers of shares, units, options or rights. There are variable types of awards, variable vesting timing, variable (for international participants) currency rates and for many recent awards, there are variable performance conditions. So, it’s not just four variables I mentioned earlier, but six or more variables that come into play. This can be tough to grasp in the compensation world where everyone would really like some level of expected consistency.

In addition to all of the variables, there are Continue reading

From the SEC: Please Link Executive Pay to Performance

untitledSleep well sweet Prince, or perhaps Emperor. We now send executive compensation to its inevitable peaceful and infinite slumber. Shown brightly for a few decades, your glory days are over.  April 29, 2015 was officially the beginning of the end of soaring executive pay. The SEC proposed a new rule on executive pay for performance, pursuant to the requirements laid out in Section 953(a) of Dodd Frank, that will change everything we know. Essentially, the rule can be summarized thusly: “You must disclose how your executives are paid relative to company and peer performance.” With this rule, it is obvious that companies will no longer be able to justify executive pay at the levels of the past decade or more.

Who am I kidding? The new rule will just make it easier for all of your shareholders to know what your more engaged and advanced shareholders already know. Do you pay your executives in a way that aligns with total shareholder return for a three to five year period? It is an important thing to know, but it is not earth shaking new information, or even the most important metric for some companies or their shareholders.

Ok. Now that the fireworks have concluded, let’s get back to reality. The proposed new rule has several parts. I will summarize them and discuss their potential impact below.

1)     There will be a new table in the proxy. The table will show the following:

  • Compensation reported in the Summary Compensation Table (SCT) and the amounts “actually paid”(I) to the principal executive officer. Basically, this will be the information from the SCT that already exists, with some added information for the change in value to pensions and equity. Equity and pension adjustments will be shown in another new table.
  • Same values, averaged for the remaining NEOs (Named Executive Officers)
  • Companies’ TSR (total shareholder return) on an annual basis for the past five fiscal years (or three years for smaller companies).
  • The TSR for companies’ peer group for the same periods (smaller companies will avoid this for now).

2)     Companies will be required to, “describe the relationship between the executive compensation actually paid and the company’s TSR and the relationship between the company’s TSR and the TSR of its selected peer group. This disclosure could be described as a narrative, graphically, or a combination of the two.

(I) Amounts actually paid will be the amounts from the SCT with adjustments for changes to pension and equity value. Pension amounts would be adjusted by deducting the change in pension value reflected in that table and adding back the actuarially determined service cost for services rendered by the executive during the applicable year. Equity amounts will be considered “actually paid” on the date of vesting, using the Fair Value (usually Black-Scholes Value for options or Intrinsic Value for full value awards) calculated on that date.

What’s this mean to you?

1)     Private companies.  It means very little. Maybe several years from now some of this will trickle down, but for now this may be another advantage of staying private.

2)     Smaller public companies. First, look here to see if you qualify. If so, you will have at least a couple of years to transition. Even then some of the most onerous stuff won’t apply to you.

3)     The rest of public companies. You will still have some time to transition, but you also have 60 days to submit a comment letter.  Will creating, managing and communicating a peer group for this be difficult? Let the SEC know. Do you think the amount “actually paid” is a reasonable method for valuing compensation? If not, send the SEC a comment letter.

4)     Do you calculate TSR differently than the SEC? If so, how will you communicate the different methods to your executives, or will you change your plan(s) definition(s) for future periods?

  • (The SEC 201(e) calculation for TSR is “measured by dividing the sum of the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and the difference between the registrant’s share price at the end and the beginning of the measurement period; by the share price at the beginning of the measurement period.)

5)     Are their peer groups your peer groups? It is pretty unlikely these groups will be the same. We don’t yet know if this rule will impact the peer groups that companies use for their actual plan design and pay comparisons. We do know that many companies are unlikely to agree with the peer groups that may be provided.

 

So, this is an important update. How will this change the way your company looks at executive compensation (if at all)?

P.S. The full text (all 129 pages) of the SCE proposal can be found here: http://www.sec.gov/rules/proposed/2015/34-74835.pdf

Dan Walter is the President and CEO of Performensation a firm committed to aligning pay with company strategy and culture. Do you want to be a better business leader? “Everything You Do in COMPENSATION IS COMMUNICATION” was written by 3/8th’s of the Comp Café, Dan Walter, Ann Bares and Margaret O’Hanlon. It’s a practical guide to improving the communication process (with how-to worksheets). Dan has also co-authored of several other books you may find useful including “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives.” Dan welcomes connections on LinkedIn. Follow him on Twitter at @Performensation and @SayOnPay.

Profit Sharing Incentive Plan

Question (orig. at WorldatWork): 

Do you have a profit sharing incentive plan?  If so, what % of eligible wages does an award equate to?  What % of your company’s profit does the pool represent?

Any info would be appreciated.  Thanks.

Answer by Dan Walter

“Profit Sharing” is a term that is often misunderstood.

On one hand you may mean a formal, tax qualified, profit-sharing program that is subject to ERISA requirements etc.

On the other hand you may mean an STI or LTI plan that use profit amount, profit growth, profit margin or a similar metric, or combination of metrics to deliver cash or equity compensation.

The first type of profit-sharing is subject to some very well-defined rules, mainly via the IRS.  These rules tend to drive some similarity in the plans across companies.  But, these rules often are viewed as too difficult to deal with and this results in less companies using these plans than you might expect.

The second type of plan does not provide the tax advantage, but it is far more flexible in design, features and eligibility.  These plans are fairly common and there is not a lot of commonality between companies (nor should there be).

I am happy to chat with you about either type of plan or, if you provide a bit more detail here, I may be able to expound on this answer.

Baking is to Science as Cooking is to Art, Pay = Both

Stickman Baker Cook

Baking = Science, Cooking = Art, Pay = Both

Many great bakers are average cooks. Many great cooks avoid baking all but the simplest of things. Baking requires precision in measurement and actions. Even a small mistake can result in an inedible mess. Cooking requires creativity and flexibility. The best outcomes are usually a result of unique twists that match the food to the audience. Compensation requires you to be both a baker and a cook.

A client recently had a member of their board ask that a new analysis be done for a new executive in exactly the same way as performed for a prior executive a couple of years ago. The company is unique in industry, location and compensation philosophy. Its peers have continued to grow, change and even disappear over time. It is simply not possible to replicate the exact recipes and processes used to create the numbers from years ago (or even more than a few months ago.)

Executive pay is often more like cooking than baking. You are beholden to the ingredients that are fresh at the time you perform the task. Data sets, like great veggies or herbs, are often only available in small quantities at certain times of the year. Some professionals thrive in this environment, loving the swirl of possibilities and the frequent changes that must still result in predictable success.

Broad-based pay can often be more like baking than cooking. The data sets are larger and less volatile. Like flour, butter and other less perishable ingredients, you can expect some level of consistency throughout the year. You have a specific recipe that you can follow with only perhaps a replacement of the fruit that goes in the pie or muffin. Many professionals live for this organization, process and exactness.

What we seldom recognize is the precision required to create great art or the creativity required to make a recipe better.

Cooks must practice new things all the time while being flexible with both the ingredients available and their patrons’ tastes. They must learn flavors and techniques to build meals from a wide range of disparate sources. All of this practice must come together at the time of execution so that quick decisions can be made and executed without fear or hesitation. Differentiation is easy and variety allows for many different choices at every meal. Execution is often as much a matter of taste as it is technique. Incentive pay professionals are chefs.

Bakers must work and rework recipes, sometimes for years, to create something that is completely new and confidently repeatable. Differentiation is hard since the ingredients are so similar. Since there are also fewer opportunities for baked goods in any meal, the final product must have wider application and appeal. Execution is about rules and techniques first and taste will generally follow. Board-based pay professionals are bakers.

In reality, most compensation professionals do a little of each of these nearly every day. They are less likely to be as specialized as the pastry chef at a five star restaurant and more like the head chef at the local family café. In other words, you are right. Your job is probably harder than most people realize. When you do it right, most people simply get what they expected all along. When you do it wrong it is obvious to everyone.

In your current position do you identify more as a baker or cook? Which is more enjoyable for you?

Dan Walter is the President and CEO of Performensation a firm committed to aligning pay with company strategy and culture. You may want to get a copy of “Everything You Do in COMPENSATION IS COMMUNICATION” written by Dan Walter, Ann Bares and Margaret O’Hanlon of the Comp Café as a practical guide to improving the communication process. Dan has also co-authored of several other books you may find useful including “The Decision Makers Guide to Equity Compensation”, “If I’d Only Known That”, and “Equity Alternatives.” Dan welcomes connections on LinkedIn. Follow him on Twitter at@Performensation and @SayOnPay.

The ABCs of Communication ROI

Stickman ABCs of ROI

The math of compensation communication budgeting

It’s time to talk about communication. That means it’s time for everyone to get out their calculators (or spreadsheets) and do a little math. (Woohoo! We get to do math today!)

I meet very few compensation professionals or members of executive management teams who strongly believe they are doing a good job communicating their pay programs. And yet, companies continue to short change communication budgets even though we all know that “Everything You Do in Compensation is Communication.”

After years of working with all types and sizes of companies, I have come up with a little Continue reading

“I wish this book had been around decades ago…it’s a must have”

Peggy Andrews, PhD, SPHR, Lecturer in Management & Leadership Curriculum Coordinator at Hamline University School of Business recently reviewed “Everything in Compensation is Communication.” the new books from pay exerts Dan Walter, Ann Bares and Margaret O’Hanlon.

Here’s what Ms. Andrews had to say:

“I wish this book had been around decades ago when I started my career – it’s a must have..and one I recommend to all my management students”

“In my 20+ years of experience in HR and Organizational Consulting, I have seen 3 typical reactions to compensation discussions depending on who is leading the charge.”

  1. Overexcitement about the mysteries of spreadsheets and micro-changes in numbers (Finance);
  2. Order-taking (HR Administrators);
  3. Feigned boredom as a cover-up for nervousness/fear (Unskilled Managers and HR Staff). 

The result is that far too many organizations have legally compliant and operationally effective pay plans, yet are missing out on an incredible opportunity to use compensation dollars to communicate their business strategy to employees and build organizational performance.  Thankfully Bares, O’Hanlon and Walter have come to the rescue with this clever book that demystifies the process of designing and implementing a compensation program that will orient and motivate employees around organizational strategy and performance objectives.  With deceptive brevity and wit, this easy read provides a comprehensive outline that shows HR Professionals and Managers step-by-step how to engage stakeholders, identify the real compensation challenges and opportunities in your organization, bring employees into the conversation, and measure the effectiveness of your program.”

ewdic book quote 2b 20150217

Woulda, Coulda, Shoulda: An Incentive Compensation Story

Stickman woulda coulda shouldaNot so long ago in a town not so far away, there was a growing company. Inside that company, worked a compensation professional (“Yolanda”) who juggled many projects. Not the least of them was the creation, design and management of the company’s long-term incentive program.

Yolanda was very good at her job. She planned her year well and executed with the precision of a heart surgeon. She brought creativity to her communications and structure to her base pay and Continue reading

Quick Fixes May Not Be Good Fixes

Stickman King TutRecently, it was reported that employees at the Egyptian Museum in Cairo accidentally broke the braided beard off of the iconic burial mask of King Tutankhamen. Even more disturbing is that the beard was quickly glued back on using common epoxy. To make matters even worse, the epoxy got on the face of the mask, leaving marks where it was hastily scraped off. Curators at the museum said they were told to make the repairs quickly since the mask is one of the main attractions (revenue generators) for the museum.

I have seen many broken incentive plans similarly repaired. Incentive plans are tightly Continue reading