LinkedIn, Microsoft and “Stock-based Compensation”

I just had someone send me an article titled “REASON BEHIND THE MICROSOFT-LINKEDIN DEAL”. The premise behind that article is that stock-based compensation (the accounting term for this piece of the compensation pie) was a major driver behind LinkedIn’s decision to be acquired by Microsoft. LinkedIn did use stock-based compensation more heavily than many companies, but that alone would not be a good reason to desire an acquisition at a value significantly less than the 52 week high. Stock-based compensation includes virtually any type of pay where the individual gets ownership in the company at some discount to the value and it is eventually owned in full by them. In order for stock-based compensation to factor into the decision at all, there would need to be Continue reading

How Will The New Overtime Rules Affect You?

34899216_l (2)Is your mind already racing about how the new overtime regulations will affect your company? The media is buzzing about today’s release of the U.S. Department of Labor’s new rules regarding overtime pay.  The recent DOL publication highlights the following changes: Continue reading

What are current (2016) best practices for employee stock option programs for US pre-IPO startups?

Question: (org. on Quora)

Answer (by Dan Walter)

Hi Alex.  Thanks for the A2a.  And thanks to Shriram Bhashyam for also recommending me.
The first thing to clarify is the difference between “best practices” and most common practices. In the realm of equity compensation the most common practices are seldom the best. I will try and cover a bit of both.
“Early Stage” has also become a term of art in many cases. In this case I will write from the perspective of a company who may have up to a medium sized B Round. Your company may certainly fall into a different category.
Lastly, before I get into details, please realize that essential ANY equity compensation data is wrong at some fundamental level. Since you are unlikely to know how another company has designed their plan, what their investors expectations are, what the releasing timeline and potential value at the time of liquidity and whether the liquidity event is focused on IPO or acquisition (*and a series of other potential factors), you may be comparing apples to hotdogs, or plastic cups. (A list of the 11 reasons your equity compensation data is wrong)
The most common practices in the Silicon Valley (another assumption I am making, since these rules may not apply to you if you are located elsewhere) have been generally boxed in by VCs over the past couple of decades. The VC sway on startups is so strong that many companies (and many VCs) don’t realize that there may be other ways.  In summary:

Continue reading

Sam Reeve to Cover 4 topics at BLR Thrive 2016!

Performensation is pleased to announce that Sam Reeve, Performensation’s Executive Vice President of Consulting Services, will be presenting on four topics at the BLR Thrive 2016 annual conference, May 12-13, 2016 in Las Vegas!

Sam is a well-regarded compensation leader with broad and deep experience across many industries and virtually every size of company. Come to Las Vegas and spend a little one on one time learning more from Sam.

Sam’s presentations will cover:

The Cutting Edge of Compensation: Critical Trends of 2016 and Beyond

Selling the C-Suite on Your Compensation Plan: Secrets to Securing Executive Buy-In

Total Rewards Tactics for Motivating the Multigenerational Workforce

Sales Compensation Strategies for Retaining Selling Stars

 

When will the new 2016 GPS Stock Options become available to view?

Question: (org. on Quora)

When will the new 2016 GPS Stock Options become available to view?

Answer (by Dan Walter)

The updated 2016 version of the GPS Stock Options document was released yesterday, January 27, 2016, in draft format (GPS options DRAFT.pdf), and is currently available for Public Comment through February 17, 2016. The final publication, which will include public comment, is expected to be available towards the end of March 2016. Please take a look and provide your feedback. Additional details can be found at:  https://www.scu.edu/business/cepi/gpsproject/public-comment/

How does HR contribute to an organization’s success?

Question: (org. on Quora)

Answer (by Dan Walter)

Whether you have an HR professional or not Human Resources is likely the single greatest contributor to your organizations success.

First. Unless your company is really large, HR controls more of your revenue than any other department.  At small and mid-sized company as much as 65-75% of revenue is used to pay staff and provide their benefits. This means that even small improvements in HR can result in material budget increases for other departments. Improvements in this area are often simply viewed as controlling pay or limiting staff. But, even better improvements may be gained by improving the perception of pay or creating a work environment where people actually do their best, instead of operating at three quarters of their potential.

Second. The best strategy and tactical planning in the world cannot be well executed by incompetent, uninterested or unmotivated people. Human Resources first goal is making sure you have the right people. Without them you will fail, 100% of the time.

Third. They protect you from the problems that come from the mercury poisoning of disgruntled employees and lawsuits that come (mostly) from disgruntled ex-employees. Whether it is mediating disputes, motivating personal and professional growth or simply documenting and enforcing policies that keep people from becoming injured, a good HR department has your back, by being out in front of things.

Fourth. Great HR build your company culture and communicate your company strategy. (poor HR departments may not do either.) Your company culture or personality drives employee (and often investor) perceptions. Perceptions are reality for most people. Every company’s strategy is clear to its founders. But communicating this strategy and how it will become reality requires a broader vision and understanding of human dynamics. The task of communication usually falls to HR. So your HR department is in charge of how your employees define reality and how you make it better.

This most could stretch many pages. It should also be noted that failure in each of the above items can directly lead to your company’s failure or stagnation.

What is the normal RSU policy for private companies? I recently got an offer from such company and they say that if I work for x years and I leave, I would get x more years to sell the RSUs otherwise they would expire. So if I leave after 1 year and no IPO in the next 2 years, I don’t get anything.

Question: (org. on Quora)

Answer (by Dan Walter)

The most common company policy for RSUs follows the basic structure below:

1) Award of RSUs, generally to be settled in stock when they vest (some companies convert the RSUs to cash)
2) Vesting schedule of 3 years (annually increments or cliff vested) (this period can vary widely).  Vesting is may also be restricted to ONLY occur after a period of time AND a liquidity event like and IPO or Change in Control. — this is becoming far more common.
3) When RSUs vest they are “converted” to real stock and delivered to the participant (or held in electronic book entry).
4) When the individual leaves the company the unvested RSUs are forfeited back to the company. The vested RSUs are now shares (usually of common stock) and the individual is therefore a shareholder.
5) Most companies let people who hold shares keep the shares.  They also usually restricted any transactions so the shareholders have little or no liquidity until a major event.
6) It is uncommon, but not unheard of, for companies to take back vested and delivered shares.  When they do they usually pay the individual the current market price.

NOTE:  There are a ton of exceptions to every single statement above.  The statements above may not represent the best strategy for every (or any) company. Equity compensation is Variable, Variable, Variable, Variable (and up to three more variables) compensation. The type of equity, the number of shares/units/options/etc., the price at the time granted, the price when vested, the currency at the start and end, the vesting schedule and several other components can all be variable within a single award. “Normal” is often not synonymous with “best”.

What are the arguments for establishing long term incentive plan metrics that are different than those tied to the annual incentive plan?

Question:

What are the arguments for establishing long term incentive plan metrics that are different than those tied to the annual incentive plan?

Answer (by Dan Walter)

Great question!

There are several arguments for clear differentiation between the metrics used for annual incentive plans and LTI plans.

1)   The first concern is that overlapping metrics can create too much leverage for a specific objective, or tie too much risk to a potential goal.   Ex. When your short term goals are revenue and profit margin and your long term metric is EBITDA you are essentially incenting the same thing twice.  This may result in people no longer focusing on other critical factors.  And if there is a big swing up or down it may blow up your compensation strategy and budget.

2)   Another concern is that certain metrics are more valid and less volatile over several years. The wide swings in some metrics from year to year may be good when getting people to focus on the immediate horizon, but they may not align with a compensation philosophy that is intended to align employee or executives with shareholders.

3)   Some metrics are the result of a longer term cycle of Decision, Action, Behavior, Result. Focusing people on the entire cycle, rather rewarding each component individually may get them to see the big picture in a new way. Example: Company realizes its internal software for supporting the business is out of date and needs to be replaced.  The process requires finding the right replacement, getting it built or set up, rolling it out, then managing the tool and users to ensure they get the most out of it. Without a long-term program for the whole process you may get a series of results that take down a hole of failure.  Imagine: Decision to get new software is delayed because there is not short-term metric for it this year. The next year the decision to get new software controlled by a short-term budget goal that must be met, even though the software will be a long term investment.  The cheaper software requires far more work in year 2 or 3 to get installed correctly and it conflicts with the annual incentive plan in that year, so corners are cut to get a ”simpler” version put in place. The simpler version turns out to be less effective that the old software (which you are still using). A partial roll out occurs and is immediately followed by outcries that the new software is terrible. The team meets and decides to start all over again.  In the means time 4 or 5 years of annual incentive payments were made because each small piece seemed to be achieved, but no concept of the successful long-term deliverable was included in the pay program.

4)   Certain types of LTI programs (example:  equity plans) have a far different impact than short-term plans. These plans also rely on metrics like stock price that are built into the plan but not directly controllable by the individuals. Metrics for these programs need to account for the different “nature” of the plan and compensation instrument itself.

eHarmony Gets It! It’s About Professional Relationships

12 pillars sunset square (2)In today’s news, eHarmony announced that they are planning to expand from personal to professional matchmaking. Performensation has long held that finding the right people to work for your company is attuned to online dating. Like finding your true love, every employee wants to work at a company that “gets him or her”.

In the past, many employers held the power position. Companies believed that if they were providing jobs that paid a fair wage with decent working conditions, then people should be happy to work for them.  In today’s world, this is no longer enough. Just like Continue reading

Sales Compensation in a World of Solutions

Sales Comp in a World of SolutionsMany companies today know that customers are looking for more value. Haven’t you found that selling a simple product or service just doesn’t feel like “enough” anymore? Are you wondering how to adjust your strategy to increase your future success? With technology becoming increasingly complex, your customers need additional help understanding how things fit together.

As a case in point, Continue reading