Pay for Performance Lessons from the Tour de France

Stickman Tour de France P4PThe 2014 Tour de France is 2276 miles (3664 K). It is a grueling race that covers 21 stages that include mountains, hills and flats. The “winner” is the individual with the lowest total time at the end of the final stage. How they accomplish this goal is very enlightening and applies directly to pay for performance and corporate culture.

Every rider is part of a team. Every team has a designated leader. The leader is generally very good at multiple disciplines, while other team members may have specific skill sets that are important during different stages. The final trophy is presented to an individual, but no one rides alone.

Like the employees at most companies, many of the team members work hard but are fairly anonymous. And like corporate executives, the lead rider gets most of the glory, money and fame. The top riders on each team can make more than $1,000,000. The average salary is around $200,000 and there is even a mandatory minimum wage of $52,000. In addition to these amounts, there are performance bonuses, appearance fees and other considerations. So, in general, the riders are paid much like employee of most companies.

Individual performance is lauded. The specialist riders have specific goals throughout the race. The sprinters, hill climbers and young riders all get recognized from day one through the race completion. They compete in races within the race even as they help their teams.

We all know it can be hard to see how each employee contributes to the success of a company. The Tour de France is great because the teamwork involved in winning the Tour can be easily seen every mile of the race. The teams mostly ride in groups to make the race easier on the team leader. They protect the key players and they allow for a team to control the pace of the race. When everyone is riding well it is similar to an effective software development or manufacturing team. It’s when things go wrong that we see our real pay for performance lesson.

When an average rider crashes or has a mechanical problem, they can quickly fall behind the peloton (or pack of riders). The lower level riders may get help from a teammate or may be left to work their way back to the team. But, when a team leader goes down, a multi-person escort immediately falls back to ensure their path back to the front is as easy as possible. Yes, this is the guy who is paid the most, but he is also the guy who is most likely to get every team member a win. There is a team manager riding in car who decides who gets help and how much help will be given.

Rather than build an all or nothing environment where an individual must perform perfectly or be left by the roadside, the teams understand which individual gives them the best chance to win. As long as the team leader provides them with the best chance in the long run, the team will do anything to support them. As pay for performance becomes the new normal this is a lesson we must all remember.

Designing a plan that pays all or nothing creates many issues. It magnifies a single failure into what may seem like complete failure. It can leave an individual feeling like they have no support to get back to the front, even when they provide the best chance for everyone else to win. It can inspire people to display bad behaviors. The leaders may “bend” rules in order to win. The next layer of players may be inspired to sabotage the leader to capitalize on their own opportunity. In long-term incentives, the focus on the end of the race can distract from the day to day strategy and tactics required to stay in contention. In short, providing for small wins and measured success along the road is a far more effective way to win a race.

The Tour’s focus on the team work, interim goals, long-term planning and execution make it a great example of how to do many things right. Of course, it has had many ignoble problems over the years, which also shows the need for great oversight and management. Let’s discuss “all or nothing” plans that have worked or failed in your career.

How to reduce dysfunctional peer competition among managers

Question:

I oversee the HR function in a large Process Consulting/ Outsourcing firm. We plan to grow aggressively in near future as our Fortune 500 clients recover from the downturn and initiate new projects.
Our company culture is very performance driven. As we promote our A-players to managerial positions to handle growth, we want to engender in them a spirit of cooperation. We feel this will help us win/ handle more business by coming up with innovative solutions for complex client needs.

How can we accelerate collaboration/ co-operation in these new managers who come from high-pressure single contributor roles?

Dan Walter’s Answer

This is both a simple and complex issue.  Simple, because providing a system of direction and compensation toward a common goal is a must in this situation.  Complex for many many reasons.

The four main considerations of a pay for performance system are:

1) Metrics

2) Goals

3) Communication

4) Human Nature

Good metrics require an understanding of your strategy and culture.  They also require evidence, and not just anecdotal, that the metrics either link to driving performance or are the result of performance.

Good goals require good, and honest, modeling.  Best Case, Worst Case, Mathematically Modeled and Gut Expectations must all be combined to create a range of reasonable and acceptable goals.

Communications are what makes sense of the above. There are many paths to the top of each mountain.  Your individuals and teams may be climbing from different directions but they must all understand that they are headed to the same location. Early climbers must understand that leaving a well set path helps everyone succeed.  Slower climbers must understand that they may need to carry more supplies to provide the early teams with replenishment when they must rest.  We sometimes explain the entire process in the context of the ecosystem of the industry that the business supports. It helps people understand things from their day to day perspective. Imagine a brewery where everyone component of pay and reward is linked back to the types of things the company produces, the people who produce them and the process used to produce them. Even the language used can be similar.

Human Nature is the biggest factor. The program must be able to have multiple aligned and intertwined threads that allow you to explain it from many perspectives. They importance and impact of the program cannot be explained from your perspective and result in any level of success.  It must be able to resonate with each individual.  This is especially true in a professional services organization.  You people are solution providers. They are idea people.  Let them help you craft your solution. If they are involved they will feel ownership. If they are involved it will be hard for them to explain how they “would have done it better.”  This will make the process harder at the start, but must easier over the long run.

A couple of other thoughts:

First, every A player you have is not necessarily suited to be a team leader.  You must be willing to accept the fact that some of your best performers will likely best serve you as individual performers.  For these people providing metrics and goals that appeal to the individual nature (or self-interest) is a must. The onus will be on you to ensure the metrics and goals also align with, or support, the broader group and company goals that apply to team leaders.

For those A players that have the skill set or potential to be leaders of groups you must take the time to clearly communicate what is meant by a leader in your culture. Leadership may come naturally to some, but the combination of leadership and your culture will come easily to almost no one. Give them a strong foundation and follow it with consistent and frequent messaging, additions and clarifications.  Even professional athletes need to be reminded on a regular basis of the “right” way to do things.

Most importantly you must be able to show how individual performance ties to group success and how group success ties back to individual rewards. Be honest and critical when you evaluate your structure and pay approach. Be willing to change components that worked well when you were smaller and more individualistic. Understand the pieces that got you where you are that will also stop you from moving to the next level of your evolution.

We have found that a good approach is to create a group of stakeholders from a level below the top of the company.  Your top leaders are likely to be successful with the old approach and since it worked for them, it may be hard for them to see a different/better way. The next level down is where your strivers exist. This is often where your “culture carriers” make their home.  Most importantly this is the group that will provide the idea that will take you to the next level.

Read the original question on MentorsGuild

The Best Laid Plans of Mice and Compensation Professionals

stickman best laid plans of miceIt’s hard. Sometimes it’s very hard. You took the classes. You studied the facts. You brought in great outside experts. You have determined the solution. You are the expert and you know what you are doing. How can they say no?

“In preparing for battle I have always found that plans are useless, but planning is indispensable.”
Dwight D. Eisenhower

My job is to go into a meeting with the head of HR, a CEO or Board with what I believe is the perfect solution to their problem. “You should get rid of the old XYZ plan and put in a new ABC plan.” Occasionally I leave those meetings excited and ready to act on a very different solution. “Let’s leave the XYZ plan alone for now and work on adjusting base pay and equity for this key group of employees who are critical to the next six months of our success.”

As an HR or compensation professional, even the best plans require the agreement of others. Some of you have taught sessions on how to get a seat at the table. Many have taken courses on how to negotiate, be persuasive or sell ideas. Sometimes that extra chair just doesn’t fit in the room. Sometimes no matter how much evidence you have to support your idea, it simply isn’t going to happen.

This does not make you a failure. It does not make your idea bad. It doesn’t mean that you need to forget your great solution or leave it in the rubbish. It also doesn’t mean that you are done. It is frustrating, but it is nothing more than a temporary setback.

The best plans usually solve more than one problem. An effective approach after losing the first round of discussions is to find the most important (or well-received) nugget in your “big plan”. Polish it up like a diamond and go back in with the idea they can’t refuse.

Even a little help is better than demanding that you get everything you want. If you can’t get that incentive plan budget for the entire staff at least make sure you get something for the group of people without whom you will suffer or fail.

We plan for the opponent we expect, but we must fight the opponent who shows up.

Maybe your board won’t support the mission critical solution your have devised. Instead of waiting until next year and trying again, consider recommending Plan B or Plan C. Have an idea of what these might be, but prepare well enough that you can suggest potential alternatives quickly and thoughtfully.

Instead of getting approval from the top down, you may have similar issues getting buy-in from the ground up. Your employees may not be enamored with the “motivational pay for performance plan” you rolled out with great fanfare. Your sales people may find that the new commission program you designed to fix their complaints about the terrible old plan is even worse.

We often discuss communications as a solution to these kinds of problems. Better communication is always a good place to start, but even best communications can’t solve every problem. Don’t be afraid to regroup, retool and try a smaller, different or less exciting idea. Even the best-laid plans may be useless once the real fighting starts, but even the smallest solutions move you forward, regardless of the plan.

Resources and thoughts on recurring stock option grants?

Question:

I’m currently working on a project for a high-growth, 500 ee company in the tech sector, would like to implement recurring stock grants as a retention strategy. Need information on best practices and creative ideas around vesting schedules, grant timing (annual, bi-annual, promotional, etc.).

Any resources or anecdotal input would be terrific.  I’m familiar with NASPP but am not sure how granular their data cuts are for private and pre-IPO co’s.

Dan Walter’s Answer:

Equity compensation plans are a specialty of mine. As far as data goes for a company your size, in the tech sector, I would probably start with Radford and Culpepper for the granular “comp style” stuff.  The NCEO also has some good information.

The NASPP is likely to have more information for public companies that private, but the details they have regarding features such as termination rules, exercise types and accounting/taxation issues is very useful.

All of that being said, creating a recurring grant program is far more about your companies goals and compensation philosophy than it is about market data. Market data has a difficulty incorporate all of the unique details that make equity compensation compensation programs work for some companies and fail for others.

Most of the survey data you find will show that companies of your size use stock options, those stock options have a four year vesting schedule (25% annual vesting or 25% at the end of the first year and monthly thereafter). They will show values that are related to the price at the time of grant, rather than what is expected to be realized or planned to be achieved.  Data won’t show much about the current trends to RSUs as you get closer to an IPO. The data won’t show the increase in performance unit plans for management and above. The data also won’t show the provisions around change in control or termination provisions.  Most importantly it won’t show WHY the each company made each decision, or whether the decisions turned out as expected.

I would be happy to have a quick chat to point out some of the key considerations regarding putting a program like this in place. I can also direct you to some specific resources once I understand better what your objectives are.  Feel free to shoot me a message, or give me a call 415-625-3406, or contact me via email (dwalter@performensation.com)

I am looking for specific information on design considerations and options/practices in developing a long term incentive plan for a privately held company. Any anonymous examples would also be helpful. Your assistance is greatly appreciated!

Dan Walter’s Answer:

I think I can provide some help. This is a bit of a specialty of mine.  First I will need some clarification. “Long-term incentive plan” is a broad term. Do you know if the intent is to provide a cash or equity compensation plan? Some of the design considerations overlap, but many are unique. The resources I have listed below are focused on equity compensation. If you are looking to put a cash-based LTI in place please let me know and I will post additional resources.

Here’s is a link to initial considerations for en equity compensation plan for a private company (free download): http://www.slideshare.net/performensation/performensation-private-co-template-top-11-considerationsemail

I would also be happy to send you a document titled “Equity, Ownership and Related Incentive Compensation Instruments for Private Companies.” It is three pages long and provides an overview of Restricted Stock Shares, Restrocted Stock Units, Phantom Stock, Stock Options (ISO and NQ), Stock Appreciation Rights, ESOPs, Direct Purchase Plans and more.

If you are looking for more detailed information I would recommend The Decision Makers Guide to Equity Compensationfrom the NCEO. It provides detailed information on design, tax, legal and other issues for a wide array of equity compensation instruments. Full disclosure: I am a co-author of this book.

If you would like to provide additional details on your needs I would be happy to provide additional resources.  Of course you can always contact me directly by phone (415)-625-3406 or email dwalter@performensation.com

How Relative TSR is a Bit Like Cough Medicine – a bedtime story for executive compensation professionals.

Stickman RxTSR is Cough MedicineOnce upon a time in a land pretty darned close to where you live…

Little ExecComp wasn’t feeling well. Whatever ailed him had been lingering for a long time. While sometimes he felt great, other times he coughed so badly he feared he would be quarantined. His mom and dad, Mr. and Mrs. Board, had tried a long list of remedies including herbal equity baths, expensive cash showers and hot packs filled with perqs and deferred release solutions. Nothing seemed to work.

One night while watching late night TV, the Boards saw an advertisement from a guy with a Continue reading

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

If Shareholders and Executives Explained Executive Pay as a Meal

Recently a lawyer mentioned to me that he had decided to utilize more basic executive plan designs, even when they might not be as good a fit for a specific client. When asked to explain he said that it was too hard to communicate complex plan designs when board members and shareholders demanded something they could understand quickly.

He said the ironic part was that shareholders then complained when executive pay was too high, or ineffective at retention, or paid out large amounts at severance. The disconnect between what was needed and what the shareholders understood was just too big.

Now, of course, this isn’t the case at every company. But with there being so many issues and details to review during proxy season, a simple executive compensation plan is certainly attractive. And, simple approaches are often more than enough to accomplish the goals of many companies. Even when pay is simple, the misunderstanding between shareholders, boards and executives can persist. Perhaps its just a matter of perspective. I would love to know what you think about this issue.Shareholder Executive Pay Meal Infographic

 

Is Company Culture Killing Your Pay for Performance?

Stickman Culture Killing P4PI just returned from a conference where “culture” was the buzzword. Over and over industry professionals stressed that your compensation plans must be designed to match your culture. But, what if your culture is exactly what is killing your pay for performance?

In June, nearly a year after the crash of Asian flight 214 in San Francisco, the NTSB will hold a hearing to determine the cause of the deadly accident. But, we already know much from the interviews of the co-pilot Continue reading

Small Companies Deserve Compensation Excellence

Small Company Compensation-imageOften your HR person is also your benefits, recruitment, training, organizational development, problem resolution and party planning resource. Even though pay is just a small part of an HR professional’s expertise, your company should have access to the same experience and expertise as the larger companies you compete with. Why should your company be at a disadvantage?

Consider the following:

Liz, a CEO at a quickly growing company wants to make sure her company is paying its staff competitively. Her VP of HR / Office Manager, Tom, has been great at his job, but is swamped with other critical projects. Tom has also told Liz that he hasn’t had a ton of experience in dealing with compensation issues.

The company wants to pay its staff fairly. It also wants to make sure that pay levels are in line with the returns delivered to its owners and investors. There have also been rumblings that Continue reading