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

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

The Mind Heart Body and Spirit of Total Rewards

Stickman Mind Heart Body SpiritWorld at Work defines Total Rewards as:

“All of the tools available to the employer that may be used to attract, motivate and retain employees. Total rewards include everything the employee perceives to be of value resulting from the employment relationship.”

We have invented more tools with corresponding rules, regulations and variations. And our employees have become more diverse. Explaining the totality of Total Rewards has become increasingly difficult for many in and Continue reading

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

I Was Wrong. Pay for Performance Doesn’t Work!

Stickman I was wrong p4p doesnt workYou may want to disregard nearly everything I’ve ever posted here. As it turns out, I may not know anything about pay for performance. Recently, I brought someone new onto my team. This guy seemed like a great match for the position. He’s good looking, has a strong intellect along with a very unique skill set. He is exactly what we needed on the team. But now, a few weeks in, I am realizing that he is a narcissist. You may even call him a crybaby. The frustrating fact is that he simply isn’t motivated by any of the P4P Continue reading