Our Nearsighted Friends and Us

12022015 6a00d83451df4569e201b7c7f4012c970b-200wiI have a brother with 20:15 vision. For those of you normal humans, this means he can see things clearly in the distance that the rest of us see as only a blur (if at all). I have a sister with, to be kind, worse vision. Like many people, her vision imperceptivity worsened over decades. She began to think it was normal to see street signs only as she came close to them. It did not seem odd that she depended on her experience rather than her senses. And, simultaneously, most of her friends were also slowly losing their ability to see into the distance so they didn’t notice anything changing.

Perhaps the world of executive compensation and all of our friends have slowly become nearsighted.

A recent New York Times Continue reading

You are Not Lebron James (or Facebook, or Google)

6a0134836082f8970c01bb088b1ce3970d-800wiLebron James has just become the youngest person in NBA history to score 25,000 points in his career. He is not yet 31 years old. You are not Lebron James. It is an obvious fact. You are not 6’8”. You are not 250 lbs. of muscle. You cannot dribble a basketball while running faster than your neighbor being chased by a bear. You cannot leap 3 and half feet into air and gracefully land with a smile. You haven’t spent your entire life optimizing your skills and talents to be the best basketball player in the world. You know this.

Yes, you may be about 31 years old. Maybe you weigh 250 lbs. You might even be 6’8”. Even if these things were true, it would be a mistake to directly compare yourself to Lebron. Lebron is fun to watch, but at no point would you fool yourself into believing you can do what he does. Even those players who contend with him for the title of “best basketball player” don’t try to do things the way Lebron does.

Your company is also not Facebook or Google. Your product is Continue reading

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”.

How have you seen Stock Options or Performance Rights grants change for employees from Pre-IPO to Post-IPO?

Question (Orig. on Quora):

How have you seen Stock Options or Performance Rights grants change for employees from Pre-IPO to Post-IPO? What are the triggers and how have the amounts differed? Building out our long term comp strategy. Thanks!

Answer (by Dan Walter):

First, it must be clarified that this answer refers to “pre-IPO” as companies with a realistic chance of an IPO, not simply any company (tech or not) that is not currently publicly traded.  This distinction is important since it plays directly into many of the design goals and trends for equity compensation. I can cover non-pre-IPO companies in a separate post)

Second, the difference between pre-IPO companies and so-called “unicorn” (>$1B) pre-IPO companies is also a significant differentiator in equity plan design and use.

Stock Options:
For most pre-IPO companies these are fairly basic. MOST TYPICAL… They may be ISO or NQSO. They are granted with a strike price equal to the IRC 409A) compliant Fair Market Value of the companies common stock.  They vest over time. Usually over 4 years. Sometimes 25% each year, sometimes 25% at the end of the first year and monthly for 36 months after that. We are also seeing more grants with a secondary event-based goal that has to be met before final vesting takes place (typically Change in Control). Leaving the service of the company usually ends up with the individual losing all unvested options and having a limited period to exercise vested options (usually 3 months for termination in good standing, 0 for cause, 1 year for death or disability). Grant size is generally determined as a % of outstanding shares for early employees and some formulaic number of shares for later employees. Exercises, if allowed before the IPO, usually require cash paid directly by the optionee to the company. The optionee is no longer an employee the cash payment may also include taxes due (since withholding may be difficult or impossible).  In a small percentage of companies still optionees are allowed to exercise unvested optionees and hold the remaining shares until they are vested.

So what is different for post-IPO options?
Often not much. The grant price becomes driven by the stock price traded on the open market (usually closing price on the date of grant). Vesting is generally the same schedule as pre-IPO (although many companies do away with allowing exercise of unvested options). Vesting for post-IPO seldom requires any trigger other than time. Leaving the service still ends up with the option losing unvested options and having a limited time to exercise vested options. GRANT SIZE: once a company is public grant size is most commonly driven at least partially by the black scholes value of the options at the time of grant. Values are less likely to be based on percentages or fixed formals and more likely to be based on compensation dollar values. Exercises become much easier with the addition of same-day sales and net settlement methods for payment. But, with public trading comes insider trading policies, black-out windows and, for some officers, SEC filings for nearly every transaction.

Back to pre-IPO companies
But, companies that stay private for a long time AND have a lot of employees AND grant a lot of equity may find themselves running out of stock options to grant.  This is one of the two biggest drivers for the pre-IPO move to Restricted Stock Units (RSUs). The other major driver is the fact that most options allow for a voluntary exercise transaction. These transactions create shareholders.  Too many shareholders means the company must file information with the SEC that may be available to competitors.  So, companies move to RSUs and restrict the vesting event to occur only after a period of time (usually at least 3 years) AND after the company choose to file publicly.  This can simplify the process for the company, but removes a lot of flexibility and leverage for the individual.  But, it still beats giving no equity at all.

More recently companies have been granting RSUs with performance-based vesting (most often also requiring a period of time to pass as well, typically at least a year).  Performance criteria for these pre-IPO performance-based RSUs are usually focused on internal financial and operational metrics.  Companies love metrics like EBITDA, but we recommend metrics that are more closely aligned with the jobs people do and decisions they make, rather than something like EBITDA that is a result of many things, but may not be understood or feel like it can be personally impacted by individuals.

Performance equity is still relatively uncommon in pre-IPO companies, except officers, but it is a growing trend.

So what about Public companies?
Public companies who moved to RSUs pre-IPO usually stick with them after the IPO.  Most of these companies also add and ESPP (Employee Stock Purchase Plan) that is focused on the rank and file.

At the time of IPO most companies create entirely new plans that are built to conform with public companies rules and best practices.  These plans also can include an “evergreen provision that automatically increases the pool of shares available to grant on an annual basis. Evergreen provisions usually expire before the start of the 4th fiscal year after IPO (shareholders and the advisors kind of hate them).

It should also be noted that overhang changes pre and post-IPO.  This is partly due to the different ways overhang is calculated pre and post-IPO.  But it is also due to the fact that once a company goes public people start exercising options and RSUs start vesting.  Every exercise of options or release of vested RSUs moves equity from one side of the overhang calculation (outstanding equity) to the other (outstanding shares). SO, the impact of exercises and releases is double that of equity cancelled for a terminated employee which only impact the outstanding equity side of the equation.  The quick movement in transaction during the first year after IPO reduces overhang quickly at many companies, giving them more room for new grants (as long as they have new shares coming through something like an evergreen provision.)

Now if you have gotten this far you are probably taking this seriously.  So you should know a little secret.  While all of the above is true it doesn’t mean that it is right.

The most common methods of using equity compensation are often not supported by any evidence of effectiveness. They are follow-the-leader approaches that many lawyers and compensation consultants throw out to companies to create average solutions (and great consulting fees).

The real process to determine a long-term compensation strategy requires a true understanding of your company culture and strategy. It requires know how and why each equity instrument works and it requires a communication program that ensures that your employees perceive the value of equity in a manner similar to your intent for that equity. The end result is a program that is unique to your specific facts, circumstances and goals.

I can go on (I have co-authored books on this topic), but I will wait for any follow-up questions first.

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


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

What’s the Right Size for Private Company Equity Compensation?

T shirtThe most common question asked about equity compensation is only two words: “How much?” For private companies, it is frustratingly hard to answer. The crux of every equity compensation conversation is how much to give. The answer leads to the best equity instrument to use, features of the plan, expected exit strategy, or time to liquidity. Determining levels for private companies is never as simple as Continue reading

5 Lessons for a Compensation Department of None

untitledOver the last few years, we have seen a rise in attention to the all too common, “HR Department of One”. These jacks-and-jills-of-all-trades, (and master of many), must be the policy maker, recruiter, trainer, confidant and much more for many companies. Often, on this very site, we talk about “compensation departments and compensation professionals” as if every company has one or both. But, what if, as is often the case, a company has NO compensation professional on staff? Or, what if the company has a great compensation analyst with little or no training in executive compensation, sales compensation or some other important specialty?

Many successful companies operate with Continue reading