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.

What are some examples of incentives you used to keep top employees as per the recommendation in the book “How Google Works”?

Question details (orig. on Quora)

In their book “How Google Works”, the authors recommended that startup founders should do their best to keep top employees. For example, in Google, they offered a key employee, who was about to leave, the opportunity to attend founders meetings. This kept him for two more years. What other incentives did you offer your key employees who were about to leave?

Answer by Dan Walter

I think the key answer to this question is “Play Offense.”

By that I mean, don’t wait until a key person is considering leaving to try and “save them. Talk to your key people and learn what they need, want and what motivates them to excel.  Most times it is a surprisingly easy to put things in place long before anyone would ever consider looking somewhere else.
Most of the programs I have seen to save leaving talent have been failures, or, at best, very temporary. I had a boss years ago tell me that you can always get back someone’s mind, but if you have lost their heart you will probably never get it back.
Communicate early, often, consistently and passionately. This will allow you to put things place to stem the flow, or prepare things to be ready in the event someone expresses a desire to leave.

Startups: How can a startup provide the necessary diversity of projects to its employees?

Question from Quora

As a software developer I worked at companies both large as well as small and I can tell that the former have a greater diversity of projects and technologies compared to smaller ones.

I consider diversity of experiences an important part of a professional’s improvement because I met people that mastered well one technology but lacked the overview that a wider range would give.

Having said the above, do you consider wise to join a small startup (before A series) early in your career (after college)? If you were to stay for 4 to 5 years there, I think that lack of diversity can put an upper bound on one’s learning. For senior guys (10+ years) it might not be a problem to go deep into an area but for a graduate, diversity is quite crucial.

What’s your opinion about this?

Dan Walter’s Answer

Diversity of projects at a small company comes in a far different form.  I wrote an article about this a few years ago and thought it might be good to provide a summary here.

At a small company you may be focused on a single technology or single product, but you will likely be involved in far more aspects of that single thing.  It is common to have a voice in the product name. But at a small company you may also find yourself designing a logo, or working directly with internal or external market experts to get the word out. You will learn more about the nuances of sales and finance and probably how to change a roll of toilet paper and how to make good coffee.

As a company grows your job become more focused, even as you use more (and sometime better) technology. Some people love the ability to contribute to almost every piece of a company.  Some people like the deeper dive that a big company has to offer.

When hiring people it is a good policy to dig into these questions.  Hiring a people that matches the reality of your company is the best way to succeed.

my article: Offer the World First and Money Second. “Small Company, Big World”

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

Would You Like Mayo and Lettuce with that Noncompete?

Stickman Pay enough for noncompeteNoncompete clauses are often hard to enforce, but sometimes they still make sense. Heck, youcan’t really keep a person from making a living in their chosen field. But, a company has to be able to protect itself from employees who may steal customers, ideas, staff members or worse.

Noncompetes are not only hard on HR and legal departments; they can also be an issue for compensation professionals. At the most basic level, comp pros are paid to attract, motivate, retain and Continue reading

New Book on Communicating Compensation Plans!

Everything You Do in Compensation is Communication: 3/8 of the Compensation Cafe Publishes a Book! …. $10 discount through September 30, 2014! (use code “8steps”)ewdic book cover w quote

About three years ago, a trio of cheeky compensation bloggers joined forces around an idea.  The insight that started it all – that everything (and we mean everything) we do in compensation is, in fact, communication.  When we talk and when we stay silent.  When we share details about how plans work and how awards are earned and when we keep it all under wraps.  The reality is that we are sending messages — inadvertently and often unintentionally — with every step of the compensation design, implementation and management process.

If this is true — and we believe it is — then why not get ahead of this communication process, take control and use it to make our compensation work better and more impactful?  And to increase our own influence and career success along the way?

Compensation Cafe cohorts Margaret O’Hanlon, Dan Walter and Ann Bares are pleased to announce the publication of our book.

Dreaming about ways that you can have more influence and impact in your work? To learn more and to order your own copy, please go here and get your copy today.

 

Tipping Points – 5 for Pay Professionals

stickman Pay Tipping Point“The moment of critical mass, the threshold, the boiling point.1” This is how Malcolm Gladwell describes the tipping point. It is the moment when things truly change and return to the prior state becomes hard, or even impossible. Responding to major changes like these tend to drive evolution or revolution. The results can be more volatile than expected and occur more quickly. There have been many compensation-related changes happening over the past couple of decades. I make the case for five elements that may be nearing a tipping point.

1. Pay for Performance.

Pay for performance is incredibly popular right now. I am one of its biggest proponents. But, as the use of P4P rises, so does the lack of verification of effectiveness, structure and communication for these programs. There is real potential for the abject failure of these programs as a whole. P4P is filled with potential risk. Failure will likely be seen in angry employees and struggling companies.

2. Pay Disparity.

It has been almost one hundred years since we have had wealth disparity in the United States like we are currently experiencing. Not all of the disparity is driven by pay, but as the wealth gap has grown, so has the pay gap. We are already seeing attention from the media, scrutiny from the government and discontentment among employees. While the first two get the most attention, it is the employees who will drive the tipping point. Unless they are given some path to correction, they will find a more volatile way to drive change.

3. Retirement Shortfalls.

The way we currently look at retirement has been around for just about the same amount of time as our oldest citizens. These senior people had a lot of help in preparing for retirement and we still have huge problems with poverty among the elderly. It is expensive to be alive. The shortfall between retirement funds versus needs has been well documented. We have built a society where people live a long time and can do so knowing that they are supported by funds that were designated long ago. As retirement funding changes and social security fails to keep up with the cost of living, will we see new “families” where employees spend as much time and effort supporting their parents as they do their children? Can the two-income work structure we have built support this additional need for time and money?

4. Pay Survey Use.

Pay surveys are useful ingredient in delivering proper pay. But, like sugar, overuse can be unhealthy. The flaws of the data and how we use it have been documented for years. Search on the term “survey” on this site and you will see what I mean. Pay surveys help make our decisions “feel” better. Sometimes at the expense of them actually “being” better. Are we prepared for the moment when the overuse of surveys becomes a rallying cry for those people outside of our profession?

5. Equity Compensation.

Many of you know that I believe equity compensation is an incredibly important element of pay. But, like other forms of pay for performance, it has often been used without a thorough understanding of its impact. The growth of equity compensation easily aligns with the growth in executive / employee pay disparity. Pay disparity is itself nearing a potential tipping point. Without thoughtful planning and better use of equity compensation, we may see it disappear like so many other formerly useful pay programs (defined benefit plans anyone?).

1 The Tipping Point: How Little Things Can Make a Big Difference

 

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

4 Links Between Entrepreneurs, College Students and Swimming

Man Swimming in Ocean-squareI spoke to a recent high school graduate who wanted some insight on going to college. He was leaving California for Hawaii where he would be attending Chaminade University of Honolulu. I kept my advice simple. “Don’t Stop.”

I likened his college years to his journey from California to Hawaii. But, in this journey, instead of flying he would be swimming. If you stop swimming you may never be able to complete the journey. As I talked to him, I realized the same is true for entrepreneurs. Running a start-up and being a college student have many similarities, including limited funding and learning as you go. In fact, there are four distinct lessons from swimming that apply to both.

4. You are at your best when the environment isn’t completely comfortable. Elite swimmers like water that is too cold to lounge in. They know they will be working hard and a little discomfort will keep you moving. You have to have the confidence that your own power will heat both you and the environment around you.

3. A crooked path is most effective. When you’re in the water a straight-line always looks like the most effective path to your destination. This is because you cannot always see the currents and tides that will impact your journey. You must pay attention to what is happening at every moment and make adjustments to stay on course. Although counterintuitive, the best strategy to escape a riptide is not to swim faster or harder, but to swim parallel to the beach for a while in order to reach safety. Apply the same rule to your college career and start-up and you will see surprising results.

2. Even resting uses energy. Swimming is so much different than walking. When you are on land you can rest by standing, finding a bench or even just sitting on the ground. If you stop while swimming you must still tread water. At that point, you might as well expend the energy to keep moving forward. Even a small island in the ocean provides only a temporary resting place, as it will be overrun by rising tides quickly.

1. You cannot stop until you succeed. This is the key point. Once you have committed to swimming from one point to another you have only three choices. A) Turn back before you get half way and accept the fact that you may never have the guts to try again; B) Stop somewhere in the middle and exhaust yourself; C) Don’t Stop. Keep swimming. Rest while you are on your back. Think while you stroke forward. Slow if you must and get your bearings, but never ever stop. Stopping means failure so keep on swimming. You will never get this exact chance again. You must keep the vision of your beachside destination in mind and know that only your own power, persistence and determination will get you there.

“If you want to swim across the English Channel from England to France – you have to leave your doubt on the beach in England.” – Lewis Gordon Pugh

Mel Jameson has more than 20 years of experience in financial services, sales and marketing. One of the founder’s of Performensation, an industry leading compensation and human capital consulting firm, she has a proven track record of growing businesses through strategic marketing, business development and sales management. Mel’s passion is assisting women in navigating the challenging waters of business. Mel can be reached at mjameson@performensation.

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