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
Coty is the multinational beauty manufacturer of brands such as: Calvin Klein fragrances, Davidoff perfumes, Adidas Bodycare, and Sally Hansen nail care products. The company has just announced that it must pay someone $1.8 million even though they didn’t actually work as the company’s CEO. How in the world can this happen? Let me explain. Continue reading
Sleep 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.
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.
Often 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
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More than two years ago I wrote about “Defining Pay for a Compensation Unicorn”. A unicorn is a person with a skill set so specific and high level that it is hard to imagine them existing anywhere other than fantasy. Recently, some have referred to these people as “purple squirrels”. While the quest for these fantasy positions continues a more common person is the duckbilled platypus.
More than a unicorn, or even a hybrid, duckbilled platypus jobs combine skills so eclectic they won’t fit Continue reading
Riding the Growth Curve
Several years ago, I worked for a company that was beginning to experience some significant growing pains brought on by its expansion into the global marketplace. The young company I had joined had grown rapidly in the U.S. and was now looking for a stronger presence internationally. Opportunities to open locations in Europe, Asia and Latin America had triggered a hiring phase unlike any the company had previously experienced and in the eagerness to expand; we overlooked the fact that we were rapidly outgrowing our own infrastructure.
It didn’t take long before the problems became apparent. There was no process in place Continue reading
I read a recent article that discussed the annual Rotman Design Challenge. The competition pits teams from Design and MBA programs to determine the value of design methods in business problem solving. This got me to thinking about the eternal compensation debate of program design, versus business strategy (vs. communication.) The argument is whether design is more or less important than understanding the “business data” and whether both of these are trumped by communication. Continue reading
A friend recently updated their status with the title to this article. Ironically, I saw it just as I got off a call with a client who was explaining that somehow she was expected to serve as both the strategic visionary and tactical processor for her company’s multinational LTIP programs. The simple request in my friends status update seemed reasonable, well thought-out and familiar. As we traverse the crags of an uneven recovery, companies have found it difficult to create compensation plans that perform as expected. As budgets continue to be bound by uncertainty, companies have been unwilling, or unable, Continue reading