As someone who spends a lot of time designing and honing long-term incentive programs, I thought I’d skip 2014 and make some predictions about time frames that compensation people really have to worry about.
3 Years from now, 2017: The durations used to measure past and future performance for executive compensation. The most common service-based vesting for restricted stock and restricted stock units. Most frequently used forecast for performance plans that use Total Shareholder Return as a metric.
What can we expect? First, more of the same. Many current compensation programs will still be in effect. We seldom have wildly varied programs in place simultaneously. If you want your programs to be truly different in 2017 you need to make material changes this year and keep that pace for a few years. Beyond this, I think we will see executive compensation still gaining ground at close to the current pace. But, more leverage will be put on internal metrics and external metrics will need to meet generally acceptable standards for incentives to kick in. General compensation budgets will continue to increase at about 3.5% per year, but far more of this budget will be dedicated to strong performers. Weaker performers will, unfortunately, be left further and further behind.
5 Years from now, 2019: Five years from now most stock options granted today will still be vesting and have another 5 years to be exercised. Major HRIS/Compensation system projects started in 2013 will just be reaching the end of their initially planned goals. In short, most of the big stuff you are doing today will still be impacting much of what you do in 2019.
By 2019, stock option grants will have become clearly bifurcated in purpose. Plans will continue to exist that emphasize 5-10 year long-term incentive potential, while many companies will move away from RSUs to shorter term stock options. The use of pay for performance plans will increase from the current 56% of companies to somewhere near 75%. At least one very successful company will explain that its success was due, in large part, to its generous and atypical compensation and recognition plan. Tons of public companies will see an opportunity and jump on the new bandwagon. If we do things right, this may trigger a change in compensation as seminal as the equity compensation explosion of the late 1990’s.
10 Years from now, 2023: That plan you just designed should finally be about to die a natural death. You will likely be working at your second or third company over this period. The 30-40 year old employees of today will be seriously wondering how to fund their retirement while also paying off their kids’ college education. If the past has been any indication, compensation will have lagged cost of living while your “off-shored” staff will be catching up.
What will compensation look like? There will still be just a few basic ways to pay people: money, recognition, ownership and prestige. The current mix of total rewards will move back to a greater emphasis on better base pay, even while more companies use incentives as a component of total compensation. Recognition will be more clearly separated into two camps. In the first camp, companies will strive to use recognition as a true motivator and link to prestige. This camp will be larger than it is today. In the second camp, companies will be low budget and dispassionate to a level where their programs have as much meaning as “cake day” (the infamous monthly all-inclusive birthday). Lastly, research will finally show when, where, how, why and to whom more complex compensation tools are effective. This evidence will provide companies the confidence they have always wanted to put in place effective compensation without simply following market trends.
Of course, I hope the good things progress more quickly and the poor things simply fade away. But, given the pace of our past, I think this is likely to be fairly accurate. What are your predictions for 3, 5 and 10 years from now?