Stop Building Sinking Ships

untitled69Last week esteemed fellow Comp Café writer, Stephanie Thomas, Ph.D., wrote an article asking, “Should You Scrap Your Long-Term Incentive Plans?” I commented that LTI programs are for more likely to be used improperly than correctly. But the real question is, why?

Why do we continue to design and implement programs that are ineffective? More important, why do plans at so many companies look almost exactly like the plans at very different companies? It’s kind of like watching your competitor’s ship sink and deciding to build the same ship for your use.

I was reading about a cargo ship that can carry more than 6,000 cars across the Pacific Ocean. The ship accomplishes this task nearly every time it leaves on a voyage. It does so with a fairly small crew and performs this task fast enough that the cars are still “new” when they get to their destination. Less than 100 years ago this would be unheard of.

Ships are part of the foundation that is long-term incentives. Carine Schneider, Founder of WFF Connect, likes to tell of the birth of equity compensation happening in the 1800’s when whaling ships starting offering a share of the catch, instead of a salary (check out Page 60). The trick was not only making sure the catch was good, but that it also got back to port. Seaworthiness of a ship became even more important than ever before.

The ships of the today look nothing like the ships of the 1800s. They are purpose-built and evolve at a rate faster than the rail or airline industry. Perhaps our LTI programs should follow their lead. Today’s ships can handle enormous waves. They can handle storms that would destroy most cities. They can also operate delicately enough to be considered safe near the most populous and environmentally sensitive spots on the planet.

An aircraft carrier can have 5,000+ onboard and still carry planes and assortment of weaponry. Cargo ships can operate with skeleton crews, and soon some will operate with no crew at all. Ships that transport oil can survive accidents, without leaking that would have sunk other ships. And yet, our Long-Term Incentive Plans look very much alike and very much unchanged over the past two decades.

Let’s all stop building ships that do not serve our specific purpose. More importantly, the compensation industry should pledge to build ships that are almost guaranteed to make it to their destination, regardless of the conditions.

In short: Don’t use RSUs just because it is a trend. Use them only if they support your culture, philosophy and strategic goals. Don’t assume that the winds of change or the frothiness of the market sunk your plan. Build programs that can withstand the forces that will need to be faced. Don’t use equity when you have enough cash to make people happy. Don’t avoid equity simply because communication is more difficult.

Most importantly, keep building and improving your Long-Term Incentives. The success of our profession, the companies it supports, and the people who get paid all depend on our building and operating better ships every chance possible.

Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and considered a leading expert on equity compensation issues. Dan has written several industry resources including a recent Performance-Based Equity Compensation issue brief. He has co-authored Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives and other books. Connect with Dan on LinkedInOr, follow him on Twitter at @Performensation.

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