In the past week there have been two major reports describing how to fix executive compensation. The first is from the UK report and comes at the end of a project by the “Executive Remuneration Working Group” (those Brits love their whimsical names) This project was publicly announced September 8, 2015 as an effort by The Investment Association. The second report “Commonsense Principles of Corporate Governance” is from a group of executives in the US. It covers a broad list of corporate governance issues. For the purposes of this post we will focus only on the section titled “Compensation of Management.”
Performensation is pleased to announce that Sam Reeve, Performensation’s Executive Vice President of Consulting Services, will be presenting on four topics at the BLR Thrive 2016 annual conference, May 12-13, 2016 in Las Vegas!
Sam is a well-regarded compensation leader with broad and deep experience across many industries and virtually every size of company. Come to Las Vegas and spend a little one on one time learning more from Sam.
Someone recently asked me to explain how I knew what direction to take plan design conversations. She had participated in a several plan design discussions and it seemed like there was not much rhyme or reason to the process. After giving it some thought, I told her it was a bit like navigating a river with occasional whitewater.
Much of any long-term incentive plan design is like gently steering your boat in slow moving water. But, every plan design has stretches (sometimes miles) of whitewater. The path through these Continue reading →
I was reading a Facebook message a parent posted about their kid’s physics homework and it resonated as a reminder for the compensation world. The question was how do you explain the differences between speed, velocity and acceleration. A few years ago, I wrote an article about Newton’s Three Laws of Compensation Motion and I guess it’s time for another physics lesson.
Speed is a point on a graph. It tells you a whole bunch about an instant. Much of the data we use in compensation is like this. We know exactly the amount or percentage, but we have little information regarding the path to that point. We feel like we somehow already have this information, but in most cases it’s a deception. Most pay data provides as little Continue reading →
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)
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.
The situation: The SEC proposes rules for executive compensation claw back provisions required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The SEC has finally proposed the long-awaited rules for executive pay claw back. Rule 10D-1 describes who, what, when and how “erroneously awarded executive compensation” must be returned to the company.
I hope your employees aren’t complaining about your compensation programs. If they are complaining out loud, then the problem has likely been there for a while and you need to address it post haste. But, that’s not what this article is about. We all can, and do, identify problems as they become vocal. I want to talk about compensation programs that people aren’t complaining about.
Most of us have been taught that silence is golden. That simply isn’t true in our line of business. When it comes to pay, if people aren’t talking about it then Continue reading →
What are the tax implications vs getting paid in cash? (I understand how RSUs work for employees [viewed as income], but I don’t know if it is viewed as income if the person is a contractor)
For example, if a person is a board member of a company and not an employee, can they offer to receive payment in RSUs vs cash?
Answer (by Dan Walter)
RSUs are allowed, by law, to be granted to employees and non-employees alike. This means they can be used for contractors and outside directors.
From an individual income and tax perspective they are also similar to RSUs given to employees. The income generated at the time of vest is Ordinary Income and is subject to associated taxation. Unlike RSUs given to employees, the company is not required to (and in fact should not) withhold taxes.
This means the reporting of income and payment of taxes is the responsibility of the individual. At the end of he year the company will provide an 1099-misc, but your tax burden may need to be satisfied prior to that.
From a company perspective the accounting consequences are quite different when granting to non-employees. RSUs, when give to employee and settled in stock, are generally accounted for as equity and have a fixed compensation expense that is amortized relative to the vesting schedule. For non-employees this expense must be accounted for using FIN 28 (even though this doesn’t technically exist anymore) methodology. This means that each reporting period (assume quarterly) you will need to adjust the expense associated with the RSUs. If the stock price at the company grows this can result in the company take a far greater expense for a non-employee RSU that was granted at the same time as an employee RSU.
All of that being said…Plan documents can be written to expressly forbid granting any type of of equity to non-employees. If the plan doesn’t allow it, then it doesn’t matter if the law does.
Those of you who regularly read my articles know I often view the world from a different perspective. This is one of those posts. WorldatWork is the main professional association for total reward professionals. Each year they put on an excellent conference and this year was no exception. The theme for the event was “Grow.” The setting was Minneapolis, MN. The weather, as one might expect, was capricious. The conference had tons of great sessions and speakers, but the most important lesson I learned was from Minneapolis’ famous Skyway.
If you have ever been to Minneapolis, the Skyway is sort of a hamster “Habitrail” for humans. It is a system of above ground tunnels that provide shelter from the extreme weather conditions that residents call “seasons.”
After using the Skyway to get from my hotel to the conference site, I realized that the system was exactly like incentive compensation. Continue reading →
Anyone who has taken a class or performed a Google-search on performance goals has learned about the concept of “SMART” goals. The most common breakdown seems to be: S – Specific, M – Measureable, A – Attainable, R – Relevant, and T – Time-bound. We all seem to know this and yet many still seem to have problems creating successful pay for performance programs. I would like to propose a new D.U.M.B. approach that celebrates the spirit of insanity. Insanity is being defined as the repetition of doing the same thing, again and again, with the expectation of different results. If SMART goals aren’t working for you, why not try DUMB goals?