compensation, evaluation and evolution: set your own trends for 2014
DESCRIPTION
Every company battles to balance the desire to follow trends and the need to remain unique and competitive. Our presenters, Dan Walter and Sam Reeve from Performensation, will discuss how to do just that. The world of compensation is like a box of crayons. Every company has its own color that is a special mix of its corporate strategy, corporate culture and compensation philosophy. Learn how to keep your color separate from the melted brown of generic trends and survey data. This presentation will explain how to: "SWOT your comp" (strengths, weaknesses, opportunities, threats) and deliver what your stakeholders need. Calculate the ROI of your STI and LTI programs. Learn what other companies are planning for 2014. Reeve and Walter will also discuss industry-specific market trends that may drive changes in compensation design, metrics, goals and instruments. Industries to be discussed will include health care medical devices, energy and alternative energy, software and more.TRANSCRIPT
©2013 Performensation
Compensation, Evaluation and Evolution: Set Your Own Trends for 2014
December 10, 2013
Performance + Compensation = Performensation
©2013 Performensation 2
Presenting
Sam Reeve is a global certified compensation consultant (CCP, GRP) with 15 years of experience in Total Reward Strategies. He is an expert in broad-based compensation and focuses his talents on enhancing performance through the effective use of incentive and recognition programs.
Prior to joining the firm, Sam has worked in the corporate compensation functions of notable firms such as BlackRock, McKesson and Automatic Data Processing (ADP).
Sam currently lives in Colorado and aside from his professional life, enjoys numerous outdoor activities with his 4 children and wife, Jessica.
Sam has a degree in Finance and Economics from California State University, Sacramento.
SAM REEVE, CCP, GRPExecutive Vice President
TF 1 877 803 9255 ext 702Office 1 415 625 3088Mobile 1 970 403 5775
[email protected]: SamReeveTwitter: @SamReeve3
©2013 Performensation 3
Presenting
Dan has more than 19 years of experience focused on aligning compensation to corporate strategy and culture. His work includes both executive and broad-based programs and he has provided end-to-end solutions for private and public companies both within the United States and abroad.
His work with start-ups and established Fortune 100 companies provides his clients with an unique perspective on compensation issues.
Dan is also a highly sought after speaker on a broad range of topics. He is board member for the National Center for Employee Ownership and the Institute for Human Resources, an award winning member of the National Association of Stock Plan Professionals and an active member of World at Work, Global Equity Organization and the Society for Certified Equity Professionals.
DAN WALTER, CEPPresident and CEO
TF 1 877 803 9255 ext 700Office 1 415 625 3406Mobile 1 917 734 4649
[email protected] Skype: PerformensationTwitter: Performensation
©2013 Performensation 4
Define Your Compensation “Color”
Every company is has its own color for compensation
Your unique color is defined by
Strategy Industry, culture, philosophy, history, goals
This color defines the trends that work for you
©2013 Performensation 5
Most Data and Trends Melt All Colors Into a Blurred Mess
Trends are are generic market data
Trends are about choosing your specific path from among the blurred colors available
You create your own trends by understanding your unique color and applying your compensation expertise the the many shades that color has to offer
©2013 Performensation 6
What is the industry saying is “hot” right now?
Merit increases, on average of 2.6-3.1%.
BUT high performers are being reported at 4.5-5%
©2013 Performensation 7
What is the industry saying is “hot” right now?
Variable Pay as a component of total compensation is remaining flat at virtually all levels.
BUT Pay for performance is on the list of high priority items for a majority of companies.
HOW CAN THIS MAKE SENSE?
©2013 Performensation 8
What is the industry saying is “hot” right now?
Diminishing use of stock options.
BUT this is mainly for companies in the Fortune 250, in large part because of:
1. Concerns from ISS and other Institutional investors
2. Rising stock prices have bitten into potential future gains
©2013 Performensation 9
What is the industry saying is “hot” right now?
Growing Use of RSUs.
BUT this is often communicated incorrectly since these are often performance units in disguise.
©2013 Performensation 10
What is the industry saying is “hot” right now?
Growing use of Performance Units.
BUT currently most at the very top of most companies.
©2013 Performensation 11
What is the industry saying is “hot” right now?
TSR – Total Shareholder Return
TSR as the main performance metrics for performance unit plans.
BUT TSR already losing favor in Europe as a stand-alone metric. Combining with financial or operational metrics is the way to get ahead of the curve.
©2013 Performensation 12
What is the industry saying is “hot” right now?
Growth in Realizable and Realized Pay as a metric communicate executive compensation compared to peers.
BUT most companies are not using the same methodology as ISS which gives rise to new conflicts and disagreements
©2013 Performensation 13
What is the industry saying is “hot” right now?
Better alignment between STI and LTI target levels and actual compensation delivered.
Pricing low and paying high is far less accepted than in the past
©2013 Performensation 14
So, if the trends are not black and white…?
How do we define our own trends?
©2013 Performensation 15
Critical Skill 1 – Understand How to SWOT Your Comp Team
©2013 Performensation 16
SWOT Your Comp Team
The Environment for Rewards is Changing
We need to Adapt
Start by evaluating your teams ability to service your clients
©2013 Performensation 17
Steps
1) Understand the Changing Environment
2) Consider your Circle of Influence
3) Update your Service Delivery Model
4) SWOT your Comp Team
©2013 Performensation 18
Adapt to the Changing Environment
What should your Service Delivery Model
look like?
??
?
©2013 Performensation 19
Defining Your Circle of Influence
Who provides direction?
Who do you answer to?
©2013 Performensation 20
The Circle of Influence
Internal
The Comp Team
Circle of Influence
©2013 Performensation 21
The Circle of Influence
Internal and
External
The Comp Team
Circle of Influence
Associations
Publications
FutureCandidates
Shareholders
Media
©2013 Performensation 22
Identify your Clients
Who currently uses the services of the
Comp Team?The
Comp TeamCircle of Influence
©2013 Performensation 23
Identify your Clients
Who currently uses the services of the
Comp Team?
And
The Comp Team
Circle of Influence
©2013 Performensation 24
Identify your Clients
Who currently uses the services of the
Comp Team?
And
Who isn’t leveraging the Comp Team that
would benefit?
The Comp Team
Circle of Influence
©2013 Performensation 25
Identify your clients
Participants
?
?
?
Participants of your Current Programs
Such as the:• Salary Program• Short Term Incentives• Long Term Incentives• Recognition
©2013 Performensation 26
Identify your clients
Managers Participants
?
?
?
Managers
Need Support with:• Pay for Performance• Retention• Reporting
©2013 Performensation 27
Identify your clients
Managers Participants
Finance
?
?
?
Finance a reciprocal relationship
Share reporting:• Comp Accruals• Budgeting• Forecasting
©2013 Performensation 28
Identify your clients
Managers Participants
Recruiting
Finance
?
?
?
Recruiting
Need support with:• Competitive Comp for
Jobs• Complex Offers• Informing New Hires
©2013 Performensation 29
Identify your clients
Managers Participants
Recruiting HR Advisors
Finance
?
?
?
HR Advisors a reciprocal relationship
Such as:• Comp Program roll-out• Critical Talent• Benchmarking
©2013 Performensation 30
Identify your clients
Managers Participants
Recruiting HR Advisors
VendorsFinance
?
?
?
Vendors of your Current Programs
Such as:• Relationship Management• Upgrades• Participant Support
©2013 Performensation 31
Identify your clients
Managers Participants
Business Leaders
Recruiting HR Advisors
VendorsFinance
?
?
?
Business Leaders
Interested in:• Clear Guidance• Effective Pay for
Performance• Cost Control
Monitor Stakeholders
©2013 Performensation 32
Defining Your Service Delivery Model
What tools do you need to succeed?
Who is involved in providing data and resources?
©2013 Performensation 33
Review Your Service Delivery Model
What functionsare needed to deliver your Products and Services
Service Delivery Model
?
?
?
©2013 Performensation 34
Review Your Service Delivery Model
Managers Participants
Business Leaders
Recruiting HR Advisors
VendorsFinance
Program Management
Managers want to leverage programs to motivate and engage
Participants want to be compensated
Vendors are needed to provide expertise
Program Management
©2013 Performensation 35
Review Your Service Delivery Model
Managers Participants
Business Leaders
Recruiting HR Advisors
VendorsFinance
Reporting
Business intelligence is critical
Reporting
©2013 Performensation 36
Review Your Service Delivery Model
Managers Participants
Business Leaders
Recruiting HR Advisors
VendorsFinance
Consulting
Expertise where it is needed
Consulting
©2013 Performensation 37
The New Service Delivery Model
Managers Participants
Business Leaders
Recruiting HR Advisors
VendorsFinance
We have a plan…
…but can we deliver? Consulting
Program
Management
Reporting
©2013 Performensation 38
Plan for Success
Consulting
Program Management
Reporting
The company depends on the products and services that your team provides, so …
©2013 Performensation 39
Plan for Success
Consulting
Program Management
Reporting
Know the skills that are required to support the Service Delivery Model
©2013 Performensation 40
Assess your Team
Does your team have the necessary Knowledge, Skills and Abilities?
©2013 Performensation 41
Assess your Team
Team Member impactis a combination of:
Functional KnowledgeSuch as:
Worksheets, Executive Comp,
Stock Administration, etc.
Soft SkillsSuch as:
Team Work, Influence,
Presence, etc. EXPERIENCE
Soft Skills
Functional
Knowledge
©2013 Performensation 42
SWOT Time
Where do you reinforce?
Where to you rebuild?
Where do you focus your defenses?
Where are your greatest potential successes?
©2013 Performensation 43
The SWOT Analysis
Organize your findings into a SWOT analysis
Provides clarity that can lead to an improved service standard
StrengthsWeaknesse
s
Opportunities
Threats
©2013 Performensation 44
The SWOT Analysis
Internal
Factors that can be
Controlled
StrengthsWeaknesse
s
Opportunities
Threats
©2013 Performensation 45
The SWOT Analysis
External
Uncontrollable Factorsbut can
position for success
StrengthsWeaknesse
s
Opportunities
Threats
©2013 Performensation 46
The SWOT Analysis
BuildOn
Strengths
StrengthsWeaknesse
s
Opportunities
Threats
©2013 Performensation 47
The SWOT Analysis
LimitWeaknesses
StrengthsWeaknesse
s
Opportunities
Threats
©2013 Performensation 48
The SWOT Analysis
STRENGTHS:Reporting
Dynamic ToolsResponse Time
WEAKNESSES:Consulting
Problem SolvingReactive
OPPORTUNITIES:
New PM SystemNew Sales Team
THREATS:Regulation
Limited Bonus Pool
Talent Departure
Example:
©2013 Performensation 49
Take Action
If your team has gaps in Knowledge, Skills and Abilities:
Consider dedicating money and effort to
Training or Acquiring the Right Talent
©2013 Performensation 50
So, I know what I am good (and bad) at…
Again…How do we define our own trends?
©2013 Performensation 51
Calculating ROI – Cost-Benefit Analysis
Return on Investment is simple to talk about in theory, but can it be done in reality?
YES Include a Cost-Benefit Analysis in every major decision
©2013 Performensation 52
Calculating ROI – What are you Measuring?
Be clear about what you are spending and what you expect to get in return
Attraction. Know what is costs to hire a new employee. Time, marketing, fees, relocation, replacement grants etc…
Motivation. Understand how much it takes to communicate and support any pay for performance programs, equity compensation programs and sales compensation.
Retention. Knows what it costs to get an employee to the expected productivity level. Understand how much it costs YOUR company to replace someone who leaves. The industry averages are irrelevant. You need to know this for each type of role at your own company.
Don’t forget systems…
Performing a CBA
SECTION I: Capture Costs and Benefits– Current Processes Vs. Proposed Solution
– Costs are segmented into human capital costs and economic costs
– Current Technology Vs. Proposed Technology
• Captures costs of the current solution(s)
• Captures costs of the proposed solution(s)
• Difference of proposed to current (if positive) is cost benefit of the proposed method
SECTION II: Cost/Benefit Analysis (CBA)– Human capital and participant impact benefits of the proposed
project
– Economic analysis of the proposed project
ESTIMATION OF COSTS (Cont.)
Types of Costs:– Upfront Costs: One time, spent right away
– Recurring Costs: Keep project operating over time
– Sunk Costs: Money already spent; not considered in analysis of project
– Disposal Costs: Money spent to retire a project as opposed to
– Residual Value: Money returned to you at conclusion of project lifecycle
Net Present Value
• Net Present Value
– Tells you whether the project represents a net gain or a net loss over the project lifecycle
ZERO NPV:
• The project benefits offset the costs
NEGATIVE NPV:
• The project will cost more than it will bring back in benefits
POSITIVE NPV:
• The project’s benefits offer a net gain
• C/B Ratio (Discounted Benefits/ Discounted Costs)
– Tells us how much you will get back in benefits. Helpful in determining if project will reach the breakeven point (ratio of 1) for the project lifecycle
Cost/Benefit Calculation
• Ratio of 1 – The project benefits equal the costs for the project lifecycle
• Ratio less than 1 – Cost outweighs the benefits
• Ratio greater than 1 – The benefits outweigh the costs
•The payback period is defined as the number of years and/or months it will take to recover the costs involved in the project
PAYBACK PERIOD
NOW YR 1 YR 2 YR 3 YR 4 YR 5
$20,000 (Startup Costs)
Costs
BenefitsCumulative $
$40,000 (Gross Return)
©2013 Performensation 58
Calculating ROI – STI Programs
Your investment in STI is not just the dollars you budget as compensation costs.
You must include the direct impact on improved company performance, including intangibles
A complete ROI will look into the past STI plans and any direct or extrapolated results that can be tied to pre and post-STI roll-out.
Don’t assume cause and effect, prove it.
©2013 Performensation 59
Calculating your ROI – LTI/Equity Programs
LTI programs require multiple measurementsCost of creating the program. Just because a new type of program is trending upwards doesn’t mean it makes sense for your company to have that program. The creation and implementation costs of a new plan, may not be worth it.
Cost of the awards, per accounting methods.– Variable costs, cash accounting– Cost of equity (dollars and political) at time of grant, Vs. When it is booked
by the company, Vs. When payout is made to the individual, Vs. Planned payout as a component of comp philosophy
Cost of communication.– Initial roll-out– On-going systems, helpful reports and web access– Regular re-education, dealing with lower stock prices, poor company
performance, poor industry performance
Administration costs
©2013 Performensation 60
Merit Increases – Define Your Own Trend
Retrain your managers to understand what is meant by “merit”?
Understand your culture and if your define your company as “high performance” make sure you allocate better than average increases to top performers before allocating increases to average and low performers
Redefine your compensation philosophy if you need to. Everyone can’t target the 50th percentile and be competitive.
©2013 Performensation 61
Variable Pay – Define Your Own Trend
Don’t be afraid to push variable compensation deeper into your organization.
BUT make sure you provide the training, support and systems to make the program successful.
©2013 Performensation 62
Stock Options – Define Your Own Trends
If your stock price is strong, don’t be afraid to continue using options.
If stock options are no longer an option consider pushing performance units deeper into the organization. (once again, ensure you provide the requisite training, support and systems)
©2013 Performensation 63
RSUs – Define Your Own Trends
RSUs are a great, stable element of LTI
3 Year vesting is the average, but isn’t a requirement.
Consider shorter and longer vesting periods
Don’t get locked into RSUs if your stock price is rising and your overhang allows for more leveraged tools.
©2013 Performensation 64
Performance Units – Define Your Own Trends
Performance units can offer the downside protection of RSUs and the upside leverage of stock options. Don’t be afraid the explore these beyond the C-Suite
Take the time to do the analytical work before you finalize your metrics and goal levels.
Don’t jump in the pool without someprofessional assistance.
Start soon, but evolve at a careful pace. The biggest problem is poor design andmodeling before roll-out.
©2013 Performensation 65
TSR – Define Your Trends
Combine TSR with internal financial or operational metrics to get ahead of the curve.
Understand the how and why of any peer group chosen.
Does it work with shareholder expectations?
Is it big to survive the entire measurement period?
Can you get the data when you need it?
©2013 Performensation 66
Realizable Pay – Define Your Own Trends
Everyone should do a Realizable Pay calculation, but not everyone should include it in their proxy.
Understand the key differences between your model and the model used by your major investors.
This is a first line of analysis when problems with executive pay are identified. Don’t be caught unaware.
©2013 Performensation 67
STI/LTI Alignment – Define Your Own Trends
Don’t guess about your company strategy. Get confirmation from your executive team.
Make sure you model Best, Worst, Mathematical and Expected Case scenarios. Wild pay swings and “lowball targets” are no longer acceptable
©2013 Performensation 68
Reminders
Managers Participants
Business Leaders
RecruitingHR
Advisors
VendorsFinance
Consulting
Program
Management
Reportin
g
KNOW YOUR UNIQUE COLOR
KNOW YOUR STRENGHTHS
AND WEAKNESSES
KNOW YOUR SERVICE
DELIVERY MODEL
KNOW YOUR COSTS AND BENEFITS
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Please visit our website at www.performensation.com
Twitter: www.twitter.com/performensation
LinkedIn: http://www.linkedin.com/company/performensation
Facebook: https://www.facebook.com/pages/Performensation-Consulting/371636619516008?fref=ts
Slideshare (presentations and documents): http://www.slideshare.net/performensation
Quora (Q&A): http://www.quora.com/Dan-Walter
SAM REEVE, CCP, GRPExecutive Vice President
TF 1 877 803 9255 ext 702Office 1 415 625 3088Mobile 1 970 403 [email protected]
SamReeve@SamReeve3
514 Precita Ave, Suite 100, San Francisco, CA 94110
DAN WALTER, CEPPresident and CEO
TF 1 877 803 9255 ext 700Office 1 415 625 3406Mobile 1 [email protected]
DanWalter@Performensation
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Performensation was founded in 2006 in response to the demand for more strategic and effective compensation programs.
Successful compensation requires four key elements. Each component must be carefully crafted to your unique goals and culture.
Vision: We understand where you are headed and have the skills to get you there. We are respected throughout the industry for our forward-thinking perspective and our ability to execute on it.
Foundation: Long-term solutions are based on evidence, not founded on gimmicks or fads. They are built to allow for adjustments to organizational and market conditions. Your program’s foundation must reflect your company and the goals it is designed to support.
Design: A great program combines creativity with practicality. We utilize our broad and deep understanding of rules, regulations, processes and providers to ensure your program delivers high- performance results. Our designs are easy to understand, compliant and effective.
Communication: Participants only value what they understand. Communication must be built in to every step of the process. We ensure that all program elements are relevant and make sense to your targeted audience.
We Align Compensation with Corporate Strategy and Culture