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Navigating the Whitewater of LTI Design

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 frothy sections is not always clear and is seldom the same twice. You need to react to conditions as they arise and make decisions quickly. Like each drop of water in the river, you must maneuver around the rocks to your ultimate destination. Even the most basic plans can require more than expected. Read on for an adventure.

First, you must understand the goals of the business. Is acquisition in their future? An IPO? Continuing to grow as a successful private-held organization?Here comes a splash.

Wait a minute! First you must understand how the company is legally structured. Is your company an LLC, C-Corp or S-Corp? What country or state holds the privilege of being the place where this was established? Is there a plan to change this during the expected life of the plan being designed? Your raft is thrown into the air and you land facing backwards.

Oh…you have a new CEO? She doesn’t support the prior LTI program? It’s too complex? It’s not focused enough on individual performance? AND, the payout levels are too high (except when they are too flat)? And, the new plan has to be cost neutral when compared to the old plan. You are paddling hard, trying to control the out of control craft.

How does LTI fit into the company's compensation philosophy? Oh, really? You are not sure if you have one? At its most basic, a compensation philosophy defines how to target your pay levels. You target the 50th percentile (of what?). Do you have access to more than one data source? Do you weigh differently based on how directly applicable they have been in the past? At its best, your philosophy will help guide your evaluations and decisions, but that’s a topic for another day. Another mouth full of water and your helmet is now on sideways.

Well, yes, survey data for equity plans can be sketchy. There are so many details that drive values and assumptions at the time of grant and so many more that drive the actual value delivered. 5,000 shares may be enough, but it is impossible to know at this point. And, that brings us back to an important question. How many shares do you currently have outstanding? That will be an important piece of information as we move forward. The water feels like it is calming down again.

Let’s take a step back. When does this new plan need to be rolled out? Next Friday? The bottom drops from under the craft and you hurtle back into the maelstrom…

Dan Walter is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture. Grab a copy of Dan’s new comprehensive issue brief, Performance-Based Equity Compensation. Dan also cowrote “Everything You Do in COMPENSATION IS COMMUNICATION”, with Comp Café writers, Ann Bares and Margaret O’Hanlon. And believe it or not, he has co-authored “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives.” Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.

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