All in Bonus

This year’s tax reform has had some negative consequences for executive pay. As a reminder, here’s a link to my January article on 162(m). As it turns out, it has also given many companies additional cash which, of course, is absolutely a positive. Many companies have used some of that cash to execute stock buy-backs. This, in turn, has resulted in some executives making additional compensation. How does all of this work and is there a long-term impact?

The world of compensation is filled with odd inconsistencies. Are you motivating someone to retain them, or are you retaining people, so you can motivate them? Are you looking to hire “world-class talent”, or do you want to pay more like your peers? Perhaps the most frustrating is the dilemma of compensation data being absolutely accurate and almost completely wrong.

I was speaking to the Head of HR at a small, talent-intensive company. We were discussing the cost of long-term incentives as related to their compensation philosophy of paying between the 50th and 75th percentile. Adding equity effectively and economically is always a challenge.

Your new CEO wants the old LTI plan replaced before the start of the new year. The head of Business Development needs a new sales incentive plan by the end of the month. People know exactly what needs to be fixed but may not have a complete understanding of what it takes to fix them. We can build temporary solutions quickly, but doing things correctly often requires starting with the foundation.

For more than 25 years, tech companies have used equity to share ownership and motivate people to perform better and augment (sometimes) under-market base pay. Before this, company stars sometimes did well, but those who came in early and helped turn a good idea into a great company received little more than experience and the pleasure of the job. Broadway companies are finally seeing the benefit of sharing more than just acclaim.

Consultants are not magic. We usually know the same things you know. Sometimes we have better data. Sometimes we have more polished techniques and tools. Sometimes we have more complete answers for questions. Mainly, we have an air of outside credibility (and the weight of a decent consulting fee) that makes people believe they should listen.

Please note, that for all of the talk about pay clawbacks, it appears that both Mr. Stumpf and Ms. Tolstedt each still have over $100 million in potential retirement payments that remain outstanding.

A friend of mine likes to say: “It’s not that incentive pay doesn’t work well, it’s that it works TOO well. It usually does exactly what it is designed to do, even if that wasn’t your intent.” Wells Fargo just paid $185Min fines and penalties because its employees fraudulently opened additional accounting for people who were already customers.