All in Compensation Plan Design
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 best pay program can’t beat the head wind of a disinterested or actively negative CEO. I have seen numerous examples of professionals who have tried to force a great approach on their CEO only to see it crumble over time. When evaluating the cause of compensation problems, it’s a good idea to start with the five items below.
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.
The next group aligns pretty well with Target levels of achievement:
6. We Believe
Congratulations, you read this sentence! Not impressed? You shouldn’t be. You probably would be looking at this article if you couldn’t read basic sentences. Celebrating a foregone conclusion is a spiraling path to mediocrity. Achieving the inevitable is not an accomplishment.
This rule is a modification of a proposal that has been floating around for a few years. It is designed to allow individuals who exercise stock options, or vest in RSUs to delay recognizing the income and associated taxes. The theory is that this will allow people to become owners at a lower initial cost and catch up when there is some liquidity in the stock. BUT…
Is your compensation structure a Payalotasuar? Could it be an Equitops? Maybe it’s a Budgetgonadon. No matter your approach to pay, you are probably acting as a Compensation Paleontologist to get things done.
As compensation professionals, it is our responsibility to educate people about our tools. Perhaps we have been a bit complacent over the past decade. The people who represent us, our companies, and our employees have an obligation to know what makes us successful. Those of you who have tried to teach yourself about equity compensation may have found it was not an easy task. Imagine if you were a politician and this was item 133 on your priority list!
Stock Options, Restricted Stock Units, young Performance Units and their cousin Non-Qualified Deferred compensation tragically died in 2017 as an unintended consequence of colliding with the 429 page U.S. tax reform called the ‘‘Tax Cuts and Jobs Act.’’ It should be noted that Employee Stock Purchase Plan is currently in critical condition at a local hospital.
Executive compensation is always in the spotlight. With all of that attention, mostly focused on supposed failures, you’d think that we would have seen some fairly dramatic changes over the past decade. The truth is, even with lots of new regulations, some fairly visible failures in governance and annual increases that surpass the rank and file every year, executive pay has stayed fairly consistent.
Hiring a great salesperson is the key to success for many high-growth companies. The Rainmaker, high-earner, big kahuna or closer can change the growth directory for any company, large or small. These great revenues generators do not come cheap. In fact, they may often make more money than anyone else in the company. They may be worth it.
I often hear statements like, “Our employees don’t value that. We asked them.” Overall, we have improved our efforts to engage our employees in the participation in new of pay programs, but perhaps we should be asking different questions.
IPOs and equity compensation have become almost mythical in the media and entertainment. Because of this they are often mythical in the eyes of your employees. We have all read about the massage therapist, artist or receptionist who became multimillionaire when their company went public. We have all see the headlines about twenty-something billionaires.
A growing best practice is building regular reporting summaries at critical decision and measurement points. These summaries often include pictures or easy data visualization because our brains are best at remembering images. These summaries become a diary of our past. At their best, they also include the "why" of each decision. This approach to remembering history is seen in things like "Facebook memories" and old family videos but is very new to the world of total rewards.
I promise you if NASCAR tossed its rule book, teams would immediately build better, faster, and more incredible race cars. The best teams would become better. The most innovative teams would try new things, most of which could be proven to work elsewhere (Formula 1 aerodynamics, next generation tires, lightweight cars, etc.) Those who stick with their old cars would seldom compete at any race and would never compete for a season title.
Not so long ago nearly all of the “big” executive compensation consulting firms were touting Relative Total Shareholder Return (R-TSR) as the solution to executive pay misalignment. Just add this one ingredient to LTIP and your officers and shareholders will be happy! In the past six months, many of those same firms have explained how it is crazy to depend on ONLY Relative TSR. They are now focusing the majority of performance weighting on financial and operational metrics.