All in Compensation Philosophy

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?

Triennial merit pay increases are the latest trend in compensation. This exciting new approach to base pay is something to consider before your next round of raises. Once every three years.

I have listed five reasons to consider triennial increases and am sure you can add to this list. I am also sure that naysayers will point out potential problems, but we optimists can chat about those some other time.

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.

At the companies who eschew variable pay altogether, the problem can be worse. Many of these companies pay base above the median. Over the year, the compounding growth in base pay outpaces the market, their needs, and the companies’ budget. High base pay can be a great approach, but it must be managed and explicitly communicated. Errors in this philosophy can be hard to correct.

Every musician will tell you that a great conductor can draw a better performance than an average one. They provide insight, emotion and energy to everyone involved. The best conductors are also aware when someone needs help or a little more time. They contour the performance of the group to match the strengths of the soloist and they ensure that the music uplifts the visual presentation, rather than overshadow it.

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…

It is the holiday season and during this chilly time of the year many reach for a nip of whisky to create some warmth. Scotch is not a drink for everyone. But, for those who partake little else can replace it. Equity compensation is similar. It isn’t perfect for every company, or every situation, but when is done right it can be a game-changer.

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.

We have been living in an age of 3% annual increases for several years.  Sometimes it’s a bit more; sometimes it’s a bit less. On average, it’s not too inspiring. We do our best to give a bit more to our best performers, but those in the middle must fend for themselves. It’s not hard for them to find a time machine.

Stop. Take a quick evaluation of the fires you are currently trying to put out. Do any of the following sound familiar? Unplanned succession planning? Short-term incentive plan that doesn’t align well with recent company performance? An equity plan that is undervalued by participants or running out of shares? Market pricing that your talent acquisition team claims is off-target? Pay levels and execution that do not match your compensation philosophy (or vice versa)? Your list may differ, but I know you have a list.

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.

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.