All in Executive Compensation

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?

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.

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!

My name is Equity Compensation and I have recently read of my passing and that of my family. I am happy to announce that I am alive. Dan Walter, the President and CEO of Performensation wrote my obituary a bit prematurely ("Obituary for Equity Compensation"). Like any famous personality I fully expect people to have an obituary ready to go, but I dislike having it published before I am actually gone.

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.

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.

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.