I’d Gladly Pay You Tuesday for Work Performed Today
The timing of variable compensation and rewards is, and should be, a common topic here. A short while ago fellow blogger Derek Irvine, wrote an article titled “Why Wait? Timely Rewards Deliver Increased Intrinsic Motivation.” His focus was on the immediacy of rewards and the impact they have on intrinsic motivation. In 2016 Chris Dobyns wrote an article, “Time is Money” looking at “temporal discounting”. I do a lot of work with Long-Term Incentives, especially equity compensation, so I’ll try and cover this from another side of the prism.
When valuing equity compensation, many people see their company as the character Wimpy in old Popeye cartoons. “I’d gladly pay you Tuesday for a hamburger today.” Like Wimpy, the company communicates from the position of an introvert. It can often feel like the company is apologizing for offering non-cash compensation.
Let’s clear up some myths.
For most companies, equity compensation no longer granted to make up for subpar base pay. In nearly all cases equity is now frosting on the total rewards cake (or should that be cheese on the burger?) very few companies have a compensation philosophy that states: “We would like to target base pay at the 50th percentile, but we just don’t have that kind of cash, so we are going to set base at the 25th percentile and make up the difference with equity.”
Equity compensation is not monolithic. RSUs, stock options, ESPP and PSUs and other forms of real and synthetic equity are not interchangeable cogs in a well-oiled machine. Survey data may group all of them into one bucket (and exclude some altogether), but let’s all admit that it’s a terrible practice. Every type of equity serves specific purposes. The weighting and efficacy of those purposes can change based on the timing of awards and vesting; the features associated with the awards; and company granting the awards. The list is actually too long to list here.
Don’t be Wimpy
If your employees view you as Wimpy, one of two foundational issues is probably true. 1) Your company is underperforming or, 2) You have not done a good job at communicating your awards. Underperformance is tough. When you link pay to performance, but the performance isn’t well-aligned to individual or team decisions and behaviors, the results can be demoralizing (you may need a better plan design.) Communication actually isn’t that tough. If you know why your company is using equity, and your understand how the awards can deliver value, effective communication is more a result of frequency than anything else (don’t tell Margaret O’Hanlon). If you talk about the program multiple times a year, and know what you are talking about, people will listen, understand and their perceived value of their awards will grow.
What if Wimpy offered to pay you twice the price of the hamburger on Tuesday if you were willing to give it to him today? The value proposition changes. What if he was excited when he presented his proposal and was able to show you the benefit of waiting?
What if you allowed people to access their equity sooner (like an ESPP with frequent purchase dates?) What if it was easier to start the clock on income and taxes recognition (like allowing exercise prior to vest on stock options?) What if you took the time and effort to explain that RSU vesting doesn’t occur until after the IPO purely to help employees avoid a nasty tax hit when the underlying stock was illiquid?
Equity compensation is about potential and anticipation. Treat it like an amazingly cool gift that you can’t wait to give someone, and they are more likely to value the potential and excitedly anticipate it’s delivery. If you treat it like an apology, expect your employees to view it through the same lens. Sometimes we make it all too hard. Know the why of your LTI. Understand how the program works. Talk about it…a lot. Be excited when you do. As my son likes to say, it’s easy peasy lemon squeezy.