Long-Term Incentives for a Short Term Generation

stickman LTI for STI Generation.jpeg

Long-Term Incentives for a Short Term Generation

Deloitte recently published a fascinating report on their 2018 Millennial Study. They received responses from more than ten thousand Millennials and almost two thousand more from Generation Z. There is a ton to unpack in this report, so I’m going to focus only on employee tenure for now. You may want to download the entire report to learn more about culture, learning, and development, etc.

43% of Millennials and 61% of Gen Z plans to leave their current jobs within two years. Only 28% of Millennials and 12% of Gen Z plan to stay for five years. First, that’s a big ol’ gap! Second, this means that the majority of these workers do not intend to benefit from the entirety of their Long-Term Incentives (LTI). In the case of LTI awards with 3-year cliff vesting (like many RSUs), they don’t plan to get ANY of the value. This creates Opportunity 1 for new, more effective, approaches to LTI.

Ironically, more than half of both groups rank pay and workplace culture as “very important” when choosing a job. More than half also think their companies focus too much on generating profit and not enough on generating jobs and employment. This creates Opportunity 2 for new, more effective LTIs.

Most fascinatingly to me was the correlation between the diversity of an organization and the intent to remain for more than five years. 69%  said they would stay beyond 5 years if their organization was diverse, versus 27% for companies that were not diverse. The creates Opportunity 3 for new, more effective LTIs.

Designing LTI to attract, motivate and retain the “next” generation:

Opportunity 1: Consider “Mid-Term Incentives” that link to Long-Term Incentives.

We all love to focus our LTI on cycles of 3 to 5 years (often longer). For this newer generation of worker, create incentive plans that can build over time. Example: Give an award that vests completely in 2 years, but allows for a bump in value if you hold the value for 3 more years. You can do this easily with Employee Stock Purchase Plans (ESPP), Restricted Stock Units (RSUs) and Stock Options. If people hold the stock they receive for a predefined period, offer an add-on award that vests over an additional two or three years.

Opportunity 2: Stop using profit as a goal. Focus on growth.

Profit is important. But it’s like working out or eating right. Most people don’t want to hear how impressive you are. Instead, focus on talking about the things drive contribute to profit. And, focus on the things that profit will allow you to do as a company. Profit, for profit's sake, doesn’t sell well to this crowd. It’s great that you still make a profit, but it may be better to focus on the good that comes from making a profit.

Opportunity 3: Use diversity as an LTI metric. (and talk about it)

This is a trickier issue. Diversity is a broad topic. The average individual can do little to impact it, but executives and managers can impact it materially. Consider adding a diversity-focused metric to your management Long-Term Incentives. Perhaps you can establish a multi-year goal to balance internal pay equity or create more diversity in career matrix execution. For many companies, this will be an easy win that has little downside. Regardless of the diversity metric selected, you won’t be able to make everyone happy. This will be a metric that evolves and grows over the years. Given its potential impact on retention, it seems like it may be worth the effort.

Lastly, communicate your commitment and prove it in your execution. This generation is looking for more than lip service. It expects results and seems willing to hold you to them. If we can learn to energize and engage them, Millennials and Generation Z professionals will be the secret weapon to success over the next decade.

One Woman is Ruining Executive Compensation

I’d Gladly Pay You Tuesday for Work Performed Today