All in incentive pay

Could it be that we are designing and communicating incentives for our highest performance all wrong? A recent study titled “Reappraisal of incentives ameliorates choking under pressure and is correlated with changes in the neural representations of incentives” appears to show that the fear of losing a reward allows people to perform at the edge better than the desire for earning more award.

I began my compensation career in 1994. People still typed things (on typewriters). Email was a new thing used by only a limited few. Equity compensation was the wild west. It cost companies nothing. It was used as liberally as salt at a corner burger joint. Few companies knew all the rules and fewer followed them. Gains were expected and repricings were performed without much thought. Importantly, equity was used to fill sometimes massive gaps between cash compensation expectations and cash compensation realities. Stock options were a secret weapon of startups and IPOs to asymmetrically compete for talent against the tech titans and other big companies of the day.

Equity is a term that has become a keystone in the world of compensation. We use it in a wide-ranging list of topics including stock-based compensation, pay transparency, gender and race. I recently did a presentation about the topic titled “Three Buzzwords and One Truth. The buzzwords being fairness, transparency, and internal equity, the truth is the continued growth in variable (differentiated) pay.

On October 11, 2018, Uber filed a request (available from Axios) with the SEC to allow these workers to receive pre-IPO equity that is compliant with Rule 701 and allow those equity awards to be registered for post-IPO use and issuance under an S-8 Registration. This would be a fundamental change to equity compensation and change the playing field for companies active in the gig economy.

The more useful type of tension can be as magical as the tug of a helium balloon on the string in a child’s hand. It can also be equally difficult to control and similarly capable of escape. It can also be as dynamic as launching from a trampoline. Learning to use it properly takes practice, but the results can be pretty impressive. This is the tension that effectively links pay and performance. It is also the tension that links groups, and entire companies, together into a stronger, more cohesive entity.

I find that the Rule of Three works for nearly every incentive program, for nearly every company, and in nearly every industry. Like many good things, the process requires some additional thought and effort, but the results are effective, manageable and easy to communicate. Would the Rule of Three work for your company? If not, how would you improve it?

Perhaps I should have titled this “Ownership without leadership is almost certainly doomed.” A business near me was recently sold to a new owner. The place ran like a top for more than a decade. It had established procedures, great service and great products. The owners regularly spent time on site, and in the mix of day to day activities. Then it was sold as a “turnkey” operation.

Performance Equity in Uncertain Times

With performance units investors, individuals, rule-makers, and regulators seemed to get what they wanted. Investors got assurances that payouts were linked to their own success. Individuals received awards that had upside potential, like stock options. Rule-makers thought they had found a key to slowing the growth of executive compensation and regulators had a framework of established processes that they could apply without too much hassle. But, companies and compensation committees had a real challenge.

As compensation professionals, all we can actively do is provide data and guidance with a blind eye. But, we can also be a reminder of the opportunity each company has to fix this issue at any time they wish. There is no rule that says we must wait until next year.  There is no reason that, with every new CEO hired or promoted, this situation can’t improve. Done with simple intent without upheaval this issue can be corrected over several years, and certainly less than a decade.

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.