Which is Better in an Uncertain Economy

Which is Better in an Uncertain Economy
Which is Better in an Uncertain Economy— Higher Salaries or Bigger Incentives?
22 Today’s Presenter: Ken Gibson SeniorVice President (949) 265-5703 kgibson@vladvisors.com 23201 Lake Center Drive, Suite 207 ⬧ Lake Forest, CA 92630 ⬧ 949-852-2288 www.VLadvisors.com ⬧ www.PhantomStock.com
Which is Better in an Uncertain Economy— Higher Salaries or Bigger Incentives?
44 We’re happy to provide a copy of today’s slides. To open or close the control panel: Click the red arrow For questions during today’s presentation: Use the question area on your control panel Webinar Q: Are the slides available? A: Yes, more info will be provided at the end
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77 Post Webinar Intro 5 Minutes:  Who We Are  What We Do  How We Do It
88 23201 Lake Center Drive, Suite 207 Lake Forest, CA 92630 (888) 703 0080 www.vladvisors.com www.phantomstock.com www.bonusright.com  Headquartered in Lake Forest, CA  Founded in 1996  Over 600 clients throughout North America
99 What is the “New Economy?”  Post COVID  Uncertainty  Nature of business has changed  The “job to be done” has evolved  Expectations are different  Many unknowns
1010 Consensus Future business is not going to be the same.
1111 Therefore, What? Cannot assume what worked in the past will work in the new economy.
1212 Key Question How would your compensation strategies have been different had you known the coronavirus economy was coming?
1313 Answer of Most Business Leaders  More flexibility  Fewer high-cost guarantees
1414 What Was Impacted? Key Insight: Compensation is expensive and can wreak havoc on cash flow.
1515 Dilemma Created Pay salaries, or ▪ Furlough employees ▪ Lay off employees ▪ Ask employees to take lower salary Pay incentives, or ▪ Freeze plan ▪ Change the performance period ▪ Change the performance requirements
1616 Core Cause Lack of Agility
1717 What is the Ideal? Agile but Stable
1818 5 Keys to Balancing Salaries & Incentives… ..and Creating the Ideal Pay Strategy in the Process 1. Define Value Creation 2. Define Your Pay Philosophy 3. Replace Incentives with Value-Sharing 4. Understand the Talent Market 5. Create Structured Flexibility
1919 1. DEFINE VALUE CREATION
2020 Case Study
2121 Keith Williams  Assumed leadership of UL in 2005  Company carrying considerable debt  Losing market share  Low employee morale  UL had become bureaucratic and “siloed”
2222 Core Changes Shift from “Incentives” to “Value Sharing”  Took away local measurements driving management incentive plans—all paid on same metrics ▪ “We live together and we die together”  Aligned everyone behind company success ▪ “I call it ‘pay the company first.’ ”
2323 Pay the Company First “Basically, up to the company’s operating profit target, all of the profits go to the company; and only after that target is met, do we start funding the incentive pool.” Example: If UL’s target is $80 million--  100% of first $80 million in profit goes to company  The next $20 million goes to the incentive pool  From there on, 50/50 between company & incentive pool
2424 Pay the Company First Once value creation is defined, compensation can follow a formula for sharing value in a way that aligns key producers with the company’s business plan and priorities.
2525 2. DEFINE YOUR PAY PHILOSOPHY
2626 Pay Philosophy A written statement of what the company is willing to “pay for.” Should be tied to value creation.
2727 Compensation Philosophy Statement  How value creation is defined.  How value is shared—and with whom.  How market pay standards apply.  How guaranteed pay and value- sharing will be balanced.  How short and long-term value- sharing will be balanced.  How merit pay is defined.
2828 Key Areas to Focus On  Explore and refine “emergency” principles.  Determine priorities for cash and non-cash compensation, as well as benefits.
2929 Then What?  Put it in writing  Refer to it frequently  Communicate it  Emphasize what will be rewarded
3030 3. REPLACE INCENTIVES WITH VALUE-SHARING
3131 From Incentives to Value-Sharing The premise should be to promote value creation and value-sharing: ▪ “When you help us create value you participate in that value” ▪ Define value creation around the shareholders’ most important goals
3232 Outcomes, not Methods "You cannot hold people responsible for results if you supervise their methods.“ (Stephen R. Covey) 32 "You cannot hold people responsible for results if you pay them for their methods.“ (VisionLink)
3333 Shareholder Priority Sustainable and growing profitability 33
3434 Key Metric Focus on One of These:  Profit  Increase in Profits (% or $)  (Sometimes: Revenue Growth) 34
3535 Not Just Profit but Productivity Profit Productivity profit is that surplus that can be attributable to the contributions of your people, not just the contributions of capital.
3636 Calculate Productivity Profit The key to value sharing
3737 Productivity Profit Calculation Item Amount Capital Account $20,000,000 Cost of Capital 12% Capital Charge $2,400,000 Operating Income $10,000,000 Productivity Profit $7,600,000 Total Rewards Investment $25,000,000 ROTRI™ Return on Total Rewards Investment 30.4% (ROTRI™ = Productivity Profit/Total Rewards Investment) 37
3838 Example: Item Figure Capital Account $20,000,000 Cost of Capital 12% Capital Charge $2,400,000 Operating Income $10,000,000 *Productivity Profit $7,600,000 Total Rewards Investment $25,000,000 ROTRI™ 30.4% (ROTRI™ = Productivity Profit/Total Rewards Investment) *Variable Pay Plans (Value Sharing) are financed from Productivity Profit 38
3939 Result: Unlimited Earnings Potential Item Figure Capital Account $20,000,000 Cost of Capital 12% Capital Charge $2,400,000 Operating Income $10,000,000 *Productivity Profit $7,600,000 Total Rewards Investment $25,000,000 ROTRI™ 30.4% (ROTRI™ = Productivity Profit/Total Rewards Investment) *Variable Pay Plans (Value Sharing) are financed from Productivity Profit 39
4040 Which is more important—rewarding short-term or sustained performance?
4141 Answer
4242 Dual Focus Peter Drucker once wrote that the manager’s job is to keep his nose to the grindstone while lifting his eyes to the hills. He meant that every business has to operate in two modes at the same time: producing results today and preparing for tomorrow. (Ken Favaro, Strategy+Business)
4343 Key One Value Sharing Philosophy with Plans that Reward Two Distinct Performance Periods: 1. 12 months and under 2. Longer than 12 months
4444 Wealth Multiplier Philosophy We want all stakeholders to participate in the wealth multiple they help create.  Fair  Prudent
4545 Rules of Thumb  Short-term value sharing should be tied to profit (ideally productivity profit)  Long-term value sharing should be tied to business growth (increase in company value)
4646 9 Long-Term Value Sharing Alternatives Stock Option Performance Shares Restricted Stock Phantom Stock Option Performance Phantom Stock Phantom Stock Profit Pool Performance Unit Strategic Deferred Compensation
4747 Grant Equity or Not Equity? Full Value or Appreciation Only? Yes Appreciation Stock Option Full Value Performance Based? Yes Performance Shares No Restricted Stock No Reward for Value Increase or Financial Performance? Value Increase Full Value or Appreciation? Appreciation Phantom Stock Option Full Value Performance Based? Yes Performance Phantom Stock No Phantom Stock Financial Performance Appreciation- Performance Based or Employee Directed? Performance Based Reward for Profit/Cash Flow or Other Metrics? Profits Allocation or Objectives Based? Allocation Profit Pool ObjectivesOther Metrics Performance Unit Employee Directed Strategic Deferred Compensation
4848 4. UNDERSTAND THE TALENT MARKET
4949 Key Questions  How would you describe the kind of experience you want your employees to have at your company?  How would your employees define the kind of experience they are actually having?
5050 Why it Matters  Your employees control the kind of experience your customers will have with your company  Your employees are your best source for attracting new talent  Your employees will determine whether your business will thrive or stall as you head into the post-COVID future. Your employees will choose whether to become growth partners or growth inhibitors.
5151 But… Shouldn’t employees be happy just to have a job? It’s not 2008. This is different.
5252 Prior to COVID-19 “Nearly 70% of business leaders participating in a new global survey said the current talent pool is shrinking. As a result, the competition for talent has increased, forcing employers to change their recruiting strategies.” (“Study: Shrinking Talent Pool Has Recruiters shifting Strategies,” HR Dive, October 5, 2018, Valerie Bolden-Barrett)
5353 Did the Pandemic Change This?
5454 Evidence How many of your key performers—people who are true catalysts and strategic leaders—have you laid off since COVID-19?
5555 Why You Must Understand the Talent Market In a talent market that has a shrinking pool of skilled labor, where will employers look for new talent? No one can afford to passively wait until the right talent appears. They have to proactively pursue the people they need—and create an environment that will draw them in.
5656 Conclusion There is much riding on your understanding the talent market
5757 Talent Pool: Primarily Millennials  Launchers  Accelerators  Catalysts
5858 Launchers  Many just left the university  1st or 2nd career job  Most are single
5959 Accelerators  Experience with more than one company  Desire to rise in ability, recognition, contribution and influence.  Many single but a growing number are married and are starting families
6060 Catalysts  Mid-30s  Meaningful experience  Unique abilities  Able to affect significant (positive) change  Companies are competing for their talents  Have leverage  Many married and have children
6161 Understand the Employees’ View of Pay How do employees look at compensation and what matters to them?
6262 6 Reasons Employees Care About Pay Personal 1. Lifestyle & Wealth Accumulation 2. Career Measurement 3. Contribution Ambitions Business 4. Roles, Expectations & Priorities 5. Partnership 6. Continuity & Fairness
6363 Financial “Hierarchy of Needs” Cash Flow & Living Standard Risk Protection Retirement Planning Value Sharing Wealth Accumulation Qualified & Executive Retirement Plans Comprehensive, Flexible Benefits Plan Short & Long-Term Incentive Plans Salary & Bonus Wealth Multiplier Philosophy Clear Pay Philosophy 1 2 3 4 5
6464 Hierarchy & Millennial Segments Launchers Area Orientation Cash Flow/Standard of Living • Pay expectations still being formed • Modest needs • Competitive salary and mentoring Risk Protection • Basic needs • Don’t want to pay anything Retirement • Small or little concern VS/Wealth Accumulation • More concerned about money for this weekend • Short-term preferred over long-term
6565 Hierarchy & Millennial Segments Accelerators Area Orientation Cash Flow/Standard of Living • Context: • Experience • Peer Pay • Life Responsibilities • College Debt Risk Protection • Adequacy of coverage— family focus • Cost sensitive Retirement • Growing Focus VS/Wealth Accumulation • Emphasis on increased cash flow • Short-term preferred over long-term
6666 Hierarchy & Millennial Segments Catalysts Area Orientation Cash Flow/Standard of Living • Prefer median of market pay but with high upside potential Risk Protection • Want flexibility and options • Maximum Control Retirement • Two areas of focus: • Retirement accumulation • Current tax savings • Deferred compensation VS/Wealth Accumulation • Large area of emphasis • Focus on long-term opportunity • Mirror owner opportunity
6767 5. CREATE STRUCTURED FLEXIBILITY
6868 Combine Agility and Stability
6969 The Need for Pay Agility Create a rewards strategy that is flexible and combine it with an operational structure that is enduring.
7070 Flexible but Enduring  Look at compensation strategy as you would an investment portfolio.  Individual pay components are your “asset classes.”  As things change, adjust weighting of each asset class.
7171 Develop a Balanced Approach The role of each pay component in relation to others within the comprehensive compensation strategy is coordinated and clear— and reflects the company’s pay philosophy.
7272 Eight Components of Pay Benefits  Core benefits  Executive benefits  Qualified retirement plans  Supplemental retirement plans Compensation  Salary  Performance incentives  Sales incentives  Growth incentives Incentives should be in the form of value sharing.
7373 Build a Total Compensation Structure A total compensation structure gives you a comprehensive view of all compensation and benefit plans and ensures operational integrity.
7474 The Total Compensation Structure Min Mid Max 1 203,531 271,375 339,219 50.0% 100% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 15,000 20,000 2 150,078 200,103 250,129 35.0% 75% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 10,000 12,500 3 119,497 159,329 199,161 25.0% 50% 100% 0% 5% Yes 5% $11,141 25 5 5,000 8,000 4 102,632 136,843 171,054 20.0% 25% 100% 0% 5% $6,127 25 5 5,000 5 81,293 101,616 121,940 15.0% 5% $6,127 25 5 5,000 6 69,720 87,150 104,580 15.0% 5% $6,127 15 5 7 58,564 73,205 87,846 10.0% 5% $6,127 15 5 8 50,176 62,720 75,264 10.0% 5% $6,127 15 5 9 44,038 51,809 59,580 5.0% 5% $6,127 15 5 10 37,211 43,777 50,344 5.0% 5% $6,127 10 5 11 30,784 36,217 41,649 5.0% 5% $6,127 10 5 12 23,562 27,720 31,878 5.0% 5% $6,127 10 5 13 19,529 22,975 26,421 0.0% 5% $6,127 10 5 14 17,354 20,417 23,479 0.0% 5% $6,127 10 5 Annual Car Allow Grade/ Band Sick Days Salary Range Bonus Target LTIP Target Financial Planning Perk Deferred Comp Elegible Deferred Comp Max Match 401k Match Max % Vacation Days % Phantom Stock FV % Phantom Stock AO Health, Dental, Life
7575 Creating a Balance Total Compensation Structure Name Title/Position Tier Salary Short-term Incentive Target Long-term Incentive Target Total Direct Comp H&W Annual Value QRP Annual Value Security Plans Annual Value Total Indirect Comp TRI Jason Smith CEO 1 $ 300,000 $ 120,000 $ - $ 420,000 $ 18,200 $ 8,000 $ - $ 26,200 $ 446,200 Lucy Jones VP Marketing 2 $ 210,000 $ 45,000 $ - $ 255,000 $ 16,200 $ 7,000 $ - $ 23,200 $ 278,200 Rick Miller VP Sales 2 $ 160,000 $ 85,000 $ - $ 245,000 $ 9,200 $ 6,000 $ - $ 15,200 $ 260,200 Janice Johnson CFO 2 $ 195,000 $ 40,000 $ - $ 235,000 $ 10,200 $ 5,000 $ - $ 15,200 $ 250,200 Maria York Director 3 $ 160,000 $ 10,000 $ - $ 170,000 $ 12,200 $ 4,000 $ - $ 16,200 $ 186,200 Frank North Director 3 $ 150,000 $ 10,000 $ - $ 160,000 $ 11,200 $ 3,000 $ - $ 14,200 $ 174,200 Ricardo South Director 3 $ 140,000 $ 10,000 $ - $ 150,000 $ 7,700 $ 2,000 $ - $ 9,700 $ 59,700 Simon Lewis Director 3 $ 130,000 $ 10,000 $ - $ 140,000 $ 8,700 $ 2,500 $ - $ 11,200 $ 151,200 $ 1,445,000 $ 330,000 $ - $ 1,775,000 $ 93,600 $ 37,500 $ - $ 131,100 $ 1,906,100 How are these values determined? Why no LTI to balance the STI? Should we be addressing these needs?
7676 What Does It Tell You? Total Rewards Investment (TRI) Allocation TRI looks at each component of pay as a percentage of the total Name Tier Salary STI% LTI% H&W% QRP% SP% TRI Jason Smith 1 67.2% 26.9% 0.0% 4.1% 1.8% 0.0% $ 446,200 Lucy Jones 2 75.5% 21.4% 0.0% 7.7% 3.3% 0.0% $ 278,200 Rick Miller 2 61.5% 53.1% 0.0% 5.8% 3.8% 0.0% $ 260,200 Janice Johnson 2 77.9% 20.5% 0.0% 5.2% 2.6% 0.0% $ 250,200 Maria York 3 85.9% 6.3% 0.0% 7.6% 2.5% 0.0% $ 186,200 Frank North 3 86.1% 6.7% 0.0% 7.5% 2.0% 0.0% $ 174,200 Ricardo South 3 87.7% 7.1% 0.0% 5.5% 1.4% 0.0% $ 159,700 Simon Lewis 3 86.0% 7.7% 0.0% 6.7% 1.9% 0.0% $ 151,200 Salary STI% LTI% H&W% QRP% SI%
7777 Pursuing a Balanced Structure Total Compensation Structure Name Title/Position Tier Salary Short-term Incentive Target Long-term Incentive Target Total Direct Comp H&W Annual Value QRP Annual Value Security Plans Annual Value Total Indirect Comp TRI Jason Smith CEO 1 $ 300,000 $ 75,000 $ 75,000 $ 450,000 $ 18,200 $ 8,000 $ 15,000 $ 41,200 $ 491,200 Lucy Jones VP Marketing 2 $ 210,000 $ 36,750 $ 36,750 $ 283,500 $ 16,200 $ 7,000 $ 10,500 $ 33,700 $ 317,200 Rick Miller VP Sales 2 $ 160,000 $ 60,000 $ 40,000 $ 260,000 $ 9,200 $ 6,000 $ 8,000 $ 23,200 $ 83,200 Janice Johnson CFO 2 $ 95,000 $ 34,125 $ 34,125 $ 263,250 $ 10,200 $ 5,000 $ 9,750 $ 24,950 $ 288,200 Maria York Director 3 $ 160,000 $ 16,000 $ 16,000 $ 192,000 $ 12,200 $ 4,000 $ 8,000 $ 24,200 $ 216,200 Frank North Director 3 $ 50,000 $ 15,000 $ 15,000 $ 180,000 $ 1,200 $ 3,000 $ 7,500 $ 21,700 $ 201,700 Ricardo South Director 3 $ 140,000 $ 14,000 $ 14,000 $ 168,000 $ 7,700 $ 2,000 $ 7,000 $ 16,700 $ 184,700 Simon Lewis Director 3 $ 30,000 $ 13,000 $ 13,000 $ 156,000 $ 8,700 $ 2,500 $ 6,500 $ 17,700 $ 173,700 $ 1,445,000 $ 263,875 $ 243,875 $ 1,952,750 $ 93,600 $ 37,500 $ 72,250 $ 203,350 $ 2,156,100 We’ve reduced the STI targets. But we’ve balanced with a LTIP (wealth creation). This can strengthen partnership and improve retention.
7878 A Better Balance? Total Rewards Investment (TRI) Allocation TRI looks at each component of pay as a percentage of the total Name Tier Salary STI% LTI% H&W% QRP% SP% TRI Jason Smith 1 61.1% 15.3% 15.3% 3.7% 1.6% 3.1% $ 491,200 Lucy Jones 2 66.2% 17.5% 17.5% 7.7% 3.3% 5.0% $ 317,200 Rick Miller 2 56.5% 37.5% 25.0% 5.8% 3.8% 5.0% $ 283,200 Janice Johnson 2 67.7% 17.5% 17.5% 5.2% 2.6% 5.0% $ 288,200 Maria York 3 74.0% 10.0% 10.0% 7.6% 2.5% 5.0% $ 216,200 Frank North 3 74.4% 10.0% 10.0% 7.5% 2.0% 5.0% $ 201,700 Ricardo South 3 75.8% 10.0% 10.0% 5.5% 1.4% 5.0% $ 184,700 Simon Lewis 3 74.8% 10.0% 10.0% 6.7% 1.9% 5.0% $ 173,700 Salary STI% LTI% H&W% QRP% SI%
7979 The Current Picture Sample Position Salary Short- TermValue Sharing Total Cash Flow Impact Plan A $110,000 $11,000 $121,000 $121,000 Plan B $100,000 $30,000 $130,000 $130,000
8080 A More Flexible Picture Sample Position Salary Short-Term Value Sharing Long-Term Value Sharing Total Cash Flow Impact Plan A $100,000 $5,000 $20,000 $125,000 $105,000 Plan B $100,000 $0 $30,000 $130,000 $100,000 Plan C $80,000 $10,000 $40,000 $150,000 $90,000
8181 5 Keys to Balancing Salaries & Incentives… ..and Creating the Ideal Pay Strategy in the Process 1. Define Value Creation 2. Define Your Pay Philosophy 3. Replace Incentives with Value-Sharing 4. Understand the Talent Market 5. Create Structured Flexibility
8282
8383  Digital platform for building short and long-term value sharing plans  Efficient plan design process  Affordable plan design cost  Effective plan launch material  Superior ongoing plan management
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8787 GROWTH NOTES
Special Offer The Productivity Profit Workbook Request your copy on the final survey.
8989 Take advantage of a one-half hour consulting call with a VisionLink principal at no charge. Indicate interest on final survey. Consultation Offer & Survey Request a copy of our slides and complimentary consultation. Please respond to research question. We value your input.
9191 Q&A
9292 Today’s Presenter: Ken Gibson SeniorVice President (949) 265-5703 kgibson@vladvisors.com 23201 Lake Center Drive, Suite 207 ⬧ Lake Forest, CA 92630 ⬧ 949-852-2288 www.VLadvisors.com ⬧ www.PhantomStock.com ThankYou!
9494
9595
9696 VisionLink’s Focus: Help Business Leaders Build and Sustain a High Performance Culture Accelerate performance through pay strategies that transform employees into growth partners.
9797 If you do that… • Quality of talent will improve. • Employee engagement will expand. • Performance will be magnified. • Business growth will be accelerated. • Shareholder value will increase.
9898 Today’s Presenter: Ken Gibson SeniorVice President (949) 265-5703 kgibson@vladvisors.com 23201 Lake Center Drive, Suite 207 ⬧ Lake Forest, CA 92630 ⬧ 949-852-2288 www.VLadvisors.com ⬧ www.PhantomStock.com ThankYou!

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