Post on 24-Jul-2020
How to Create an Incentive Planthat Pays for Itself
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Today’s Presenter:
Ken GibsonSenior Vice President(949) 265-5703kgibson@vladvisors.com
23201 Lake Center Drive, Suite 207 ⬧ Lake Forest, CA 92630 ⬧ 949-852-2288
www.VLadvisors.com ⬧ www.PhantomStock.com
How to Create an Incentive Planthat Pays for Itself
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Post Webinar Intro
5 Minutes: Who We Are What We Do How We Do It
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23201 Lake Center Drive, Suite 207
Lake Forest, CA 92630
(888) 703 0080www.vladvisors.com
www.phantomstock.com
www.bonusright.com
Headquartered in Lake Forest, CA Founded in 1996 Over 600 clients throughout North America
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What Have You Learned?
During the lockdown– What organizational
flaws were revealed? What structural issues
had the biggest financial impact?
What changes have you instituted to minimize risk in the future?
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Key Question
How would your compensation strategy have been different had you known the coronavirus economy was coming?
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Answer of Most Business Leaders
More flexibility Fewer high-cost
guarantees
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Why?
Compensation is expensive and can wreak havoc on cash flow.
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Flaws Revealed by COVID-19 Economy
Unbalanced Pay Offerings
Heavily weighted to guarantees (salaries, benefits)
Heavily weighted to short-term performance rewards (bonus or other STIP)
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The Coronavirus Economy Dilemma
Sample Position
Salary Short-Term Value
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
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The Future Ideal
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
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3 Keys to Creating an Incentive Plan that Pays for Itself
1. Measure & Reward Value Creation2. Adopt a Wealth Multiplier Pay
Philosophy3. Tie Rewards to Productivity Profit
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1. MEASURE & REWARD VALUE CREATION
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Case Study
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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.’ ”
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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 in
profit goes to company The next $20 million
goes to the incentive pool
From there on, 50/50 between company & incentive pool
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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.
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Outcomes, not Methods
"You cannot hold people responsible for results if you supervise their methods.“
(Stephen R. Covey)
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"You cannot hold people responsible for results if you pay them for their methods.“
(VisionLink)
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Replace Incentives with 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
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Shareholder Priority
Sustainable and growing profitability
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Key Metric
Focus on One of These:
Profit
Increase in Profits (% or $)
(Sometimes: Revenue Growth)
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2. ADOPT A WEALTH MULTIPLIER PAY PHILOSOPHY
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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.
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Old School
Defensive
Wealth Creation
Wealth Multiplier
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Pay Philosophy Evolution
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Wealth Multiplier
Let’s Secure Growth Partners
PhilosophyShare economic value. "If you create financial value, you will participate in a generous portion of it."
Cost or Investment?Compensation is allocated to produce the highest possible return for both shareholders and contributing employees.
SalariesWe use data for benchmarking, but our pay philosophy drives where we want to be vis a vis market pay.
BonusesBonuses (value sharing plans) are tied to profits and are not capped.
Long-term Incentives (quasi-equity)
Viewed by top performers as the most meaningful part of their rewards program.
ResultsIf you want to be able to attract and retain the best talent in your industry and have them adopt a stewardship mindset regarding shareholder goals, this is your system.
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Wealth Multipliers vs. Wealth Creators
Wealth Creators Profitability focus Recruit to skills and
experience Pay is an expense to be
contained Salaries and total pay
should be “at market” “Pay-for-performance”
Wealth Multipliers Accelerate value creation Recruit premier talent that
fits performance expectations
Pay is an investment that should produce a growing return
Market pay for bench marking but pay philosophy drive comp strategy
Sharing value with value creators.
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The Value of Profit
Wealth Multiplier
Profits
Secure Business
Reward Employee
Results
Protect Shareholders
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A Sense of Partnership Leads to a Growth
Multiple
The Value of Profit
Wealth Multiplier
Profits
Protect Shareholders
Secure Business
Reward Employee
Results
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Wealth Multiplier Philosophy
We believe all stakeholders should participate in the wealth multiple they help create.
Fair
Prudent
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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)
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Key
One Value Sharing Philosophy
Rewards Plans for Two Distinct Performance Periods:
1. 12 months and under
2. 3 years and longer
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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)
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Setting Payout Thresholds
Base
Target (budget)
Superior
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What’s Base?
Base is the threshold amount of profit that justifies employee bonuses
Begin sharing value above that threshold
Below Base = No bonus You should expect to achieve Base
performance 4/5 years
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What’s Target?
Target is the amount of profit that is expected to be achieved
Bonus values at Target should be your “Market” opportunity
You should expect to achieve Target performance 3/5 years
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What’s Superior?
Superior is the amount of profit that is achievable assuming exceptional performance
Bonus values at Superior should be impressive
You should expect to achieve Superior performance 1/5 years
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Other Metrics
Minimum profit thresholds must be met first. Then…
Department or team metrics
Non-correlated factors (customer retention, customer or client increase, etc.)
Individual performance metrics
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Ways to treat individual performance
Component of the allocation
Discretion
Modifier
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Component of Allocation
Allocation to plan participants contingent on:
▪ Company Performance – Employees should have all or a majority portion of their bonus based on company performance
▪ Org Unit Performance – A portion of an employee’s bonus can be allocated based on department, location, division, or business unit
▪ Individual Performance – A portion of the bonus is allocated to Individual Results
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Problems
Unless the slice is big, many employees will pay little attention to it
▪ “I can still get 75% of my bonus without worrying about that piece”
Performance management score may not be trustworthy
▪ “I hate to give him a low score because it will reduce his bonus”
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Problems
Full (or even partial) discretion may lead to charges of unfairness or even discrimination
▪ “Why was he paid more than me?”
Lengthy list of employee goals may be hard to track fairly or accurately
▪ “I didn’t get that done because you asked me to focus on something new”
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Performance ManagementRevolution
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Individual Performance
Trend is to disconnect performance from incentive pay
Performance Management is still important
Managers more likely to be honest about performance if incentives are not directly correlated to performance rating
If performance is deemed “unacceptable” discretion should be utilized to eliminate incentive payment
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Solution: Spot Bonuses
For employees that make special contributions over the course of the year…
Create a discretionary reserve inside of plan funding
Reserved for “exceptional” performers only
Point to clear contributions (the reason for the award)
Immediate recognition (not end of the year)
Nomination process
Budget a “reserve” to fund these awards
They don’t have to be big ($500)
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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
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Grant Equity or
Not Equity?
Full Value or
Appreciation Only?
Yes
Appreciation
Stock Option
Full Value
Performance Based?
Yes
Performance Shares
No
Restricted StockNo
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 StockFinancial
Performance
Appreciation-
Performance Based or
Employee Directed?
Performance
BasedReward for Profit/Cash
Flow or Other Metrics?
ProfitsAllocation or
Objectives Based?
Allocation
Profit Pool
ObjectivesOther Metrics
Performance Unit
Employee Directed
Strategic Deferred
Compensation
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Phantom Stock
Company establishes a phantom share value (formula or valuation)
Employees given an award that has current value essentially equivalent to company stock value (subject to vesting schedule)
No rights of ownership
Rewards for past contributions and future growth
Payments will be made in cash (or stock) at pre-determined dates
Full value awards create a direct link to ownership
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Performance Phantom Stock
Employees given the promise to receive phantom shares upon fulfillment of pre-determined (often annual) financial goals
Shares can be full value or appreciation only
“Double” pay-for-performance concept
▪ You earn shares based on performance
▪ Share values go up based on performance
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Phantom Stock Options
Employees given a promise of cash payment at a future date
The value will be based on the appreciation in stock price from the date of award to the date of redemption (like stock appreciation rights)
Like stock options but without the need to pay for shares
Rewards employees for contributing to the increase in enterprise value
Can be part of the employee’s annual pay package
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3. TIE REWARDS TO PRODUCTIVITY PROFIT
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Replace Incentives with 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
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Shareholder Priority
Sustainable and growing profitability
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Not Just Profit but Productivity Profit
Productivity profit is that surplus that can be attributable to the performance of your people.
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Productivity Profit
The Secret to Creating an Incentive Plan that Pays for Itself
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Productivity Profit CalculationItem 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) 58
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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
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Result: Unlimited Earnings PotentialItem 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
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Special Offer
The Productivity Profit Workbook
Request your copy on the final survey.
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Market a Future
Build a Sense of Partnership
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The Coronavirus Economy Dilemma
Sample Position
Salary Short-Term Value
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
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The Future Ideal
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
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Market a Future
Here’s the short-term picture
Here’s our vision for the future.
Here’s how we plan to get there.
Here’s the role we need you to perform.
Here are the resources you will be able to use.
Here’s our philosophy about pay and rewards.
Here are the specific pay programs you’ll participate in.
Here’s how our pay programs will work for you if we achieve our plan.
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Employee Value Statement
Year 1 2 3 4 5
TargetedResults
100% 100% 100% 100% 100%
Salary $160,000 $166,400 $173,056 $179,878 $187,177
STVS $64,000 $66,560 $69,222 $71,991 74,871
LTVS(EOY)
-- $74,000 $186,000 $311,000 $448,000
401(k)@7%
$17,120 $36,123 $57,169 $80,428 $106,086
Total Cash
$224,000 $232,960 $242,278 $251,970 $262,048
WealthAccrual
$17,120 $110,123 $243,169 $391,428 $554,086
TotalValue
$241,120 $567,083 $942,407 $1,342,636 $1,767,343
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3 Keys to Creating an Incentive Plan that Pays for Itself
1. Measure & Reward Value Creation2. Adopt a Wealth Multiplier Pay
Philosophy3. Tie Rewards to Productivity Profit
6868
Take advantage of a one-half hourconsulting call with a VisionLinkprincipal at no charge.
Indicate interest on final survey.
Request Consultation & Take Survey
Request a copy of our slides, report,
complimentary consultation and BonusRight demo.
We value your input.
6969
Special Offer
The Productivity Profit Workbook
Request your copy on the final survey.
7070
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www.BonusRight.comwww.bonusright.com
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New SaaS tool
Build and manage your bonus plan online.
7373
Free Tool
Introducing: The Total Rewards Assessment
Indicate on survey if you would like to schedule a demo.
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Post Webinar Intro
5 Minutes: Who We Are What We Do How We Do It
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Q&A
7777
Today’s Presenter:
Ken GibsonSenior Vice President(949) 265-5703kgibson@vladvisors.com
23201 Lake Center Drive, Suite 207 ⬧ Lake Forest, CA 92630 ⬧ 949-852-2288
www.VLadvisors.com ⬧ www.PhantomStock.com
Thank You!
7878
Post Webinar Intro
5 Minutes: Who We Are What We Do How We Do It
7979
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VisionLink’s Focus: Help Business Leaders Build and Sustain a High Performance Culture
Accelerate performance through pay strategies that transform employees into growth partners.
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.
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Today’s Presenter:
Ken GibsonSenior Vice President(949) 265-5703kgibson@vladvisors.com
23201 Lake Center Drive, Suite 207 ⬧ Lake Forest, CA 92630 ⬧ 949-852-2288
www.VLadvisors.com ⬧ www.PhantomStock.com
Thank You!