Compensation, Evaluation and Evolution: Set Your Own Trends for 2014

©2013 Performensation

Compensation, Evaluation and Evolution: Set Your Own Trends for 2014

December 10, 2013

Performance + Compensation = Performensation

©2013 Performensation 2

Presenting

Sam Reeve is a global certified compensation consultant (CCP, GRP) with 15 years of experience in Total Reward Strategies. He is an expert in broad-based compensation and focuses his talents on enhancing performance through the effective use of incentive and recognition programs.

Prior to joining the firm, Sam has worked in the corporate compensation functions of notable firms such as BlackRock, McKesson and Automatic Data Processing (ADP).

Sam currently lives in Colorado and aside from his professional life, enjoys numerous outdoor activities with his 4 children and wife, Jessica.

Sam has a degree in Finance and Economics from California State University, Sacramento.

SAM REEVE, CCP, GRPExecutive Vice President

TF 1 877 803 9255 ext 702Office 1 415 625 3088Mobile 1 970 403 5775

sreeve@performensation.comLinkedIn: SamReeveTwitter: @SamReeve3

©2013 Performensation 3

Presenting

Dan has more than 19 years of experience focused on aligning compensation to corporate strategy and culture. His work includes both executive and broad-based programs and he has provided end-to-end solutions for private and public companies both within the United States and abroad.

His work with start-ups and established Fortune 100 companies provides his clients with an unique perspective on compensation issues.

Dan is also a highly sought after speaker on a broad range of topics. He is board member for the National Center for Employee Ownership and the Institute for Human Resources, an award winning member of the National Association of Stock Plan Professionals and an active member of World at Work, Global Equity Organization and the Society for Certified Equity Professionals.

DAN WALTER, CEPPresident and CEO

TF 1 877 803 9255 ext 700Office 1 415 625 3406Mobile 1 917 734 4649

dwalter@performensation.com Skype: PerformensationTwitter: Performensation

©2013 Performensation 4

Define Your Compensation “Color”

Every company is has its own color for compensation

Your unique color is defined by

Strategy Industry, culture, philosophy, history, goals

This color defines the trends that work for you

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Most Data and Trends Melt All Colors Into a Blurred Mess

Trends are are generic market data

Trends are about choosing your specific path from among the blurred colors available

You create your own trends by understanding your unique color and applying your compensation expertise the the many shades that color has to offer

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What is the industry saying is “hot” right now?

Merit increases, on average of 2.6-3.1%.

BUT high performers are being reported at 4.5-5%

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What is the industry saying is “hot” right now?

Variable Pay as a component of total compensation is remaining flat at virtually all levels.

BUT Pay for performance is on the list of high priority items for a majority of companies.

HOW CAN THIS MAKE SENSE?

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What is the industry saying is “hot” right now?

Diminishing use of stock options.

BUT this is mainly for companies in the Fortune 250, in large part because of:

1. Concerns from ISS and other Institutional investors

2. Rising stock prices have bitten into potential future gains

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What is the industry saying is “hot” right now?

Growing Use of RSUs.

BUT this is often communicated incorrectly since these are often performance units in disguise.

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What is the industry saying is “hot” right now?

Growing use of Performance Units.

BUT currently most at the very top of most companies.

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What is the industry saying is “hot” right now?

TSR – Total Shareholder Return

TSR as the main performance metrics for performance unit plans.

BUT TSR already losing favor in Europe as a stand-alone metric. Combining with financial or operational metrics is the way to get ahead of the curve.

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What is the industry saying is “hot” right now?

Growth in Realizable and Realized Pay as a metric communicate executive compensation compared to peers.

BUT most companies are not using the same methodology as ISS which gives rise to new conflicts and disagreements

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What is the industry saying is “hot” right now?

Better alignment between STI and LTI target levels and actual compensation delivered.

Pricing low and paying high is far less accepted than in the past

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So, if the trends are not black and white…?

How do we define our own trends?

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Critical Skill 1 – Understand How to SWOT Your Comp Team

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SWOT Your Comp Team

The Environment for Rewards is Changing

We need to Adapt

Start by evaluating your teams ability to service your clients

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Steps

1) Understand the Changing Environment

2) Consider your Circle of Influence

3) Update your Service Delivery Model

4) SWOT your Comp Team

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Adapt to the Changing Environment

What should your Service Delivery Model

look like?

??

?

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Defining Your Circle of Influence

Who provides direction?

Who do you answer to?

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The Circle of Influence

Internal

The Comp Team

Circle of Influence

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The Circle of Influence

Internal and

External

The Comp Team

Circle of Influence

Associations

Publications

FutureCandidates

Shareholders

Media

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Identify your Clients

Who currently uses the services of the

Comp Team?The

Comp TeamCircle of Influence

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Identify your Clients

Who currently uses the services of the

Comp Team?

And

The Comp Team

Circle of Influence

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Identify your Clients

Who currently uses the services of the

Comp Team?

And

Who isn’t leveraging the Comp Team that

would benefit?

The Comp Team

Circle of Influence

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Identify your clients

Participants

?

?

?

Participants of your Current Programs

Such as the:• Salary Program• Short Term Incentives• Long Term Incentives• Recognition

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Identify your clients

Managers Participants

?

?

?

Managers

Need Support with:• Pay for Performance• Retention• Reporting

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Identify your clients

Managers Participants

Finance

?

?

?

Finance a reciprocal relationship

Share reporting:• Comp Accruals• Budgeting• Forecasting

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Identify your clients

Managers Participants

Recruiting

Finance

?

?

?

Recruiting

Need support with:• Competitive Comp for

Jobs• Complex Offers• Informing New Hires

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Identify your clients

Managers Participants

Recruiting HR Advisors

Finance

?

?

?

HR Advisors a reciprocal relationship

Such as:• Comp Program roll-out• Critical Talent• Benchmarking

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Identify your clients

Managers Participants

Recruiting HR Advisors

VendorsFinance

?

?

?

Vendors of your Current Programs

Such as:• Relationship Management• Upgrades• Participant Support

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Identify your clients

Managers Participants

Business Leaders

Recruiting HR Advisors

VendorsFinance

?

?

?

Business Leaders

Interested in:• Clear Guidance• Effective Pay for

Performance• Cost Control

Monitor Stakeholders

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Defining Your Service Delivery Model

What tools do you need to succeed?

Who is involved in providing data and resources?

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Review Your Service Delivery Model

What functionsare needed to deliver your Products and Services

Service Delivery Model

?

?

?

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Review Your Service Delivery Model

Managers Participants

Business Leaders

Recruiting HR Advisors

VendorsFinance

Program Management

Managers want to leverage programs to motivate and engage

Participants want to be compensated

Vendors are needed to provide expertise

Program Management

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Review Your Service Delivery Model

Managers Participants

Business Leaders

Recruiting HR Advisors

VendorsFinance

Reporting

Business intelligence is critical

Reporting

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Review Your Service Delivery Model

Managers Participants

Business Leaders

Recruiting HR Advisors

VendorsFinance

Consulting

Expertise where it is needed

Consulting

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The New Service Delivery Model

Managers Participants

Business Leaders

Recruiting HR Advisors

VendorsFinance

We have a plan…

…but can we deliver? Consulting

Program

Management

Reporting

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Plan for Success

Consulting

Program Management

Reporting

The company depends on the products and services that your team provides, so …

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Plan for Success

Consulting

Program Management

Reporting

Know the skills that are required to support the Service Delivery Model

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Assess your Team

Does your team have the necessary Knowledge, Skills and Abilities?

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Assess your Team

Team Member impactis a combination of:

Functional KnowledgeSuch as:

Worksheets, Executive Comp,

Stock Administration, etc.

Soft SkillsSuch as:

Team Work, Influence,

Presence, etc. EXPERIENCE

Soft Skills

Functional

Knowledge

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SWOT Time

Where do you reinforce?

Where to you rebuild?

Where do you focus your defenses?

Where are your greatest potential successes?

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The SWOT Analysis

Organize your findings into a SWOT analysis

Provides clarity that can lead to an improved service standard

StrengthsWeaknesse

s

Opportunities

Threats

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The SWOT Analysis

Internal

Factors that can be

Controlled

StrengthsWeaknesse

s

Opportunities

Threats

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The SWOT Analysis

External

Uncontrollable Factorsbut can

position for success

StrengthsWeaknesse

s

Opportunities

Threats

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The SWOT Analysis

BuildOn

Strengths

StrengthsWeaknesse

s

Opportunities

Threats

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The SWOT Analysis

LimitWeaknesses

StrengthsWeaknesse

s

Opportunities

Threats

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The SWOT Analysis

STRENGTHS:Reporting

Dynamic ToolsResponse Time

WEAKNESSES:Consulting

Problem SolvingReactive

OPPORTUNITIES:

New PM SystemNew Sales Team

THREATS:Regulation

Limited Bonus Pool

Talent Departure

Example:

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Take Action

If your team has gaps in Knowledge, Skills and Abilities:

Consider dedicating money and effort to

Training or Acquiring the Right Talent

©2013 Performensation 50

So, I know what I am good (and bad) at…

Again…How do we define our own trends?

©2013 Performensation 51

Calculating ROI – Cost-Benefit Analysis

Return on Investment is simple to talk about in theory, but can it be done in reality?

YES Include a Cost-Benefit Analysis in every major decision

©2013 Performensation 52

Calculating ROI – What are you Measuring?

Be clear about what you are spending and what you expect to get in return

Attraction. Know what is costs to hire a new employee. Time, marketing, fees, relocation, replacement grants etc…

Motivation. Understand how much it takes to communicate and support any pay for performance programs, equity compensation programs and sales compensation.

Retention. Knows what it costs to get an employee to the expected productivity level. Understand how much it costs YOUR company to replace someone who leaves. The industry averages are irrelevant. You need to know this for each type of role at your own company.

Don’t forget systems…

Performing a CBA

SECTION I: Capture Costs and Benefits– Current Processes Vs. Proposed Solution

– Costs are segmented into human capital costs and economic costs

– Current Technology Vs. Proposed Technology

• Captures costs of the current solution(s)

• Captures costs of the proposed solution(s)

• Difference of proposed to current (if positive) is cost benefit of the proposed method

SECTION II: Cost/Benefit Analysis (CBA)– Human capital and participant impact benefits of the proposed

project

– Economic analysis of the proposed project

ESTIMATION OF COSTS (Cont.)

Types of Costs:– Upfront Costs: One time, spent right away

– Recurring Costs: Keep project operating over time

– Sunk Costs: Money already spent; not considered in analysis of project

– Disposal Costs: Money spent to retire a project as opposed to

– Residual Value: Money returned to you at conclusion of project lifecycle

Net Present Value

• Net Present Value

– Tells you whether the project represents a net gain or a net loss over the project lifecycle

ZERO NPV:

• The project benefits offset the costs

NEGATIVE NPV:

• The project will cost more than it will bring back in benefits

POSITIVE NPV:

• The project’s benefits offer a net gain

• C/B Ratio (Discounted Benefits/ Discounted Costs)

– Tells us how much you will get back in benefits. Helpful in determining if project will reach the breakeven point (ratio of 1) for the project lifecycle

Cost/Benefit Calculation

• Ratio of 1 – The project benefits equal the costs for the project lifecycle

• Ratio less than 1 – Cost outweighs the benefits

• Ratio greater than 1 – The benefits outweigh the costs

•The payback period is defined as the number of years and/or months it will take to recover the costs involved in the project

PAYBACK PERIOD

NOW YR 1 YR 2 YR 3 YR 4 YR 5

$20,000 (Startup Costs)

Costs

BenefitsCumulative $

$40,000 (Gross Return)

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Calculating ROI – STI Programs

Your investment in STI is not just the dollars you budget as compensation costs.

You must include the direct impact on improved company performance, including intangibles

A complete ROI will look into the past STI plans and any direct or extrapolated results that can be tied to pre and post-STI roll-out.

Don’t assume cause and effect, prove it.

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Calculating your ROI – LTI/Equity Programs

LTI programs require multiple measurementsCost of creating the program. Just because a new type of program is trending upwards doesn’t mean it makes sense for your company to have that program. The creation and implementation costs of a new plan, may not be worth it.

Cost of the awards, per accounting methods.– Variable costs, cash accounting– Cost of equity (dollars and political) at time of grant, Vs. When it is booked

by the company, Vs. When payout is made to the individual, Vs. Planned payout as a component of comp philosophy

Cost of communication.– Initial roll-out– On-going systems, helpful reports and web access– Regular re-education, dealing with lower stock prices, poor company

performance, poor industry performance

Administration costs

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Merit Increases – Define Your Own Trend

Retrain your managers to understand what is meant by “merit”?

Understand your culture and if your define your company as “high performance” make sure you allocate better than average increases to top performers before allocating increases to average and low performers

Redefine your compensation philosophy if you need to. Everyone can’t target the 50th percentile and be competitive.

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Variable Pay – Define Your Own Trend

Don’t be afraid to push variable compensation deeper into your organization.

BUT make sure you provide the training, support and systems to make the program successful.

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Stock Options – Define Your Own Trends

If your stock price is strong, don’t be afraid to continue using options.

If stock options are no longer an option consider pushing performance units deeper into the organization. (once again, ensure you provide the requisite training, support and systems)

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RSUs – Define Your Own Trends

RSUs are a great, stable element of LTI

3 Year vesting is the average, but isn’t a requirement.

Consider shorter and longer vesting periods

Don’t get locked into RSUs if your stock price is rising and your overhang allows for more leveraged tools.

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Performance Units – Define Your Own Trends

Performance units can offer the downside protection of RSUs and the upside leverage of stock options. Don’t be afraid the explore these beyond the C-Suite

Take the time to do the analytical work before you finalize your metrics and goal levels.

Don’t jump in the pool without someprofessional assistance.

Start soon, but evolve at a careful pace. The biggest problem is poor design andmodeling before roll-out.

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TSR – Define Your Trends

Combine TSR with internal financial or operational metrics to get ahead of the curve.

Understand the how and why of any peer group chosen.

Does it work with shareholder expectations?

Is it big to survive the entire measurement period?

Can you get the data when you need it?

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Realizable Pay – Define Your Own Trends

Everyone should do a Realizable Pay calculation, but not everyone should include it in their proxy.

Understand the key differences between your model and the model used by your major investors.

This is a first line of analysis when problems with executive pay are identified. Don’t be caught unaware.

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STI/LTI Alignment – Define Your Own Trends

Don’t guess about your company strategy. Get confirmation from your executive team.

Make sure you model Best, Worst, Mathematical and Expected Case scenarios. Wild pay swings and “lowball targets” are no longer acceptable

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Reminders

Managers Participants

Business Leaders

RecruitingHR

Advisors

VendorsFinance

Consulting

Program

Management

Reportin

g

KNOW YOUR UNIQUE COLOR

KNOW YOUR STRENGHTHS

AND WEAKNESSES

KNOW YOUR SERVICE

DELIVERY MODEL

KNOW YOUR COSTS AND BENEFITS

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Please visit our website at www.performensation.com

Twitter: www.twitter.com/performensation

LinkedIn: http://www.linkedin.com/company/performensation

Facebook: https://www.facebook.com/pages/Performensation-Consulting/371636619516008?fref=ts

Slideshare (presentations and documents): http://www.slideshare.net/performensation

Quora (Q&A): http://www.quora.com/Dan-Walter

SAM REEVE, CCP, GRPExecutive Vice President

TF 1 877 803 9255 ext 702Office 1 415 625 3088Mobile 1 970 403 5775sreeve@performensation.com

SamReeve@SamReeve3

514 Precita Ave, Suite 100, San Francisco, CA 94110

DAN WALTER, CEPPresident and CEO

TF 1 877 803 9255 ext 700Office 1 415 625 3406Mobile 1 917-734-4649dwalter@performensation.com

DanWalter@Performensation

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Performensation was founded in 2006 in response to the demand for more strategic and effective compensation programs.

Successful compensation requires four key elements. Each component must be carefully crafted to your unique goals and culture.

Vision: We understand where you are headed and have the skills to get you there. We are respected throughout the industry for our forward-thinking perspective and our ability to execute on it.

Foundation: Long-term solutions are based on evidence, not founded on gimmicks or fads. They are built to allow for adjustments to organizational and market conditions. Your program’s foundation must reflect your company and the goals it is designed to support.

Design: A great program combines creativity with practicality. We utilize our broad and deep understanding of rules, regulations, processes and providers to ensure your program delivers high- performance results. Our designs are easy to understand, compliant and effective.

Communication: Participants only value what they understand. Communication must be built in to every step of the process. We ensure that all program elements are relevant and make sense to your targeted audience.

We Align Compensation with Corporate Strategy and Culture