2019 Incentive Pay Practices: Privately Held …...2019 Incentive Pay Practices: Privately Held Companies 6 th Edition This survey, a joint research effort between WorldatWork and

©2019 WorldatWork All rights reserved.

2019 Incentive Pay Practices: Privately Held Companies6th EditionThis survey, a joint research effort between WorldatWork and Compensation Advisory Partners (CAP), focuses on the prevalence and design of short- and long-term incentive programs exclusive to U.S. privately held organizations.


Executive SummaryShort-term Incentives – Insights from 2019

• Short-term incentives (STIs) have become universal at private companies to align pay with short-term performance. STI prevalence reached 99 percent in 2019, up from 96 percent in 2017 and 94 percent in 2015.

• Spending on STIs increased to 6.5 percent of operating profit at median in 2019, up from 6 percent in 2017 and 5 percent in prior years. This increase indicates that private companies are spending more to compete for talent in this tight labor market.

• The prevalence of Annual Incentive Plans (AIPs) increased to 86 percent in 2019, up from 82 percent in 2017. The prevalence of all other types of STIs (i.e., spot awards, discretionary bonuses, team/small group incentives, project bonuses and profit sharing) fell in 2019. This indicates that firms are consolidating their STI spending on structured AIPs that incorporate companywide financial metrics and other objectives.

• AIP plans continue to be offered across the organization, with two-thirds of organizations providing eligibility to all employees.

2


Executive Summary (continued)Short-term Incentives – Trends Over Time

• Design parameters of AIP plans have remained consistent over the past several years reflecting the standardization of the plan design across companies

• Award Leverage: Threshold is 50% of target and Maximum is either 150% or 200% of target

• Award levels: Median target award levels have remained at 80% of salary for the CEO, with targets decreasing by about half for each lower position level in the organization

• Number of performance measures: 1 to 3• Type of performance measures: Focus on profitability as the most important performance

measure• Goal Setting: Based on annual budget

• Spending for STI plans continues to increase for various reasons that may include:• Participation has broadened to include more employees• Economic performance has been relatively stable and strong• Labor markets have tightened, and there is increased competition for talent

3


Executive Summary (continued)Long-term Incentives – Insights from 2019• Long-term incentive (LTI) prevalence increased in 2019 to 62 percent. This is up

from 54 percent in 2017 and 53 percent in 2015. The increased prevalence

65%

36%

15%21%

60%

34%26%

30%

0%

10%

20%

30%

40%

50%

60%

70%

Performanceplans

Real equity Phantomequity

Nonqualifieddeferred

compensation

Prevalence of Vehicles at Firms Offering LTIs

2019 2017

reflects that private firms are competing for top talent with publicly traded peers in a tight labor market.

• At firms that offer LTI plans, the choice of vehicles shifted in 2019, as shown in the chart to the right. Performance plans gained traction likely because they are less complex than other LTI vehicles.

• LTIs continue to be awarded to top management only

4


Executive Summary (continued)Long-term Incentives – Trends Over Time

• Prevalence: When this survey was first conducted in 2007, LTI plans were prevalent in 35% of private companies. Between 2007 and 2011, LTI use increased dramatically to over 60% as private companies adopted LTI plans for the first time. After having some experience with these plans, prevalence dipped down to the low to mid fifties and remained at that level until 2019. LTI prevalence has increased again as private companies realize that they need this pay component to compete for talent with their public company counterparts.

• Participation: Still limited to a small group of executives who can really drive the business results.

• Vehicle: Performance Awards, such as long-term cash plans, are favored as companies can be creative in program design and customize it to their business strategy. Private companies have more leeway than their public counterparts to design what they want as long as the owners agree.

• Number of Programs: Only one program, or plan, given the cost and complexity of design for a private company. (However, many private companies have more than one type of LTI vehicle included in the plan.)

• Design Elements: Three-year performance period and cash pay-outs based on company financial performance are still the most prevalent design elements.

5


Short-term Incentive (STI) PlansThe following questions were answered only by private companies that have STIs.


For the first time in the history of the survey, nearly all private companies offer short-term incentive (STI) programs

N = 182

99%96% 94%

97% 95%

79%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2019 2017 2015 2013 2011 2007

Prevalence of Short-Term Incentive Programs

7


Approximately eight out of 10 of private firms have three or fewer STI programs. The number of firms reporting only one program grew in 2019

36%

25%

17%

9%

3%5% 6%

20%

28%25%

11%

4%

8%

4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

One Two Three Four Five Six to 10 11 or more

Number of Short-Term Incentive Programs2019 2017

N = 181 8


Of the different types of STIs, annual incentive plans (AIPs) are by far the most prevalent in private firms. The use of other types of STIs dropped in 2019

26%

21%

19%

50%

58%

82%

12%

13%

17%

37%

42%

86%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Profit-sharingplan

Project bonus

Team/small-group incentives

Discretionarybonus

Spot awards

Annual incentiveplan (AIP)

Types of Short-Term Incentive Programs2019 2017

N = 179Respondents could choose all that apply.

9


About one in four private firms plans to add or modify an STI plan for 2020 for the following reasons:

10%

2%

8%

12%

16%

22%

38%

46%

56%

0% 10% 20% 30% 40% 50% 60%

Other

Changes due to regulatory requirements

Reorganization

Change in business results

New ownership/management

Company growth

Change in strategy

Alignment of programs with market practices

Regular annual review and update of the plan(s)

Reasons for Short-Term Incentive Additions or Modifications


10


Private company STI spending reached 6.5 percent of operating income at median, up slightly from 6 percent in 2017

3.0% 3.0% 3.0%

6.4% 6.5%6.0%

13.0% 13.0%14.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2020 Expected 2019 2017

STI Spending as a % of Operating Income25th Median 75th

N = 139 11


Annual Incentive Plans (AIPs)The following questions were answered only by private companies that have AIPs.


AIP eligibility extends across the entire workforce at private companies

87%

98% 98%

88%

66%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CEO Other execs/officers Managers/supervisors Exempt Nonexempt

AIP Eligibility

N = 120

13


The top three AIP objectives are to 1) align incentives with short-term goals, 2) share financial success with employees and 3) reward employees

4%

12%

33%

37%

43%

48%

49%

63%

0% 10% 20% 30% 40% 50% 60% 70%

Provide special recognition

Recruit qualified employees

Retain employees

Focus employees on specific goals

Be competitive with other employers

Reward employees

Share the organization’s financial success with employees

Align employees’ incentives with short-term goals

AIP Primary Objectives

N = 120Respondents could choose three objectives.

14


Private companies tend to view the effectiveness of their AIPs favorably

13%

29%

36%

19%

3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1 Effective 2 3 4 5 Not effective

Effectiveness of AIPs at Achieving Objectives

N = 118 15


The biggest AIP strengths are the performance measures used and the level of award opportunity, while the biggest weaknesses are the level of discretion and risk-reward trade-off

73%68%

59%

47% 43%36% 33%

-27%-32%

-41%

-53% -57%-64% -67%-70%

-50%

-30%

-10%

10%

30%

50%

70%

90%

Type ofperformance

measures

Level of awardopportunity

Performancelinkage

(corporate,unit, individual)

Goal setting Plancommunication

Risk-rewardtrade-off

Level ofdiscretion

% R

epor

ting

Fact

or a

s Str

engt

h (+

) or W

eakn

ess (

-)

AIP Strengths and Weaknesses

Strength WeaknessN = 100

16


Most private firms incorporate threshold, target and maximum award levels into their AIPs

69%

92%

75%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Threshold Target Maximum

Prevalence of Thresholds, Targets and Maximums in AIPs

N = 118

(50% of Target) (150% to 200% of Target)

17


Median target award opportunities range from 80 percent of salary for the chief executive officer (CEO) to five percent of salary for nonexempt employees

50%

30%

15%8% 5%

80%

40%

15%10%

5%

100%

50%

20%14%

6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CEO Otherexecutives/officers

Managers/supervisors Exempt salaried Nonexempt salaried orhourly

AIP Target Award Opportunities as a Percent of Salary

25th Median 75th

N = 87 N = 99 N = 104 N = 93 N = 66

18


Most private companies use one to three performance measures in their AIPs

61%

29%

6% 3%

Number of Performance Measures Used in AIPs

One to three Four to six Seven to nine 10 or more

N = 116

19


Financial measures are the most common type of metric used in private company AIPs, with profitability and revenue being most prevalent

12%

4%

4%

9%

15%

50%

85%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Other financial

Economic profit

Total shareholder return

Return measure (ROA, ROE, ROI, etc.)

Cash flow/cash-flow growth

Revenue/revenue growth

Profitability/earnings

Prevalence of Financial Performance Measures in AIPs

N = 113

20


Operational measures are also used in private company AIPs, but the type of measure varies

8%

6%

19%

22%

26%

28%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Other operational objectives

Employee satisfaction/engagement

Safety/occupational injury

Service/quality

Operational efficiency

Customer measures (satisfaction, retention, etc.)

Prevalence of Operational Performance Measures in AIPs


21


Individual objectives are also used in AIPs, with the prevalence split between achievement of specific goals (40%) and overall performance (38%)

3%

38%

40%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Other individual objectives

Overall individual performance, perhaps as expressed in aperformance rating

Achievement of specific individual goals

Prevalence of Individual Objectives in AIPs


22


Private companies combine performance measures in a variety of ways, with the most common being that awards are paid for performance in each measure

4%

9%

10%

10%

15%

19%

34%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Other

Different measures are used for different participants

Management discretion

Only one measure is used

Certain measures are used as modifiers to increase ordecrease the award

A balanced scorecard approach is used

Awards are paid for performance in each measure

How Different AIP Performance Measures are Used Together

N = 115

23


Company budgets continue to be the most prevalent basis for setting AIP performance targets at private firms

58%

38%

21%18%

14% 13%10%

3%

62%

41%

27%

10%

17%

10% 10%

3%

0%

10%

20%

30%

40%

50%

60%

70%

Budget Managementdiscretion

Improvementover prior

year

Formula Achievementof milestones

Fixedstandard

Relative topeers

Other

Basis Used to Set AIP Performance Targets2019 2017


24


AIP linkage varies based on position level, with executive positions having greater corporate linkage and other positions having a greater individual focus

Corporate Division/ Unit Individual N =

CEO 100% 11% 37% 102

Executive/officer 96% 46% 52% 113

Managers/supervisors 84% 55% 59% 112

Exempt salaried 82% 42% 61% 100Nonexempt, salaried and hourly 76% 41% 53% 76

AIP Performance Linkage by Position

Note: The data is not additive across rows because organizations can choose more than one linkage parameter by position.

25


Supervisor discretion plays a role in two-thirds of AIP plans

18%

27%

23%

32%

0%

5%

10%

15%

20%

25%

30%

35%

Significant Somewhat To a lesser degree Not at all

The Role Supervisor Discretion Plays in AIPs

N = 115Level of Discretion

26


Discretion is viewed unfavorably, with consistency of use and the perception of fairness being the largest weaknesses

65%

53% 49%

36%28% 28%

-35%

-47% -51%

-64%-72% -72%-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Who applies thediscretion

Amount subjectto discretion

Mechanism toincorporatequalitative

performance

Communicationof rationale for

discretion

Consistency ofuse across theorganization

Perception offairness for

payouts

% R

epor

ting

Fact

or a

s Str

engt

h or

Wea

knes

s

The Effectiveness of Discretion in AIPs

Strength WeaknessN = 60

27


Most AIPs are funded using 1) a financially based formula at the corporate level or 2) the sum of each individual’s target

5%

2%

9%

37%

47%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Other

Financially based formula at the division, unit or group level

Discretionary funding

Sum of each individual’s target

Financially based formula at the corporate level

Prevalence of AIP Funding Mechanisms

N = 113

28


Most private companies communicate their AIPs through a written plan document and/or through individual meetings

4%

4%

33%

37%

42%

60%

64%

0% 10% 20% 30% 40% 50% 60% 70%

Other

No method of communication (not communicated)

Company/team meetings (in person or virtual) to reviewincentive plan info

Annual communication by company of performancetargets, links to strategy

Periodic updates on progress by company

Verbal description by HR or supervisor through individualcommunications

Written plan document via individual email or internalcompany website

Prevalence of AIP Communication Methods


29


Long-Term Incentives (LTIs)The following questions were answered only by private companies that have LTIs.


62%

54% 53%56%

61%

35%

0%

10%

20%

30%

40%

50%

60%

70%

2019 2017 2015 2013 2011 2007

Prevalence of Long-Term Incentive Programs

About six out of 10 private companies have an LTI plan in place, up substantially from 2007 when we first conducted the survey

N = 141

31


Private companies that offer LTIs favor cash-based performance awards

Long-Term Incentive Vehicle PrevalencePerformance awards 65%

Long-term cash plans 47%

Performance units 17%

Performance shares 7%

Real equity/value tied to real equity 36%

Stock options 19%

Restricted stock units (RSUs) 22%

Restricted stock 6%

Nonqualified deferred compensation 21%

Phantom equity 15%

Phantom stock 9%

Stock appreciation rights (SARs) 8%Note: Companies could choose all that apply so the amounts do not sum; companies often use more than one vehicle.

N = 86

32


Respondents indicate that their top three LTI objectives are to 1) retain employees, 2) align incentives with long-term goals, and 3) be competitive with other employers

2%

13%

14%

15%

18%

24%

40%

44%

48%

53%

0% 10% 20% 30% 40% 50% 60%

Other

Recruit qualified employees

Promote employee ownership

Provide participants with a wealth-accumulation opportunity

Share the organization’s financial success with employees

Reward employees

Focus employees on specific long-term goals

Be competitive with other employers

Align employees’ incentives with long-term goals

Retain employees

LTI Primary Objectives

N = 85Respondents could choose three objectives.

33


About seven in 10 private companies have only one LTI program in place, likely because of the complexity of setting up such plans

68%

24%

8%

Number of LTI Programs

One

Two

Three or more

N = 84

34


LTI eligibility is typically reserved for those at the VP/director/officer level and above

12%

4%

17%

5%

51%

12%

0%

0% 10% 20% 30% 40% 50% 60%

Other

All employees receive LTIs

All key employees and above

All managers and above

All VPs, directors or other officers and above

CEO and his/her direct reports

CEO only

LTI Eligibility

N = 84

35


Median LTI award opportunities rose across all executive levels from 2017 to 2019

85%

45%25%

100%

70%

40%

200%

120%

55%80%

50%30%

0%

50%

100%

150%

200%

250%

CEO CEO's Direct Reports VPs/Directors/Other Execs

LTI Target Award Opportunities as a Percent of Salary

25th Median 75th 2017 Median

N = 37 N = 46 N = 42Note: Insufficient data was reported for managers and below.

36


About one in five private firms plans to add or modify an LTI plan for 2020

19%

81%

Private Companies Planning to Add or Modify Long-Term Incentives for 2020

Yes

No

N = 83Note: Since only 16 firms are adding or modifying a plan, insufficient data was reported for questions about what prompted the changes, and what type of changes are being made.

37


For private companies that use real equity, total overhang of less than 10 percent is most prevalent

8%

23%

35%

15%

4%

12%

4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0% 0.1% to 4.99% 5% to 9.99% 10% to 14.99% 15% to 19.99% 20% to 24.99% More than 25%

Total Overhang for Private Companies using Real Equity (Overhang is the total pool allocated for current and future employee grants divided

by common shares outstanding)

N = 78 (52 “no real equity used” responses were excluded)

38


LTIs: Performance AwardsThe following questions were answered only by private companies that offer performance awards, such as long-term cash plans, performance units and performance shares.


Performance awards are mainly reserved for top executives

91%96%

28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CEO Other executives/officers Managers/supervisors

Performance Award Eligibility

N = 47 (Note: Performance awards were not reported

below the manager/supervisor level.)

40


Profitability measures are by far the most prevalent in performance plans

10%

2%

4%

4%

4%

12%

12%

12%

18%

28%

64%

0% 10% 20% 30% 40% 50% 60% 70%

Other

Market share

Target stock price

Total shareholder return

Discretion

Operational measure

Economic profit or similar

Cash flow

Annual sales/revenue

A return measure (ROA, ROE, ROI, etc.)

A profitability measure

Prevalence of Metrics in Performance Plans


41


Private firms set performance plan targets using a variety of approaches, including budget and improvement over the prior year

35%

27%

23%

19% 19%17%

15%

2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Budget Improvementover the prior

year

Formula Discretion Fixedstandard

Relative topeers

Achievementof milestones

Other

Basis Used to Set Performance Targets in Performance Plans


42


Performance plan payouts are primarily linked to results at the corporate level

Corporate Division/ Unit Individual N =

CEO 100% 5% 14% 43Executive/officer 96% 20% 14% 49

Note: The data is not additive across rows because organizations can choose more than one linkage parameter by position.

Performance Award Linkage by Position

43


Most private companies set performance thresholds, targets and maximum in their performance plans

62%

81%

67%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Threshold Target Maximum

Prevalence of Thresholds, Targets and Maximums in Performance Plans

N = 48(200% of Target)

44


The majority of private companies pay out performance awards in cash

83%

8% 6% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Cash Shares of equity Cash and/or shares are paidinto a deferral account

Combination of cash andequity

Performance Award Payout Vehicles

N = 52

45


Three years is the most common performance period for performance award plans

12%

2%

73%

8% 6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

One year Two years Three years Four years Five or more years

Performance Period for Performance Award Plans

N = 52

46


Beyond Incentive PayThe following question was given to all survey respondents.


Besides incentive pay, private companies are retaining talent with intangibles such as job advancement and flexible work arrangements

2%

1%

1%

6%

11%

19%

28%

29%

34%

44%

48%

66%

0% 10% 20% 30% 40% 50% 60% 70%

Other

Additional perquisites

Student loan repayment

Specialized training

Tuition assistance/additional education

Additional benefits

Retirement plan

Developmental job assignments

Culture/community

Additional base compensation

Flexible work arrangements

Job advancement/promotion

Top Three Rewards Tools for Retaining Talent

N = 132Respondents could choose three reward tools.

48


Survey DemographicsThe following questions were provided to all survey respondents.


Survey Demographics: Industry

3%1%1%

2%2%2%2%

2%3%3%

4%5%

6%8%

11%12%

17%19%

0% 5% 10% 15% 20%

OtherEducational services

Admin. & support & waste mgmt. & remediation svcs.Transportation & warehousing

Wholesale tradeArts, entertainment & recreation

Accommodation & food serviceConstruction

UtilitiesAgriculture, forestry, fishing & hunting

Computer & electronic product manufacturingHealth care & social assistance

Chemical manufacturing (includes pharmaceuticals)Retail trade

Consulting, professional, scientific & technical servicesInformation (includes publishing, IT technologies, etc.)

All other manufacturingFinance & insurance

Prevalence of Industries

N = 133

50


Survey Demographics: Full-time Equivalent Employees (FTEs)

1%

7%

10%

31%

23%

14%

5%4%

2% 1%

0%

5%

10%

15%

20%

25%

30%

35%

Fewer than100

100 to 499 500 to 999 1,000 to2,499

2,500 to4,999

5,000 to9,999

10,000 to19,999

20,000 to39,999

40,000 to99,999

100,000 ormore

Number of FTE Employees

N = 134

51


Survey Demographics: Annual Revenue

2%

19%

15%

24%

18%

11%

5%

0%

6%

0%

5%

10%

15%

20%

25%

Less than$100 million

$100 millionto $499million

$500 millionto $999million

$1 billion to$2.49 billion

$2.5 billion to$4.9 billion




More than$20 billion

Annual Revenue

N = 123

52


Survey Demographics: Corporate Status

3%

5%

8%

14%

22%

24%

25%

0% 5% 10% 15% 20% 25% 30%

Other

Partnership

Mutual

S corporation

Subsidiary

C corporation

LLC

Corporate Status

N = 106

53


Survey Demographics: CEO Ownership

72%

22%

7%

Is the company’s CEO an owner?

No

Yes

Yes, and also a founding memberof the organization

N = 134

54


Survey Demographics: Company Ownership

71%

29%

Is your company family-owned?

No Yes

74%

26%

Do your company's owners include a private equity firm?

No Yes

N = 128 N = 133

55


AppendixMethodology and Contact Information


MethodologyThis report summarizes the results of a June/July 2019 survey of WorldatWork members that gathered information on incentive pay practices at privately held, for-profit companies. The survey also collected information on tax-exempt and government organizations; the survey results for those organizations are detailed in a separate report. In June 2019, survey invitations were sent electronically to 7,164 WorldatWork members. The survey closed in July 2019. The dataset was cleaned, resulting in a final dataset of about 300 responses: 182 private, for-profit companies covered in this report, and 116 tax-exempt and government organizations covered in the sister report. Due to rounding, frequencies of data responses provided in this survey may not total 100 percent. In addition, some questions allow the respondent to choose more than one response, which results in totals that exceed 100 percent. For questions where respondents were asked to provide a number such as a position’s incentive target, zeros were excluded. When trend data is shown, the “N” or number of responses for each question is for the 2019 data. Questions with fewer than 30 responses were omitted from the survey. (This includes LTI sections focusing on stock options, restricted stock, phantom stock and deferred compensation.) The full text of the questionnaire and definitions of terms used in the survey can be found here. A list of participating organizations can be found here.

57

https://worldatwork.org/docs/research-and-surveys/2019+Incentive+Pay+Survey+CAP+WAW_FINAL.pdf?language_id=1

https://www.worldatwork.org/docs/research-and-surveys/IPP0619_PrivatelyHeld_Participant%20List_FINAL.pdf


Contact Us:WorldatWork

Global Headquarters14040 N. Northsight Blvd. Scottsdale, AZ 85260 USA

Washington, D.C. Office1100 13th St. NW, Suite 800Washington, DC 20005 USA

Telephone

• 877-951-9191 (United States and Canada)

• +1 480-922-2020 (other countries)

Email• [email protected]

Website• worldatwork.org

Compensation Advisory Partners

Chicago OfficeBonnie Schindler, Principal200 South Wacker Drive, Suite 3100Chicago, IL 60606Phone: 847-636-8919Email: [email protected]

Los Angeles OfficeSusan Schroeder, Partner400 Continental Blvd., 6th FloorEl Segundo, CA 90245Phone: 310-426-2340Email: [email protected]

Website• capartners.com

58

Documents

2019 Incentive Pay Practices: Privately Held …...2019 Incentive Pay Practices: Privately Held Companies 6 th Edition This survey, a joint research effort between WorldatWork and