Dan Walter, CEP, is the founder of Performensation Consulting. Dan has more than 18 years ofexperience in with equity compensation programs. He has designed and administrated bothmanagement and broad-based programs, for both public and private companies.Dan has worked extensively with companies in U.S. and abroad. His experience with youngentrepreneurial companies and established Fortune 100 companies provides his clients with a uniqueperspective on compensation issues. He creates effective, and when needed, innovative company-specific solutions. His clients appreciate the post-consultation support he provides to help ensureprograms are working as designed.Dan’s expertise includes equity compensation, executive programs and talent management issues.He has experience with all aspects of these programs including:diagnosis, design, communication, administration and reporting. His equity compensation expertiseincludes stock options, restricted share and units, stock purchase and performance-based programs.Executive compensation experience includes benchmarking, short and long-term incentive programdesign, proxy disclosure reporting and total-reward evaluations. Dan also has significant experiencein administrative and technological best practices for these programs.Dan is co-author of two publications: “Equity Alternatives” and “The Decision Makers Guide to EquityCompensation”, available at www.nceo.org. He is also a featured writer at thewww.CompensationCafe.com blog.He accepts LinkedIn invitations from all compensation professionals atwww.linkedin.com/in/danwalter.
The What Needs: Why you are measuring? Metrics: What is being measured? Goals: Achievement Levels and Timing Done correctly it is continuous and ubiquitous We sometimes forget its happeningWhat’s Missing?The How What are the actions that must be taken?
(And Nothing) Pay for Performance has become a textable abbreviation: P4P Take that Brangelina! Performance-based equity is most companies solution to the age old compliant: “Why do you pay those guys so much!”
Through April 23, 2012 286 Companies 5 “true” failures (ATU, IGT, KBH, C, FMER) Those who passed averaged better than 89% yes votes Failures have been very decisive
UK Shareholders have had SOP for a decade Pay level growth was not materially impacted Main change was a move from time based equity and cash compensation to TSR focused equity compensation Recent push to include more financial and operational metrics after a combination of plan design stagnation and misalignment between peer pay
Shareholders Media Politicians Compensation Consultants Executives (when they pay out) Companies (when they get SOP approval)Only administrators don’t really love them And the providers who support admin
1. Links equity comp to business strategy2. Provides a easy argument for better communication (and a budget)3. Done right it can be leveraged like Stock Options and safe like RSUs4. More interesting than time-based awards5. Like or not, it is the future of equity compensation
Stock Options Restricted Performance 40% 37% 43% 41% 49% 48% 16% 22% 17% 20% 17% 20% 44% 41% 39% 39% 34% 31%2008 CEO 2009 CEO 2010 CEO
1988-1999 proved to be an anomaly.This period became basis for future equitycompensation expectations.Since 2000, the market has been more volatile and isreflective of periods prior to 1988. Higher volatilitymay lead to higher values for time-base stockoptions, but it also leads to higher corporatecompensation expense and greater risk of deliveringno value to participants
Relative Goals can reduce the impact of market volatility Relative TSR Absolute Goals can increase the focus on key achievements In a volatile Market Stock Options are too unpredictable In almost any market Restricted Stock Units provide limited motivation
Properly designed, performance equity can offer MORE STABILITY than time-based equity Not completely dependent upon stock price Can factor in influence of the market volatility on peers and self Can provide upside leverage and downside protection Time to achievement based on corporate success cycles rather than the orbit of the earth around the sun
Even if properly designed, performance equity can offer MORE RISK than time-based equity Improper goal setting can occur when source data or future projections are incorrect Payout based on excellent past performance, but delivered during poor current performance Grants at historically low prices it can result in tremendous value delivery Goals always seem ambitious until, and unless, they are achieved too soon
Long-term Performance Compensation is Like a Marathon You run slowest in the dark A bit faster when there are occasional lights Even faster when there are mile markers Faster still when you know where the competition is A bit faster when you are in a strong group Fastest when you have all of the above AND a cheering section motivating you along the way
Performance goals are in themselves a form of communication They must be talked about, consistently in patterns than mean something to participants Progress must be available when it is wanted, not only when its convenient Messages must include both the good and the bad, or the patterns will be inconsistent and unbelievable
1. Incorrect Metrics Metrics are the “things” that are being measured. These are the foundation of your plan and must represent the measurements of success Common issue: Misunderstanding of business strategy Vs employee engagement/alignment Common issue: Motivating one action without balance of counter-action
2. Poorly Set Goals Goals are the levels that define the success of each metric These are the drivers of your plan and must represent your destination Common issue: Insufficient modeling of Best Case, Worst Case and Expected Case scenarios Common issue: Goal achievement becomes obviously impossible (or far too possible) very early in the life of the program
3. Underwhelming Communication Performance compensation is often confusing Clean, clear, frequent, communications are essential to engaging and motivating your staff Common issue: No time or money to communicate after initial roll out of program Common issue: Disconnect between what HR/Comp believe is the purpose of the plan versus managements actual purpose Common issue: Communication, Who has time for communication?
4. Human Nature Human nature is the one thing that you cannot build into your compensation programs, yet it is the single biggest risk to pay for performance The problem isn’t that P4P programs don’t work well enough, it’s that they work TOO well For programs that demand high-performance, you must also provide strong management and oversight Many companies assume their compensation plans will manage people (only people manage people)
Dan Walter, CEP, President Performensation 514 Precita Ave, Suite 100 San Francisco, CA 94110 877-803-9255 (toll free) ext. 700 415-625-3406 (office) 917-734-4649 (mobile) firstname.lastname@example.org www.performensation.comTwitter: www.twitter.com/performensation LinkedIn: www.linkedin.com/in/danwalter Blog: www.compensationcafe.com
Next generation Online portal. Use Sponsor Pass Free Networking Group with 1300+ members code “GEMS” to waive $595 registration Cross Functional Evolution for Equity Compensation http://bit.ly/sharecomp2011 www.equitycompensationexperts.groupsite.com Serving up straight talk, original thinking and Free presentations, documents and more…caffeinated discussion on everything compensation www.compensationcafe.com www.slideshare.net/#!/performensation 23
A particular slide catching your eye?
Clipping is a handy way to collect important slides you want to go back to later.