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Guaranteed vs. Incentive Pay:
What’s the Right Balance?
Vision: HelpYou Become a
Wealth Multiplier Organization
Transform the way you use
compensation to share value with
employees.
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.
44
Governing Thought
Pay the least amount you can
“get away with” to attract the
best talent available and drive
the maximum performance
possible.
55
Questions
 Pay higher salaries and price out the
competition?
 Competitive salary but higher upside?
 A blend of those approaches?
66
The Situation is the Boss
77
Technology Company
 10Years-Old
 Grown from $50 to $75
million in revenue over past
three years
 Wants to grow to $125
million over next three years
 High Attrition
 Privately Owned
88
Transportation Company
 18 Years-Old
 $45 million in annual
revenue, unstable growth
(averaged 3% over past 5
years)
 Wants to grow to $75 in the
next five years
 Low Attrition
 Family Owned: Two sons
working in the business, no
formal succession plan
99
Manufacturing Company
 20 Years Old
 $150 million in
annual revenue—up
from $75 million
three years ago
 Plans to grow to
$200 million in the
next three years
 Modest Attrition
 Privately Owned:
New CEO hired by
owner three years
ago
1010
Is There One Pay Formula for All Three?
1111
Balancing Pay: Five Key Practices
1. Define value creation.
2. Establish a clear pay philosophy.
3. Replace “incentives” with value
sharing.
4. Focus on play plan alignment.
5. Build a Total Compensation
Structure.
1212
1. Define Value Creation
Value attributable
to the productivity
and performance of
human capital.
1313
Case Study
1414
Keith Williams  Assumed leadership of
UL in 2005
 Company carrying
considerable debt
 Losing market share
 Low employee morale
 UL had become
bureaucratic and “siloed”
1515
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.’ ”
1616
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
1717
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.
1818
2. Establish a Clear Pay Philosophy
A written statement of what the
company is willing to “pay for.”
Tie it to value creation.
1919
Compensation Philosophy Statement
 How value creation is defined.
 How value is shared—and with
whom.
 Market pay standards.
 How guaranteed pay and value-
sharing will be balanced.
 How short and long-term value-
sharing will be balanced.
 When or if equity will be shared.
 How merit pay is defined.
2020
Spell it Out
 Value creation occurs
beyond an appropriate
return on shareholder
capital (12%).
 We believe value should
be shared with those who
help create it.
 We believe value-sharing
should be split 50/50 in
rewarding short-term and
long-term performance
 We believe in being at the
45-50th percentile with
guaranteed pay but in
providing unlimited
upside earnings through
value-sharing
2121
Old School
Defensive
Wealth Creation
Wealth Multiplier
21
Pay Philosophy Evolution
2222
Old School
People Are Lucky to Have a Job
Philosophy Pay the least you can to get the work done.
Cost or Investment? Every dollar spent on pay is one dollar less in profits.
Salaries Check the market; pay less if we can get away with it.
Bonuses Maybe; let's wait and see if we have a good year.
Long-term Incentives
(quasi-equity)
Are you crazy?
Results
If you have a business with sustainable cash flow and it doesn't
require innovative employees or much customer interaction,
this can work…but won’t attract or retain premier talent.
2323
Defensive
Don’t Rock the Boat
Philosophy We want to pay people well, but we have to be very cautious.
Cost or Investment? We need to be very careful to control costs--including pay.
Salaries We want to be "at market." Keep searching for it.
Bonuses We will try to pay bonuses as long as we can afford them.
Long-term Incentives
(quasi-equity)
Not our cup of tea. Seems expensive and unnecessary.
Results
If you want employees who are cautious about bringing up pay
issues . . . and accept that pay should never go lower but rarely
should go higher, this is the approach for you.
2424
Wealth Creation
Let’s Focus on Performance
Philosophy
Pay strong salaries and incentives to enable the company to
attract great talent. We are willing to pay "above market" for
top performers.
Cost or Investment?
We see compensation as an investment that should produce a
positive return for shareholders.
Salaries
Salaries should be "at market" for most positions but
somewhat above for high value positions.
Bonuses
Bonuses are set and communicated early in the year; they are
expressed as a meaningful percentage of salaries.
Long-term Incentives
(quasi-equity)
May play a small role.
Results
If you want to focus on aligning employee performance and
pay with your crucial budgeted goals, consider this approach.
2525
Wealth Multiplier
Let’s Secure Growth Partners
Philosophy
Share 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.
Salaries
We use data for benchmarking, but our pay philosophy drives
where we want to be vis a vis market pay.
Bonuses
Bonuses (value sharing plans) are tied to crucial metrics,
recognize personal contributions, and are not capped.
Long-term Incentives
(quasi-equity)
Viewed by top performers as the most meaningful part of their
rewards program.
Results
If 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.
2626
3. Replace “Incentives” with
Value Sharing
Incentives imply a
“carrot and stick”
approach while value-
sharing is about
reinforcing outcomes
and forging a financial
partnership.
2727
Force Reinforce
This is the behavior that’s
expected and rewarded.
These are the results that are
valued and rewarded.
Do these things whether you like
them or not (they’re a necessary
part of the job).
Assume stewardship for the
outcomes we’re striving for,
determine the best ways to get
them done. Here are our
standards, patterns, expectations.
Our bonuses are reflective of our
“market pay” analysis for your job
classification
Our bonuses reflect the way we
share value that you help create.
Bad profits Good profits
2828
Productivity Profit
Capital Account
Cost of Capital
$ 20,000,000
ROTRI™
Total Rewards Investment
Operating Income
Capital Charge
Productivity Profit
30.4%
$ 25,000,000
$ 7,600,000
$ 10,000,000
12%
$ 2,400,000
(ROTRI™ = Productivity Profit/Total Rewards Investment)
2929
Self-Financing
Capital Account
Cost of Capital
$ 20,000,000
ROTRI™
Total Rewards Investment
Operating Income
Capital Charge
*Productivity Profit
30.4%
$ 25,000,000
$ 7,600,000
$ 10,000,000
12%
$ 2,400,000
*Variable Pay Plans (Value Sharing) are financed
from Productivity Profit
3030
Shareholder Value
Current EquityValue EOY
10% GR
(Threshold) 11% GR 12% GR 13% GR 14% GR 15% GR
25,000,000 1 27,500,000 27,750,000
28,000,000 28,250,000 28,500,000
28,750,000
15 104,431,204 119,614,737
136,839,144
156,356,759
178,448,449 203,426,541
Incremental
increase in
value
15,183,533 17,224,407 19,517,615
22,091,690 24,978,091
CumValue
Increase
Above
Threshold
15,183,533
32,407,940
51,925,555 74,017,245
98,995,336
% Shared 10% 15% 20% 25% 30%
$ Shared 1,518,353 4,861,191 10,385,111 18,504,311
29,698,601
Net
Increase for
SH
13,665,180 27,546,749
41,540,444
55,512,934
69,296,736
New SH
Value
118,096,384 131,977,953
145,971,648 159,944,138
173,727,940
IRR 10.9% 11.7% 12.5% 13.2% 13.8%
3131
Performance Incentives (Value Sharing)
3232
Two Primary Approaches
Profit
Based
Allocation
(PBA)
Targeted
KPI’s
(TKPI)
33
Profit
Based
Allocation
(PBA)
Targeted
KPI’s
(TKPI)
A percentage of
annual profits awarded
to employees
The award amount
is divided among
employees based on a
pre-determined formula
Paid at year-end
Employees assigned
a “targeted” incentive
value – often based
on a percentage of salary
Achievement of award is tied to
multiple specific measurements
or “metrics.” Metrics
can vary person to person.
Typically paid at year end,
but may be quarterly.
3434
Growth Incentives (Value Sharing)
3535
Why Long-Term Value Sharing
Matters
#1 Value sharing
attracts and retains
the best talent and
magnifies results
3636
Why Long-Term Value Sharing
Matters
#2: Value sharing
plans reinforce the
company’s business
model
3737
Why Long-Term Value Sharing
Matters
#3: Value sharing protects
against bad profits and
promotes good profits
3838
Why Long-Term Value Sharing
Matters
#4: Value sharing
promotes an
ownership mindset
3939
Why Long-Term Value Sharing
Matters
#5: Value sharing builds
trust and accelerates
results
4040
Select the Right Plan Type
Stock Option
Performance Shares
Restricted Stock
Phantom Stock
Option
Performance
Phantom Stock
Phantom Stock
Profit Pool
Performance Unit
Strategic Deferred
Compensation
4141
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
4242
Future
Company
Present
Company
Salaries
STVS
Benefits
LTVS
4343
4. Focus on Pay Plan Alignment
Pay should create a unified financial vision for
growing the business and turn employees into
growth partners.
4444
Line of Sight
Vision
Where?
Model &
Strategy
How ?
Roles and
Expectations
My Contribution?
Rewards
What’s in it for
me?
4545
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.
4646
Salary
Performance
Incentives
Sales
Incentives
Growth
Incentives
Core Health
& Welfare
Plans
Executive
Benefit
Plans
Qualified
Retirement
Plans
Nonqualified
Retirement
Plans
Salaries
Competitive with market standards?
Tied to strong performance management process (merit)?
Managed within a flexible but effective structure?
Performance Incentives
Tied to productivity gains?
Clear, achievable and meaningful?
Self-financing?
Sales Incentives
Challenging yet achievable?
Reinforcing the right behaviors?
Differentiating your offering?
Growth Incentives
Linked to a compelling future?
Supporting an ownership mentality?
Securing premier talent?
Core Benefits
Responsive to today’s employee marketplace?
Allocating resources where most needed?
Evaluated to eliminate unnecessary expense?
Executive Benefits
Flexible enough to address varying circumstances?
Communicating a unique relationship?
Reducing employee tax expense?
Qualified Retirement Plans
Giving employees an opportunity to optimize retirement values?
Operated with comprehensive fiduciary accountability?
Avoiding conflicts and minimizing expenses?
Nonqualified Retirement Plans
Optimizing tax-deferral opportunities?
Aligning long-term interests of employees with shareholders?
Structured to receive best possible P&L impact?
An Aligned
Compensation
Strategy
4747
Form of Pay Purpose Standard Investment ROI
Salaries
Provide for the current cash needs
of our executives
40-50th percentile for
peer group
$500,000
Achieve ROA standard
of 0.75%
Short-term Incentives
Enhance current cash payments to
executives for achieving top and
bottom line annual goals
30-40% of base salary $168,000 (Target)
15% revenue growth
and 12% margin
Long-term Incentives
(Cash)
Retain execs; focus them on long-
term earnings growth; align with
shareholder interests; meet wealth
accumulation needs
15-20% of base salary $84,000 (Target)
Long-term growth in
earnings (double
earnings = share 13%
of new value)
Long-term Incentives
(Equity)
Retain execs; focus them on long-
term earnings growth; align with
shareholder interests; meet wealth
accumulation needs
15-20% of base salary $84,000 (Target)
Long-term growth in
earnings (double
earnings = share 13%
of new value)
Core Benefits
Meet basic security needs of the
executives
50th percentile for peer
group
$25,500 ROA of 0.75%
Executive Benefits
Enhance basic security needs and
meet market standards for
perquisites
50th percentile for peer
group
$24,000 ROA of 0.75%
Qualified Retirement
Provide wealth accumulation
opportunity for executives
40th percentile (3% of
salary)
$15,000 ROA of 0.75%
Supplemental
Retirement
Strengthen rewards value
proposition to help recruit and
retain executives; meet wealth
accumulation needs
30th percentile
compared to banks that
have plans
$135,000 ROA of 0.9%
4848
5. Build a Total Compensation Structure
A total compensation structure gives you a comprehensive view of all
compensation and benefit plans and ensures operational integrity.
4949
Structure the Data
There are four common ways
to build a salary structure
 Pure Market Pricing Approach
 Traditional Salary Structure
 Broadband Structure
 Hybrid Structure
49
5050
Market Pay Assessment
 Benchmark your roles against salary surveys
 Major House Surveys
 Industry Surveys
 Internet Surveys
25th Med 75th
Towers Watson Accountant 1 11.1% 47.0 52.5 58.0
Mercer Accountant - Entry 11.1% 50.0 52.5 55.0
Radford Accountant I 10.0% 11.1% 55.0 59.4 63.8
Salary.com Accountant 11.1% 45.0 51.5 58.0
ERI Accounting - Junior 11.1% 48.0 54.0 60.0
Kenexa Accountant Entry 11.1% 45.0 50.0 55.0
BDG Accountant 11.1% 50.0 52.5 55.0
Pay Scale Associate Accountant 11.1% 50.0 54.5 65.3
Robert Half Accountant I -10.0% 11.1% 50.1 56.0 61.9
Average 100.0% 48.9 53.7 59.1
Accountant 1 51.4
Position Survey Match
Average
Salary
SalaryPremium
Discount Weighting
5151
The Final Structure
Salary
Sales
Incentives
Performance
Incentives
Growth
Incentives
Core Health
& Welfare
Plans
Executive
Benefit Plans
Qualified
Retirement
Plans
Nonqualified
Retirement
Plans
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
5252
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?
5353
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%
5454
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.
5555
A balanced approach will typically appeal to premier
talent who hold a long-term view .
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%
5656
Is there one right solution for all three
companies?
Company A Company B Company C
10Year-Old Technology Company 18Year-OldTransportation
Company
20Year-Old Manufacturing
Company
Grown from $50 to $75 million in
revenue over past three years
$45 million in annual revenue,
unstable growth (averaged 3%
over past 5 years)
$150 million in annual revenue—
up from $75 million three years
ago
Wants to grow to $125 million
over next three years
Wants to grow to $75 in the next
five years
Plans to grow to $200 million in
the next three years
High Attrition LowAttrition ModestAttrition
Privately Owned Family Owned:Two sons working
in the business
Privately Owned: New CEO hired
by owner three years ago
5757
5858
THANK YOU!
(888) 703-0080
www.VLadvisors.com
www.PhantomStockOnline.com
www.BonusRight.com
info@vladvisors.com

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Guaranteed vs Incentive Pay - What's the Right Balance?

  • 1. Guaranteed vs. Incentive Pay: What’s the Right Balance?
  • 2. Vision: HelpYou Become a Wealth Multiplier Organization Transform the way you use compensation to share value with employees.
  • 3. 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.
  • 4. 44 Governing Thought Pay the least amount you can “get away with” to attract the best talent available and drive the maximum performance possible.
  • 5. 55 Questions  Pay higher salaries and price out the competition?  Competitive salary but higher upside?  A blend of those approaches?
  • 7. 77 Technology Company  10Years-Old  Grown from $50 to $75 million in revenue over past three years  Wants to grow to $125 million over next three years  High Attrition  Privately Owned
  • 8. 88 Transportation Company  18 Years-Old  $45 million in annual revenue, unstable growth (averaged 3% over past 5 years)  Wants to grow to $75 in the next five years  Low Attrition  Family Owned: Two sons working in the business, no formal succession plan
  • 9. 99 Manufacturing Company  20 Years Old  $150 million in annual revenue—up from $75 million three years ago  Plans to grow to $200 million in the next three years  Modest Attrition  Privately Owned: New CEO hired by owner three years ago
  • 10. 1010 Is There One Pay Formula for All Three?
  • 11. 1111 Balancing Pay: Five Key Practices 1. Define value creation. 2. Establish a clear pay philosophy. 3. Replace “incentives” with value sharing. 4. Focus on play plan alignment. 5. Build a Total Compensation Structure.
  • 12. 1212 1. Define Value Creation Value attributable to the productivity and performance of human capital.
  • 14. 1414 Keith Williams  Assumed leadership of UL in 2005  Company carrying considerable debt  Losing market share  Low employee morale  UL had become bureaucratic and “siloed”
  • 15. 1515 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.’ ”
  • 16. 1616 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
  • 17. 1717 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.
  • 18. 1818 2. Establish a Clear Pay Philosophy A written statement of what the company is willing to “pay for.” Tie it to value creation.
  • 19. 1919 Compensation Philosophy Statement  How value creation is defined.  How value is shared—and with whom.  Market pay standards.  How guaranteed pay and value- sharing will be balanced.  How short and long-term value- sharing will be balanced.  When or if equity will be shared.  How merit pay is defined.
  • 20. 2020 Spell it Out  Value creation occurs beyond an appropriate return on shareholder capital (12%).  We believe value should be shared with those who help create it.  We believe value-sharing should be split 50/50 in rewarding short-term and long-term performance  We believe in being at the 45-50th percentile with guaranteed pay but in providing unlimited upside earnings through value-sharing
  • 21. 2121 Old School Defensive Wealth Creation Wealth Multiplier 21 Pay Philosophy Evolution
  • 22. 2222 Old School People Are Lucky to Have a Job Philosophy Pay the least you can to get the work done. Cost or Investment? Every dollar spent on pay is one dollar less in profits. Salaries Check the market; pay less if we can get away with it. Bonuses Maybe; let's wait and see if we have a good year. Long-term Incentives (quasi-equity) Are you crazy? Results If you have a business with sustainable cash flow and it doesn't require innovative employees or much customer interaction, this can work…but won’t attract or retain premier talent.
  • 23. 2323 Defensive Don’t Rock the Boat Philosophy We want to pay people well, but we have to be very cautious. Cost or Investment? We need to be very careful to control costs--including pay. Salaries We want to be "at market." Keep searching for it. Bonuses We will try to pay bonuses as long as we can afford them. Long-term Incentives (quasi-equity) Not our cup of tea. Seems expensive and unnecessary. Results If you want employees who are cautious about bringing up pay issues . . . and accept that pay should never go lower but rarely should go higher, this is the approach for you.
  • 24. 2424 Wealth Creation Let’s Focus on Performance Philosophy Pay strong salaries and incentives to enable the company to attract great talent. We are willing to pay "above market" for top performers. Cost or Investment? We see compensation as an investment that should produce a positive return for shareholders. Salaries Salaries should be "at market" for most positions but somewhat above for high value positions. Bonuses Bonuses are set and communicated early in the year; they are expressed as a meaningful percentage of salaries. Long-term Incentives (quasi-equity) May play a small role. Results If you want to focus on aligning employee performance and pay with your crucial budgeted goals, consider this approach.
  • 25. 2525 Wealth Multiplier Let’s Secure Growth Partners Philosophy Share 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. Salaries We use data for benchmarking, but our pay philosophy drives where we want to be vis a vis market pay. Bonuses Bonuses (value sharing plans) are tied to crucial metrics, recognize personal contributions, and are not capped. Long-term Incentives (quasi-equity) Viewed by top performers as the most meaningful part of their rewards program. Results If 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.
  • 26. 2626 3. Replace “Incentives” with Value Sharing Incentives imply a “carrot and stick” approach while value- sharing is about reinforcing outcomes and forging a financial partnership.
  • 27. 2727 Force Reinforce This is the behavior that’s expected and rewarded. These are the results that are valued and rewarded. Do these things whether you like them or not (they’re a necessary part of the job). Assume stewardship for the outcomes we’re striving for, determine the best ways to get them done. Here are our standards, patterns, expectations. Our bonuses are reflective of our “market pay” analysis for your job classification Our bonuses reflect the way we share value that you help create. Bad profits Good profits
  • 28. 2828 Productivity Profit Capital Account Cost of Capital $ 20,000,000 ROTRI™ Total Rewards Investment Operating Income Capital Charge Productivity Profit 30.4% $ 25,000,000 $ 7,600,000 $ 10,000,000 12% $ 2,400,000 (ROTRI™ = Productivity Profit/Total Rewards Investment)
  • 29. 2929 Self-Financing Capital Account Cost of Capital $ 20,000,000 ROTRI™ Total Rewards Investment Operating Income Capital Charge *Productivity Profit 30.4% $ 25,000,000 $ 7,600,000 $ 10,000,000 12% $ 2,400,000 *Variable Pay Plans (Value Sharing) are financed from Productivity Profit
  • 30. 3030 Shareholder Value Current EquityValue EOY 10% GR (Threshold) 11% GR 12% GR 13% GR 14% GR 15% GR 25,000,000 1 27,500,000 27,750,000 28,000,000 28,250,000 28,500,000 28,750,000 15 104,431,204 119,614,737 136,839,144 156,356,759 178,448,449 203,426,541 Incremental increase in value 15,183,533 17,224,407 19,517,615 22,091,690 24,978,091 CumValue Increase Above Threshold 15,183,533 32,407,940 51,925,555 74,017,245 98,995,336 % Shared 10% 15% 20% 25% 30% $ Shared 1,518,353 4,861,191 10,385,111 18,504,311 29,698,601 Net Increase for SH 13,665,180 27,546,749 41,540,444 55,512,934 69,296,736 New SH Value 118,096,384 131,977,953 145,971,648 159,944,138 173,727,940 IRR 10.9% 11.7% 12.5% 13.2% 13.8%
  • 33. 33 Profit Based Allocation (PBA) Targeted KPI’s (TKPI) A percentage of annual profits awarded to employees The award amount is divided among employees based on a pre-determined formula Paid at year-end Employees assigned a “targeted” incentive value – often based on a percentage of salary Achievement of award is tied to multiple specific measurements or “metrics.” Metrics can vary person to person. Typically paid at year end, but may be quarterly.
  • 35. 3535 Why Long-Term Value Sharing Matters #1 Value sharing attracts and retains the best talent and magnifies results
  • 36. 3636 Why Long-Term Value Sharing Matters #2: Value sharing plans reinforce the company’s business model
  • 37. 3737 Why Long-Term Value Sharing Matters #3: Value sharing protects against bad profits and promotes good profits
  • 38. 3838 Why Long-Term Value Sharing Matters #4: Value sharing promotes an ownership mindset
  • 39. 3939 Why Long-Term Value Sharing Matters #5: Value sharing builds trust and accelerates results
  • 40. 4040 Select the Right Plan Type Stock Option Performance Shares Restricted Stock Phantom Stock Option Performance Phantom Stock Phantom Stock Profit Pool Performance Unit Strategic Deferred Compensation
  • 41. 4141 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
  • 43. 4343 4. Focus on Pay Plan Alignment Pay should create a unified financial vision for growing the business and turn employees into growth partners.
  • 44. 4444 Line of Sight Vision Where? Model & Strategy How ? Roles and Expectations My Contribution? Rewards What’s in it for me?
  • 45. 4545 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.
  • 46. 4646 Salary Performance Incentives Sales Incentives Growth Incentives Core Health & Welfare Plans Executive Benefit Plans Qualified Retirement Plans Nonqualified Retirement Plans Salaries Competitive with market standards? Tied to strong performance management process (merit)? Managed within a flexible but effective structure? Performance Incentives Tied to productivity gains? Clear, achievable and meaningful? Self-financing? Sales Incentives Challenging yet achievable? Reinforcing the right behaviors? Differentiating your offering? Growth Incentives Linked to a compelling future? Supporting an ownership mentality? Securing premier talent? Core Benefits Responsive to today’s employee marketplace? Allocating resources where most needed? Evaluated to eliminate unnecessary expense? Executive Benefits Flexible enough to address varying circumstances? Communicating a unique relationship? Reducing employee tax expense? Qualified Retirement Plans Giving employees an opportunity to optimize retirement values? Operated with comprehensive fiduciary accountability? Avoiding conflicts and minimizing expenses? Nonqualified Retirement Plans Optimizing tax-deferral opportunities? Aligning long-term interests of employees with shareholders? Structured to receive best possible P&L impact? An Aligned Compensation Strategy
  • 47. 4747 Form of Pay Purpose Standard Investment ROI Salaries Provide for the current cash needs of our executives 40-50th percentile for peer group $500,000 Achieve ROA standard of 0.75% Short-term Incentives Enhance current cash payments to executives for achieving top and bottom line annual goals 30-40% of base salary $168,000 (Target) 15% revenue growth and 12% margin Long-term Incentives (Cash) Retain execs; focus them on long- term earnings growth; align with shareholder interests; meet wealth accumulation needs 15-20% of base salary $84,000 (Target) Long-term growth in earnings (double earnings = share 13% of new value) Long-term Incentives (Equity) Retain execs; focus them on long- term earnings growth; align with shareholder interests; meet wealth accumulation needs 15-20% of base salary $84,000 (Target) Long-term growth in earnings (double earnings = share 13% of new value) Core Benefits Meet basic security needs of the executives 50th percentile for peer group $25,500 ROA of 0.75% Executive Benefits Enhance basic security needs and meet market standards for perquisites 50th percentile for peer group $24,000 ROA of 0.75% Qualified Retirement Provide wealth accumulation opportunity for executives 40th percentile (3% of salary) $15,000 ROA of 0.75% Supplemental Retirement Strengthen rewards value proposition to help recruit and retain executives; meet wealth accumulation needs 30th percentile compared to banks that have plans $135,000 ROA of 0.9%
  • 48. 4848 5. Build a Total Compensation Structure A total compensation structure gives you a comprehensive view of all compensation and benefit plans and ensures operational integrity.
  • 49. 4949 Structure the Data There are four common ways to build a salary structure  Pure Market Pricing Approach  Traditional Salary Structure  Broadband Structure  Hybrid Structure 49
  • 50. 5050 Market Pay Assessment  Benchmark your roles against salary surveys  Major House Surveys  Industry Surveys  Internet Surveys 25th Med 75th Towers Watson Accountant 1 11.1% 47.0 52.5 58.0 Mercer Accountant - Entry 11.1% 50.0 52.5 55.0 Radford Accountant I 10.0% 11.1% 55.0 59.4 63.8 Salary.com Accountant 11.1% 45.0 51.5 58.0 ERI Accounting - Junior 11.1% 48.0 54.0 60.0 Kenexa Accountant Entry 11.1% 45.0 50.0 55.0 BDG Accountant 11.1% 50.0 52.5 55.0 Pay Scale Associate Accountant 11.1% 50.0 54.5 65.3 Robert Half Accountant I -10.0% 11.1% 50.1 56.0 61.9 Average 100.0% 48.9 53.7 59.1 Accountant 1 51.4 Position Survey Match Average Salary SalaryPremium Discount Weighting
  • 51. 5151 The Final Structure Salary Sales Incentives Performance Incentives Growth Incentives Core Health & Welfare Plans Executive Benefit Plans Qualified Retirement Plans Nonqualified Retirement Plans 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
  • 52. 5252 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?
  • 53. 5353 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%
  • 54. 5454 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.
  • 55. 5555 A balanced approach will typically appeal to premier talent who hold a long-term view . 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%
  • 56. 5656 Is there one right solution for all three companies? Company A Company B Company C 10Year-Old Technology Company 18Year-OldTransportation Company 20Year-Old Manufacturing Company Grown from $50 to $75 million in revenue over past three years $45 million in annual revenue, unstable growth (averaged 3% over past 5 years) $150 million in annual revenue— up from $75 million three years ago Wants to grow to $125 million over next three years Wants to grow to $75 in the next five years Plans to grow to $200 million in the next three years High Attrition LowAttrition ModestAttrition Privately Owned Family Owned:Two sons working in the business Privately Owned: New CEO hired by owner three years ago
  • 57. 5757