How to Create an Incentive Plan That Pays For Itself
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What if the employee incentive plan you offer didn’t really cost your company anything? How much value would you share? In theory, if it didn’t really cost you anything, the amount you could share would be unlimited, right? So, what’s the catch? Is there actually such a thing as incentive compensation that pays for itself? There really is no catch. You could start a self-financing incentive plan today if you just knew the steps to take. And that’s the purpose of this webinar. We want to teach you how to reward performance in a way that drives a positive ROI on your compensation investment, and eliminates the “cost” associated with traditional approaches. So, stop wasting money on incentive plans that are a drain on cash flow and profits.
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How to Create an Incentive Plan That Pays For Itself
- 1. How to Create an Incentive Plan that Pays for Itself
- 2. 22 Today’s Presenter: Ken Gibson SeniorVice President (949) 265-5703 kgibson@vladvisors.com 23201 Lake Center Drive, Suite 207 ⬧ Lake Forest, CA 92630 ⬧ 949-852-2288 www.VLadvisors.com ⬧ www.PhantomStock.com
- 3. How to Create an Incentive Plan that Pays for Itself
- 4. 44 We’re happy to provide a copy of today’s slides. To open or close the control panel: Click the red arrow For questions during today’s presentation: Use the question area on your control panel Webinar Q: Are the slides available? A: Yes, more info will be provided at the end
- 5. 55 Take advantage of a one-half hour consulting call with a VisionLink principal at no charge. Indicate interest on final survey. Consultation Offer & Survey Request a copy of our slides and complimentary consultation. We value your input.
- 6. 66 Post Webinar Intro 5 Minutes: Who We Are What We Do How We Do It
- 7. 77 23201 Lake Center Drive, Suite 207 Lake Forest, CA 92630 (888) 703 0080 www.vladvisors.com www.phantomstock.com www.bonusright.com Headquartered in Lake Forest, CA Founded in 1996 Over 600 clients throughout North America
- 8. 88 What Have You Learned? During the lockdown– What organizational flaws were revealed? What structural issues had the biggest financial impact? What changes have you instituted to minimize risk in the future?
- 9. 99 Key Question How would your compensation strategy have been different had you known the coronavirus economy was coming?
- 10. 1010 Answer of Most Business Leaders More flexibility Fewer high-cost guarantees
- 11. 1111 Why? Compensation is expensive and can wreak havoc on cash flow.
- 12. 1212 Flaws Revealed by COVID-19 Economy Unbalanced Pay Offerings Heavily weighted to guarantees (salaries, benefits) Heavily weighted to short-term performance rewards (bonus or other STIP)
- 13. 1313 The Coronavirus Economy Dilemma Sample Position Salary Short- TermValue Sharing Total Cash Flow Impact Plan A $110,000 $11,000 $121,000 $121,000 Plan B $100,000 $30,000 $130,000 $130,000
- 14. 1414 The Future Ideal Sample Position Salary Short-Term Value Sharing Long-Term Value Sharing Total Cash Flow Impact Plan A $100,000 $5,000 $20,000 $125,000 $105,000 Plan B $100,000 $0 $30,000 $130,000 $100,000 Plan C $80,000 $10,000 $40,000 $150,000 $90,000
- 15. 1515 3 Keys to Creating an Incentive Plan that Pays for Itself 1. Measure & Reward Value Creation 2. Adopt a Wealth Multiplier Pay Philosophy 3. Tie Rewards to Productivity Profit
- 16. 1616 1. MEASURE & REWARD VALUE CREATION
- 18. 1818 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.’ ” 18
- 19. 1919 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
- 20. 2020 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. 20
- 21. 2121 Outcomes, not Methods "You cannot hold people responsible for results if you supervise their methods.“ (Stephen R. Covey) 21 "You cannot hold people responsible for results if you pay them for their methods.“ (VisionLink)
- 22. 2222 Replace Incentives with Value-Sharing The premise should be to promote value creation and value-sharing: ▪ “When you help us create value you participate in that value” ▪ Define value creation around the shareholders’ most important goals
- 23. 2323 Shareholder Priority Sustainable and growing profitability 23
- 24. 2424 Key Metric Focus on One of These: Profit Increase in Profits (% or $) (Sometimes: Revenue Growth) 24
- 25. 2525 2. ADOPT A WEALTH MULTIPLIER PAY PHILOSOPHY
- 26. 2626 Compensation Philosophy Statement How value creation is defined. How value is shared—and with whom. How market pay standards apply. How guaranteed pay and value- sharing will be balanced. How short and long-term value- sharing will be balanced. How merit pay is defined.
- 27. 2727 Old School Defensive Wealth Creation Wealth Multiplier 27 Pay Philosophy Evolution
- 28. 2828 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 profits 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.
- 29. 2929 Wealth Multipliers vs. Wealth Creators Wealth Creators Profitability focus Recruit to skills and experience Pay is an expense to be contained Salaries and total pay should be “at market” “Pay-for-performance” Wealth Multipliers Accelerate value creation Recruit premier talent that fits performance expectations Pay is an investment that should produce a growing return Market pay for bench marking but pay philosophy drive comp strategy Sharing value with value creators.
- 30. 3030 The Value of Profit Wealth Multiplier Profits Secure Business Reward Employee Results Protect Shareholders
- 31. 3131 A Sense of Partnership Leads to a Growth Multiple The Value of Profit Wealth Multiplier Profits Protect Shareholders Secure Business Reward Employee Results
- 32. 3232 Wealth Multiplier Philosophy We believe all stakeholders should participate in the wealth multiple they help create. Fair Prudent
- 33. 3333 Dual Focus Peter Drucker once wrote that the manager’s job is to keep his nose to the grindstone while lifting his eyes to the hills. He meant that every business has to operate in two modes at the same time: producing results today and preparing for tomorrow. (Ken Favaro, Strategy+Business)
- 34. 3434 Key One Value Sharing Philosophy Rewards Plans for Two Distinct Performance Periods: 1. 12 months and under 2. 3 years and longer
- 35. 3535 Rules of Thumb Short-term value sharing should be tied to profit (ideally productivity profit) Long-term value sharing should be tied to business growth (increase in company value)
- 36. 3636 Setting Payout Thresholds Base Target (budget) Superior 36
- 37. 3737 What’s Base? Base is the threshold amount of profit that justifies employee bonuses Begin sharing value above that threshold Below Base = No bonus You should expect to achieve Base performance 4/5 years
- 38. 3838 What’s Target? Target is the amount of profit that is expected to be achieved Bonus values at Target should be your “Market” opportunity You should expect to achieve Target performance 3/5 years
- 39. 3939 What’s Superior? Superior is the amount of profit that is achievable assuming exceptional performance Bonus values at Superior should be impressive You should expect to achieve Superior performance 1/5 years
- 40. 4040 Other Metrics Minimum profit thresholds must be met first. Then… Department or team metrics Non-correlated factors (customer retention, customer or client increase, etc.) Individual performance metrics
- 41. 4141 Ways to treat individual performance Component of the allocation Discretion Modifier
- 42. 4242 Component of Allocation Allocation to plan participants contingent on: ▪ Company Performance – Employees should have all or a majority portion of their bonus based on company performance ▪ Org Unit Performance – A portion of an employee’s bonus can be allocated based on department, location, division, or business unit ▪ Individual Performance – A portion of the bonus is allocated to Individual Results
- 43. 4343 Problems Unless the slice is big, many employees will pay little attention to it ▪ “I can still get 75% of my bonus without worrying about that piece” Performance management score may not be trustworthy ▪ “I hate to give him a low score because it will reduce his bonus”
- 44. 4444 Problems Full (or even partial) discretion may lead to charges of unfairness or even discrimination ▪ “Why was he paid more than me?” Lengthy list of employee goals may be hard to track fairly or accurately ▪ “I didn’t get that done because you asked me to focus on something new”
- 46. 4646 Individual Performance Trend is to disconnect performance from incentive pay Performance Management is still important Managers more likely to be honest about performance if incentives are not directly correlated to performance rating If performance is deemed “unacceptable” discretion should be utilized to eliminate incentive payment 46
- 47. 4747 Solution: Spot Bonuses For employees that make special contributions over the course of the year… Create a discretionary reserve inside of plan funding Reserved for “exceptional” performers only Point to clear contributions (the reason for the award) Immediate recognition (not end of the year) Nomination process Budget a “reserve” to fund these awards They don’t have to be big ($500) 47
- 48. 4848 9 Long-Term Value Sharing Alternatives Stock Option Performance Shares Restricted Stock Phantom Stock Option Performance Phantom Stock Phantom Stock Profit Pool Performance Unit Strategic Deferred Compensation
- 49. 4949 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
- 50. 5050 Phantom Stock Company establishes a phantom share value (formula or valuation) Employees given an award that has current value essentially equivalent to company stock value (subject to vesting schedule) No rights of ownership Rewards for past contributions and future growth Payments will be made in cash (or stock) at pre- determined dates Full value awards create a direct link to ownership
- 51. 5151 Performance Phantom Stock Employees given the promise to receive phantom shares upon fulfillment of pre-determined (often annual) financial goals Shares can be full value or appreciation only “Double” pay-for-performance concept ▪ You earn shares based on performance ▪ Share values go up based on performance
- 52. 5252 Phantom Stock Options Employees given a promise of cash payment at a future date The value will be based on the appreciation in stock price from the date of award to the date of redemption (like stock appreciation rights) Like stock options but without the need to pay for shares Rewards employees for contributing to the increase in enterprise value Can be part of the employee’s annual pay package
- 53. 5353 3. TIE REWARDS TO PRODUCTIVITY PROFIT
- 54. 5454 Replace Incentives with Value-Sharing The premise should be to promote value creation and value-sharing: ▪ “When you help us create value you participate in that value” ▪ Define value creation around the shareholders’ most important goals
- 55. 5555 Shareholder Priority Sustainable and growing profitability 55
- 56. 5656 Not Just Profit but Productivity Profit Productivity profit is that surplus that can be attributable to the performance of your people.
- 57. 5757 Productivity Profit The Secret to Creating an Incentive Plan that Pays for Itself
- 58. 5858 Productivity Profit Calculation Item Amount Capital Account $20,000,000 Cost of Capital 12% Capital Charge $2,400,000 Operating Income $10,000,000 Productivity Profit $7,600,000 Total Rewards Investment $25,000,000 ROTRI™ Return on Total Rewards Investment 30.4% (ROTRI™ = Productivity Profit/Total Rewards Investment) 58
- 59. 5959 Example: Item Figure Capital Account $20,000,000 Cost of Capital 12% Capital Charge $2,400,000 Operating Income $10,000,000 *Productivity Profit $7,600,000 Total Rewards Investment $25,000,000 ROTRI™ 30.4% (ROTRI™ = Productivity Profit/Total Rewards Investment) *Variable Pay Plans (Value Sharing) are financed from Productivity Profit 59
- 60. 6060 Result: Unlimited Earnings Potential Item Figure Capital Account $20,000,000 Cost of Capital 12% Capital Charge $2,400,000 Operating Income $10,000,000 *Productivity Profit $7,600,000 Total Rewards Investment $25,000,000 ROTRI™ 30.4% (ROTRI™ = Productivity Profit/Total Rewards Investment) *Variable Pay Plans (Value Sharing) are financed from Productivity Profit 60
- 61. 6161 Special Offer The Productivity Profit Workbook Request your copy on the final survey.
- 62. 6262 Market a Future Build a Sense of Partnership
- 63. 6363 The Coronavirus Economy Dilemma Sample Position Salary Short- TermValue Sharing Total Cash Flow Impact Plan A $110,000 $11,000 $121,000 $121,000 Plan B $100,000 $30,000 $130,000 $130,000
- 64. 6464 The Future Ideal Sample Position Salary Short-Term Value Sharing Long-Term Value Sharing Total Cash Flow Impact Plan A $100,000 $5,000 $20,000 $125,000 $105,000 Plan B $100,000 $0 $30,000 $130,000 $100,000 Plan C $80,000 $10,000 $40,000 $150,000 $90,000
- 65. 6565 Market a Future Here’s the short-term picture Here’s our vision for the future. Here’s how we plan to get there. Here’s the role we need you to perform. Here are the resources you will be able to use. Here’s our philosophy about pay and rewards. Here are the specific pay programs you’ll participate in. Here’s how our pay programs will work for you if we achieve our plan.
- 66. 6666 Employee Value Statement Year 1 2 3 4 5 Targeted Results 100% 100% 100% 100% 100% Salary $160,000 $166,400 $173,056 $179,878 $187,177 STVS $64,000 $66,560 $69,222 $71,991 74,871 LTVS (EOY) -- $74,000 $186,000 $311,000 $448,000 401(k) @7% $17,120 $36,123 $57,169 $80,428 $106,086 Total Cash $224,000 $232,960 $242,278 $251,970 $262,048 Wealth Accrual $17,120 $110,123 $243,169 $391,428 $554,086 Total Value $241,120 $567,083 $942,407 $1,342,636 $1,767,343
- 67. 6767 3 Keys to Creating an Incentive Plan that Pays for Itself 1. Measure & Reward Value Creation 2. Adopt a Wealth Multiplier Pay Philosophy 3. Tie Rewards to Productivity Profit
- 68. 6868 Take advantage of a one-half hour consulting call with a VisionLink principal at no charge. Indicate interest on final survey. Request Consultation & Take Survey Request a copy of our slides, report, complimentary consultation and BonusRight demo. We value your input.
- 69. 6969 Special Offer The Productivity Profit Workbook Request your copy on the final survey.
- 70. 7070
- 72. 7272 New SaaS tool Build and manage your bonus plan online.
- 73. 7373 Free Tool Introducing: The Total Rewards Assessment Indicate on survey if you would like to schedule a demo.
- 75. 7575 Post Webinar Intro 5 Minutes: Who We Are What We Do How We Do It
- 76. 7676 Q&A
- 77. 7777 Today’s Presenter: Ken Gibson SeniorVice President (949) 265-5703 kgibson@vladvisors.com 23201 Lake Center Drive, Suite 207 ⬧ Lake Forest, CA 92630 ⬧ 949-852-2288 www.VLadvisors.com ⬧ www.PhantomStock.com ThankYou!
- 78. 7878 Post Webinar Intro 5 Minutes: Who We Are What We Do How We Do It
- 79. 7979
- 80. 8080
- 81. VisionLink’s Focus: Help Business Leaders Build and Sustain a High Performance Culture Accelerate performance through pay strategies that transform employees into growth partners.
- 82. 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.
- 83. 8383 Today’s Presenter: Ken Gibson SeniorVice President (949) 265-5703 kgibson@vladvisors.com 23201 Lake Center Drive, Suite 207 ⬧ Lake Forest, CA 92630 ⬧ 949-852-2288 www.VLadvisors.com ⬧ www.PhantomStock.com ThankYou!