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Global Equity Effectiveness
A Right-Brain Perspective
12th annual international conference • amsterdam • 15-17 june 2011
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Seeking Equilibrium
• Equity effectiveness requires that companies find
equilibrium in share utilization
• Effectiveness refers to both grant efficiency
(tax/accounting/dilution) and motivational value
• Optimum utilization occurs when the incentive
effect outweighs the cost (dilution and expense)
• This is the equilibrium point where the strongest
correlation between share utilization and total
shareholder return occurs
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Achieving Equity Effectiveness
• During the 1990’s,
achieving balance was
easy, with little or no
concerns about:
– Run rates
– Overhang
– Expense
– Allocation
– Motivation
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Achieving Equity Effectiveness
• In the years following the 2001-2002 recession,
optimization was more difficult as economic pressure
drove increased diversification in the use of equity plans
• Changes were felt
across many
participation levels
and geographies
• For a long time,
the solutions were
simple…
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But no one expected….
• The 2008-2009
recession was
unprecedented in:
– The depth of its decline
– The duration of its decline
– Its global economic
impact
• It also had a profound
impact on equity
compensation programs
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Why was this a surprise?
Are the foundations of global equity programs built
on an anomaly?
Growthof $10 investedinthe TotalS&P500 Index starting in1900
$1
$10
$100
$1,000
$10,000
$100,000
$1,000,000
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Year
RealS&P500StockPriceIndex
Total Price Index
(Dividends Reinvested)
Long-Term"Equilibrium"
Total Return Index: 9.30%/Yr
The “birth“
of global
equity
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CONVENTIONAL WISDOM/POTENTIAL DISCONNECTS
• An option awarded in March of 2009 with a strike of $4.00 is
worth less than a March 2010 grant with a strike of $25.00
• Accountants vs. entrepreneurs
• Surveys are a reliable source of information for compensation
comparison and planning
• Data vs. facts
• Equity grants are a powerful motivator
• Reciprocity vs. incentive
• “Stocks for the Long Run”
• Timing is everything
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Current State
• Shareholder dissatisfaction is high
– Concerns about risk, dilution, and ownership have fueled
broad-ranging governance initiatives
• Employer dissatisfaction is high
– Fueled by costs of administration, financial reporting,
compliance, and disclosure during a period in which
employee returns from grants have declined or disappeared
• For employees, the motivational value is low
– The payoff from a grant is often viewed as a “gift” that they
feel compelled to repay by working harder
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Understanding the Disconnect:
Right-Brain vs. Left-Brain
• Left-Brain is dominant:
– Tax
– Accounting
– Compliance
• Right-Brain is dormant:
– Perceptions
– Behaviors
– Culture
In the design and delivery of global equity programs:
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Left-Brain: What is an equity grant worth?
• We use complex
models to calculate
stock options
• But restricted stock is
the face value at grant
• And performance shares
are the possible delivered
value
• So what is the total value
at the date of grant?
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The Right-Brain is Driving Company Actions
0%
10%
20%
30%
40%
50%
Will do
something;
exploring
alternatives
More Perf.
Shares than
Options
More Service
RS/RSU than
Options
Relaunch
ESPP
Replace
Options with
cash
More Perf
Shares than
RS/RSU
Anticipated Changes for Upcoming Year
But actions are often reactions!
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Are these actions consistent with
employee perceptions?
Assumes ratio of 3 stock options for exery 1 restricted share
Value of Stock Options vs. Restricted Stock
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
Grant 1 2 3 4 5 6 7 8 9 10
Stock Options Restricted Stock
Assumes ratio of 3 stock options for exery 1 restricted share
Value of Stock Options vs. Restricted Stock
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
Grant 1 2 3 4 5 6 7 8 9 10
Stock Options Restricted Stock
Two
employees
Same
company
Different
perceptions on
value
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Why is perception important?
Perceived value is the key to employee engagement
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Value is tied to perceptions
• Behavior Finance proposes theories based on
psychology to explain anomalies in the market.
• Behavioral finance assumes that the information
structure and the characteristics of market
participants systematically influence individuals'
investment decisions as well as market outcomes.
• Behavioral finance seeks to better understand
economic decisions and how those decisions affect
prices, returns, and the allocation of resources.
To an employee, perception is reality
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How are perceptions formed?
• The three main themes in behavioral finance are:
– People often make decisions based on “rules of thumb”, not
rational analysis.
– The way a problem is presented will affect the decision a
person makes on how to act.
– There are behavioral explanations for observed market
outcomes that are contrary to rational expectations and
market efficiency.
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So at the date of grant, what is the
perceived value?
Assumes ratio of 3 stock options for exery 1 restricted share
Value of Stock Options vs. Restricted Stock
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
Grant 1 2 3 4 5 6 7 8 9 10
Stock Options Restricted Stock
Assumes ratio of 3 stock options for exery 1 restricted share
Value of Stock Options vs. Restricted Stock
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
Grant 1 2 3 4 5 6 7 8 9 10
Stock Options Restricted Stock
The answer is simple, it depends…
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Equity characteristics…
But, effectiveness for each individual is driven
by their perceived value
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But what shapes perceived value?
• Personal biases and experiences
• Generational differences
• Global cultures
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Behavior and Personal Perceptions
• Mental Accounting and Consumer Choice
– A new model of consumer behavior developed by Richard
Thaler using a hybrid of cognitive psychology and
microeconomics.
– People mentally frame assets as belonging to either current
income, current wealth or future income and this has
implications for their behavior
– Mr. Smith is up $50 in a monthly poker game. He has a
queen high flush and calls a $10 bet. Mr. Jones owns 1,000
shares of XYZ which went up today. He is even in the poker
game. He has a king high flush and folds. When Mr. Smith
wins, Mr. Jones thinks to himself, “If I had been up $50, I
would have called too.”
– What are unvested grants really worth to your
employees?
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Behavior and Personal Perceptions
• Hyperbolic Discounting:
– Given two similar rewards, humans show a preference for
one that arrives sooner rather than later. They discount the
value of the later reward by a factor that increases with the
length of the delay.
– if all choices appear to be in the longer term, larger benefits
will be chosen, even if these appear even later than the
smaller benefit.
– If you were offered the choice between $50 now and $100 a
year from now, most would ask for the $50. However, given
the choice between $50 in nine years or $100 in ten years
you would be likely choose the $100 in ten years.
– Application: What is more valuable to your employees, a
$10,000 restricted stock grant that vests in two years, a
$25,000 grant that vests in four years or a $50,000 grant
that vests in six years?
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Behavior and Personal Perceptions
• Endowment Effect
– People place a higher value on objects they own than objects
that they do not.
– For example, people demanded a higher price for a item that
had been given to them but put a lower price on the same
they did not yet own.
– An employee may continue to hold a large number of
worthless underwater stock options rather than
exchanging them for a smaller number of new at-the-
money options.
– What would work better, an option exchange or a cash
exchange?
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Behavior and Personal Perceptions
• Loss Aversion
– People have a tendency to strongly prefer avoiding losses to
acquiring gains
– This leads to risk aversion when people evaluate a possible
gain; since people prefer avoiding losses to making gains
– For example, loss aversion has been implicated in the
premium for stock returns over bond returns
– It may also explain why an employee who has
experienced underwater stock options will exercise and
sell an “in-the-money” option as soon as it vests, even
though there is no indication that the option will not
continue to appreciate.
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Behavior and Generational
Differences
• Generational differences
manifest themselves in
several ways, including
how individuals view their
compensation.
• There is variation in the
nature of intrinsic rewards
each generation considers
important.
• The generations also relate to their organizations
differently.
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Some generational differences are obvious
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US Generational Differences
Generation Baby Boomers
(1943-1960)
Generation X
(1960-1981)
Generation Y
(1982-2001)
Company Loyalty
Committed to their employers and
do not change jobs frequently
Change employers frequently and
will leave if their rate of career
growth or company culture is not to
their satisfaction
Change employers often and will
continually look for a workplace that
provides them with what they want.
Workplace
Environment
Focus on relationships, outcomes,
their rights and skills.
Flexible work schedule and location.
Telecommuting is very popular with
this generation and supports their
aim for a balanced work-life.
Casual and supportive environment
Very flexible working hours and
location.
What They Look
For in a Company
Stable employment, career
progression potentials
Company that promotes social
stimulus, including social events.
Company that is involved with their
community and encourages their
employees to give back.
Avoids bureaucratic companies and a
company that has a strong viable
social culture and code of ethics.
Management
Style
Comfortable with directive
command and control management
style and values feedback.
Need a mentor or supervisor to
encourage and facilitate their career
development
Requires instant gratification
constant encouragement through
rewards, entitlements and
promotions. Uncomfortable with
directive style of management.
Personality Type
Resourceful, individualistic, self
reliant and skeptical of authority
Optimistic, confident, sociable, and
have strong morals and sense of civic
duty. They put great value on their
free time away from work
Have been taught the value of
individuality and independent
thinking.
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Global Generational Differences
1950 1960 1970 1980 1990 2000
China Post-1950s Post 1960s Post 1970s Post 1980s Post 1990s
Generation Generation Generation Generation Generation
(1950-1959) (1960-1969) (1970-1979) (1980-1989) (1990-1999)
India "Traditional" Generation "Non-Traditional" Gen Y
(1948-1968) Generation (1981-onward)
(1969-1980)
South "475" Generation "386" Generation Gen X and Gen Y
Korea (1950-1959) (1960-1969) 1070 - onward
Japan 1st Baby Danso Shinjinrui 2nd Baby Shinjinrui
Boomer Generation Generation Boomer Post Bubble Junior Yutori
(1946-1950) (1951-1960) (1961-1970) (1971-1975) (1976-1987) (1986-1995) (1987-2002)
Russia Baby Boomers Gen X Gen Y (Gen "Pu")
(1943-1964) (1965-1983) (1983-2000)
Bulgaria Post War Communist Gen Y
Generation Generation (1980 - onward)
(1945-1965) (1965-1980)
Czech Baby Boomers Gen X-"Husak"'s Children Gen Y
Republic (1943-1970) (1965-1982) (1983-2000)
South Baby Boomers Gen X Gen Y
Africa (1943-1970) (1970-1989) (1990-2001)
Brazil Baby Boomers Gen X Gen Y
(1946-1964) (1965-1980) (1981-2001)
US Baby Boomers Gen X Gen Y
(1943-1964) (1965-1980) (1981-2001)
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Implications on Perceived Equity Values
Baby Boomer:
Optimistic + Involved + High Risk/High Rewards =
Preference for highly leveraged grants like stock options
Generation X:
Cautious + Conservative +
Distrustful = Preference for low
leverage grants like service-
based restricted stock
Generation Y:
Realistic + Confident + Career Focused =
Preference for moderate leverage grants like
performance shares
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Behavior and Global Culture
• Culture is the underlying value framework that guides
an individual’s behavior
• Culture is reflected perceptions, social interactions
and business interactions
• Culture guides the selection of appropriate responses
in social and business situations
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Rapaille’s Archtypes
• The more global, the more local
• Collective cultural consciousness
• For example, quality is a key to success, but quality
has different meanings in different countries
– US: It works
– Japan: Perfection
– Germany: Made to standards
– France: Quality = Luxury
– India: Quality = Reliability
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Hofstede’s Cultural Dimensions
• Power distance: degree to which members of society accept an
unequal distribution of power in organizations and society
• Individualism: degree to which individuals perceive themselves
to be separate from a group and to be free from group pressure
to conform
• Masculinity: degree to which a society looks favorably on
aggressive and materialistic behavior
• Uncertainty avoidance: degree to which members of society
deal with the uncertainty and risk and prefer to work with long-
term acquaintances and friends rather than with strangers
• Long-term orientation: degree to which members of a culture
will defer present gratification to achieve long-term goals
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Hofstede’s Cultural Dimensions
0
10
20
30
40
50
60
70
PDI IDV MAS UAI LTO
World Average
0
10
20
30
40
50
60
70
80
90
100
PDI IDV MAS UAI LTO
United States
Source: Geert Hofstede™ Cultural Dimensions
One Company,
One Plan
But One Plan for
One World?
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Hofstede’s Cultural Dimensions
0
10
20
30
40
50
60
70
PDI IDV MAS UAI
European Countries
0
10
20
30
40
50
60
70
80
90
100
PDI IDV MAS UAI LTO
United States
0
10
20
30
40
50
60
70
80
PDI IDV M AS UAI
Latin American Countries
0
10
20
30
40
50
60
70
80
90
PDI IDV MAS UAI LTO
Asian Countries
Source: Geert Hofstede™ Cultural Dimensions
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Hofstede’s Cultural Dimensions
0
10
20
30
40
50
60
70
80
PDI IDV MAS UAI LTO
India
0
10
20
30
40
50
60
70
80
PDI IDV MAS UAI LTO
Singapore
0
20
40
60
80
100
120
PDI IDV MAS UAI LTO
China
0
10
20
30
40
50
60
70
80
90
100
PDI IDV MAS UAI LTO
Japan
Source: Geert Hofstede™ Cultural Dimensions
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So, Do We Recognize These Differences?
• Senior management roles are likely to receive an equity grant
regardless of global location
• The differences in global participation start at the Managerial
level and more apparent at the Individual Contributor level
Equity Plan Participation Rates by Country & Level
96%
100% 100% 100% 100% 100%
94%94%
100%
93%
100%
92%
72%
57%
76%
81%
75%
50%
17%
11%10%
25%
33%34%
0%
20%
40%
60%
80%
100%
120%
United States United
Kingdom
Germany India China Australia
%ofEmployeePopulationParticipatinginEquityPlan
VP/GM
Director/Sr Mgr
Manager/Supv
Ind Contr
* Buck Consultants Global Long-Term Incentive Practices Survey
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Do We Recognize These Differences?
Percentage of Companies with Grant Type
VP Level
95% 94%
84% 82%
73%
63% 61%
9%
26%
48%
67% 64%
58%
62%
2% 3%
9%
13%
18%
27% 26%
0
0.2
0.4
0.6
0.8
1
2004 2005 2006 2007 2008 2009 2010
SO
RSU
PRS
•The shift from stock options toward full value shares slows
•Full value shares have edged ahead of options for the first time
•Performance-based shares have become a major practice
* Buck Consultants Global Long-Term Incentive Practices Survey
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Do We Recognize These Differences?
Average Value Allocation by Equity Type 2009
VP Level
42% 45% 43% 45%
36%
42%
31%
38%
40% 41%
26%
34%
42%
36%
16% 14% 15%
28%
24%
14%
30%
6%
3% 1% 1% 2%
0%
20%
40%
60%
80%
100%
United States United
Kingdom
Germany India China Japan Australia
Cash
PRS
TBRS
SO
Average Value Allocation by Equity Type 2010
VP Level
43%
52% 49% 50% 52% 50% 45%
41%
41% 41% 41% 34% 44% 49%
12%
6% 9% 9%
9%
4% 4%5%
3%2%1%3%
0%
20%
40%
60%
80%
100%
United States United
Kingdom
Germany India China Japan Australia
Cash
PRS
SO
TBRS
* Buck Consultants Global Long-Term Incentive Practices Survey
12th annual international conference • amsterdam • 15-17 june 2011
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Achieving Equity Effectiveness
• If this is what an understanding of global employee
behavior tells us, then how do we act today?
• By left-brain
– Accounting
– Tax
– Compliance
• Not by right-brain:
– Perceptions
– Behaviors
– Culture
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What does this knowledge tell us
about plan design going forward?
One Company, One Plan?
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Looking Ahead…
One Company, One Plan?
0%
50%
100%
150%
200%
250%
300%
70% 80% 90% 100% 110% 120% 130%
% of Goal Achieved
%ofTargetPaymentReceived
Performance Share
Plans provide the
flexibility to adapt to
global differences
Leverage can also be
adjusted to respond to
difference in risk profiles
Performance metrics can
be set to create global
alignment and/or
maximize line-of-sight
Awards can be paid in
stock, cash or a
combination to maximize
perceived value
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Parting thoughts
• Technical aspects of equity compensation are
important, but not enough
• To understand perceived value, a better
understanding of the global workforce is needed
• Value is perceived, not calculated
• Classical rational decision-making is not the model for
actual employee decision-making
• Triangulate to get answers rather than focusing on
the single best base of information
• Design simplicity should be an imperative
• More intuition, less conventional wisdom
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Questions
Jim Sillery
Principal
+1 (1) 312 846 3145
James.sillery@buckconsultants.com
Ben Wells
Senior Consultant
+44 (0) 207 429 1033
benw@talking-people.co.uk

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Global Equity Effectiveness: A Right Brain Perspective

  • 1. Global Equity Effectiveness A Right-Brain Perspective
  • 2. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Seeking Equilibrium • Equity effectiveness requires that companies find equilibrium in share utilization • Effectiveness refers to both grant efficiency (tax/accounting/dilution) and motivational value • Optimum utilization occurs when the incentive effect outweighs the cost (dilution and expense) • This is the equilibrium point where the strongest correlation between share utilization and total shareholder return occurs
  • 3. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Achieving Equity Effectiveness • During the 1990’s, achieving balance was easy, with little or no concerns about: – Run rates – Overhang – Expense – Allocation – Motivation
  • 4. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Achieving Equity Effectiveness • In the years following the 2001-2002 recession, optimization was more difficult as economic pressure drove increased diversification in the use of equity plans • Changes were felt across many participation levels and geographies • For a long time, the solutions were simple…
  • 5. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit But no one expected…. • The 2008-2009 recession was unprecedented in: – The depth of its decline – The duration of its decline – Its global economic impact • It also had a profound impact on equity compensation programs
  • 6. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Why was this a surprise? Are the foundations of global equity programs built on an anomaly? Growthof $10 investedinthe TotalS&P500 Index starting in1900 $1 $10 $100 $1,000 $10,000 $100,000 $1,000,000 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 Year RealS&P500StockPriceIndex Total Price Index (Dividends Reinvested) Long-Term"Equilibrium" Total Return Index: 9.30%/Yr The “birth“ of global equity
  • 7. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit CONVENTIONAL WISDOM/POTENTIAL DISCONNECTS • An option awarded in March of 2009 with a strike of $4.00 is worth less than a March 2010 grant with a strike of $25.00 • Accountants vs. entrepreneurs • Surveys are a reliable source of information for compensation comparison and planning • Data vs. facts • Equity grants are a powerful motivator • Reciprocity vs. incentive • “Stocks for the Long Run” • Timing is everything
  • 8. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Current State • Shareholder dissatisfaction is high – Concerns about risk, dilution, and ownership have fueled broad-ranging governance initiatives • Employer dissatisfaction is high – Fueled by costs of administration, financial reporting, compliance, and disclosure during a period in which employee returns from grants have declined or disappeared • For employees, the motivational value is low – The payoff from a grant is often viewed as a “gift” that they feel compelled to repay by working harder
  • 9. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Understanding the Disconnect: Right-Brain vs. Left-Brain • Left-Brain is dominant: – Tax – Accounting – Compliance • Right-Brain is dormant: – Perceptions – Behaviors – Culture In the design and delivery of global equity programs:
  • 10. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Left-Brain: What is an equity grant worth? • We use complex models to calculate stock options • But restricted stock is the face value at grant • And performance shares are the possible delivered value • So what is the total value at the date of grant?
  • 11. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit The Right-Brain is Driving Company Actions 0% 10% 20% 30% 40% 50% Will do something; exploring alternatives More Perf. Shares than Options More Service RS/RSU than Options Relaunch ESPP Replace Options with cash More Perf Shares than RS/RSU Anticipated Changes for Upcoming Year But actions are often reactions!
  • 12. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Are these actions consistent with employee perceptions? Assumes ratio of 3 stock options for exery 1 restricted share Value of Stock Options vs. Restricted Stock $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 Grant 1 2 3 4 5 6 7 8 9 10 Stock Options Restricted Stock Assumes ratio of 3 stock options for exery 1 restricted share Value of Stock Options vs. Restricted Stock $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 Grant 1 2 3 4 5 6 7 8 9 10 Stock Options Restricted Stock Two employees Same company Different perceptions on value
  • 13. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Why is perception important? Perceived value is the key to employee engagement
  • 14. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Value is tied to perceptions • Behavior Finance proposes theories based on psychology to explain anomalies in the market. • Behavioral finance assumes that the information structure and the characteristics of market participants systematically influence individuals' investment decisions as well as market outcomes. • Behavioral finance seeks to better understand economic decisions and how those decisions affect prices, returns, and the allocation of resources. To an employee, perception is reality
  • 15. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit How are perceptions formed? • The three main themes in behavioral finance are: – People often make decisions based on “rules of thumb”, not rational analysis. – The way a problem is presented will affect the decision a person makes on how to act. – There are behavioral explanations for observed market outcomes that are contrary to rational expectations and market efficiency.
  • 16. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit So at the date of grant, what is the perceived value? Assumes ratio of 3 stock options for exery 1 restricted share Value of Stock Options vs. Restricted Stock $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 Grant 1 2 3 4 5 6 7 8 9 10 Stock Options Restricted Stock Assumes ratio of 3 stock options for exery 1 restricted share Value of Stock Options vs. Restricted Stock $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 Grant 1 2 3 4 5 6 7 8 9 10 Stock Options Restricted Stock The answer is simple, it depends…
  • 17. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Equity characteristics… But, effectiveness for each individual is driven by their perceived value
  • 18. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit But what shapes perceived value? • Personal biases and experiences • Generational differences • Global cultures
  • 19. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Behavior and Personal Perceptions • Mental Accounting and Consumer Choice – A new model of consumer behavior developed by Richard Thaler using a hybrid of cognitive psychology and microeconomics. – People mentally frame assets as belonging to either current income, current wealth or future income and this has implications for their behavior – Mr. Smith is up $50 in a monthly poker game. He has a queen high flush and calls a $10 bet. Mr. Jones owns 1,000 shares of XYZ which went up today. He is even in the poker game. He has a king high flush and folds. When Mr. Smith wins, Mr. Jones thinks to himself, “If I had been up $50, I would have called too.” – What are unvested grants really worth to your employees?
  • 20. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Behavior and Personal Perceptions • Hyperbolic Discounting: – Given two similar rewards, humans show a preference for one that arrives sooner rather than later. They discount the value of the later reward by a factor that increases with the length of the delay. – if all choices appear to be in the longer term, larger benefits will be chosen, even if these appear even later than the smaller benefit. – If you were offered the choice between $50 now and $100 a year from now, most would ask for the $50. However, given the choice between $50 in nine years or $100 in ten years you would be likely choose the $100 in ten years. – Application: What is more valuable to your employees, a $10,000 restricted stock grant that vests in two years, a $25,000 grant that vests in four years or a $50,000 grant that vests in six years?
  • 21. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Behavior and Personal Perceptions • Endowment Effect – People place a higher value on objects they own than objects that they do not. – For example, people demanded a higher price for a item that had been given to them but put a lower price on the same they did not yet own. – An employee may continue to hold a large number of worthless underwater stock options rather than exchanging them for a smaller number of new at-the- money options. – What would work better, an option exchange or a cash exchange?
  • 22. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Behavior and Personal Perceptions • Loss Aversion – People have a tendency to strongly prefer avoiding losses to acquiring gains – This leads to risk aversion when people evaluate a possible gain; since people prefer avoiding losses to making gains – For example, loss aversion has been implicated in the premium for stock returns over bond returns – It may also explain why an employee who has experienced underwater stock options will exercise and sell an “in-the-money” option as soon as it vests, even though there is no indication that the option will not continue to appreciate.
  • 23. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Behavior and Generational Differences • Generational differences manifest themselves in several ways, including how individuals view their compensation. • There is variation in the nature of intrinsic rewards each generation considers important. • The generations also relate to their organizations differently.
  • 24. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Some generational differences are obvious
  • 25. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit US Generational Differences Generation Baby Boomers (1943-1960) Generation X (1960-1981) Generation Y (1982-2001) Company Loyalty Committed to their employers and do not change jobs frequently Change employers frequently and will leave if their rate of career growth or company culture is not to their satisfaction Change employers often and will continually look for a workplace that provides them with what they want. Workplace Environment Focus on relationships, outcomes, their rights and skills. Flexible work schedule and location. Telecommuting is very popular with this generation and supports their aim for a balanced work-life. Casual and supportive environment Very flexible working hours and location. What They Look For in a Company Stable employment, career progression potentials Company that promotes social stimulus, including social events. Company that is involved with their community and encourages their employees to give back. Avoids bureaucratic companies and a company that has a strong viable social culture and code of ethics. Management Style Comfortable with directive command and control management style and values feedback. Need a mentor or supervisor to encourage and facilitate their career development Requires instant gratification constant encouragement through rewards, entitlements and promotions. Uncomfortable with directive style of management. Personality Type Resourceful, individualistic, self reliant and skeptical of authority Optimistic, confident, sociable, and have strong morals and sense of civic duty. They put great value on their free time away from work Have been taught the value of individuality and independent thinking.
  • 26. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Global Generational Differences 1950 1960 1970 1980 1990 2000 China Post-1950s Post 1960s Post 1970s Post 1980s Post 1990s Generation Generation Generation Generation Generation (1950-1959) (1960-1969) (1970-1979) (1980-1989) (1990-1999) India "Traditional" Generation "Non-Traditional" Gen Y (1948-1968) Generation (1981-onward) (1969-1980) South "475" Generation "386" Generation Gen X and Gen Y Korea (1950-1959) (1960-1969) 1070 - onward Japan 1st Baby Danso Shinjinrui 2nd Baby Shinjinrui Boomer Generation Generation Boomer Post Bubble Junior Yutori (1946-1950) (1951-1960) (1961-1970) (1971-1975) (1976-1987) (1986-1995) (1987-2002) Russia Baby Boomers Gen X Gen Y (Gen "Pu") (1943-1964) (1965-1983) (1983-2000) Bulgaria Post War Communist Gen Y Generation Generation (1980 - onward) (1945-1965) (1965-1980) Czech Baby Boomers Gen X-"Husak"'s Children Gen Y Republic (1943-1970) (1965-1982) (1983-2000) South Baby Boomers Gen X Gen Y Africa (1943-1970) (1970-1989) (1990-2001) Brazil Baby Boomers Gen X Gen Y (1946-1964) (1965-1980) (1981-2001) US Baby Boomers Gen X Gen Y (1943-1964) (1965-1980) (1981-2001)
  • 27. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Implications on Perceived Equity Values Baby Boomer: Optimistic + Involved + High Risk/High Rewards = Preference for highly leveraged grants like stock options Generation X: Cautious + Conservative + Distrustful = Preference for low leverage grants like service- based restricted stock Generation Y: Realistic + Confident + Career Focused = Preference for moderate leverage grants like performance shares
  • 28. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Behavior and Global Culture • Culture is the underlying value framework that guides an individual’s behavior • Culture is reflected perceptions, social interactions and business interactions • Culture guides the selection of appropriate responses in social and business situations
  • 29. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Rapaille’s Archtypes • The more global, the more local • Collective cultural consciousness • For example, quality is a key to success, but quality has different meanings in different countries – US: It works – Japan: Perfection – Germany: Made to standards – France: Quality = Luxury – India: Quality = Reliability
  • 30. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Hofstede’s Cultural Dimensions • Power distance: degree to which members of society accept an unequal distribution of power in organizations and society • Individualism: degree to which individuals perceive themselves to be separate from a group and to be free from group pressure to conform • Masculinity: degree to which a society looks favorably on aggressive and materialistic behavior • Uncertainty avoidance: degree to which members of society deal with the uncertainty and risk and prefer to work with long- term acquaintances and friends rather than with strangers • Long-term orientation: degree to which members of a culture will defer present gratification to achieve long-term goals
  • 31. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Hofstede’s Cultural Dimensions 0 10 20 30 40 50 60 70 PDI IDV MAS UAI LTO World Average 0 10 20 30 40 50 60 70 80 90 100 PDI IDV MAS UAI LTO United States Source: Geert Hofstede™ Cultural Dimensions One Company, One Plan But One Plan for One World?
  • 32. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Hofstede’s Cultural Dimensions 0 10 20 30 40 50 60 70 PDI IDV MAS UAI European Countries 0 10 20 30 40 50 60 70 80 90 100 PDI IDV MAS UAI LTO United States 0 10 20 30 40 50 60 70 80 PDI IDV M AS UAI Latin American Countries 0 10 20 30 40 50 60 70 80 90 PDI IDV MAS UAI LTO Asian Countries Source: Geert Hofstede™ Cultural Dimensions
  • 33. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Hofstede’s Cultural Dimensions 0 10 20 30 40 50 60 70 80 PDI IDV MAS UAI LTO India 0 10 20 30 40 50 60 70 80 PDI IDV MAS UAI LTO Singapore 0 20 40 60 80 100 120 PDI IDV MAS UAI LTO China 0 10 20 30 40 50 60 70 80 90 100 PDI IDV MAS UAI LTO Japan Source: Geert Hofstede™ Cultural Dimensions
  • 34. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit So, Do We Recognize These Differences? • Senior management roles are likely to receive an equity grant regardless of global location • The differences in global participation start at the Managerial level and more apparent at the Individual Contributor level Equity Plan Participation Rates by Country & Level 96% 100% 100% 100% 100% 100% 94%94% 100% 93% 100% 92% 72% 57% 76% 81% 75% 50% 17% 11%10% 25% 33%34% 0% 20% 40% 60% 80% 100% 120% United States United Kingdom Germany India China Australia %ofEmployeePopulationParticipatinginEquityPlan VP/GM Director/Sr Mgr Manager/Supv Ind Contr * Buck Consultants Global Long-Term Incentive Practices Survey
  • 35. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Do We Recognize These Differences? Percentage of Companies with Grant Type VP Level 95% 94% 84% 82% 73% 63% 61% 9% 26% 48% 67% 64% 58% 62% 2% 3% 9% 13% 18% 27% 26% 0 0.2 0.4 0.6 0.8 1 2004 2005 2006 2007 2008 2009 2010 SO RSU PRS •The shift from stock options toward full value shares slows •Full value shares have edged ahead of options for the first time •Performance-based shares have become a major practice * Buck Consultants Global Long-Term Incentive Practices Survey
  • 36. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Do We Recognize These Differences? Average Value Allocation by Equity Type 2009 VP Level 42% 45% 43% 45% 36% 42% 31% 38% 40% 41% 26% 34% 42% 36% 16% 14% 15% 28% 24% 14% 30% 6% 3% 1% 1% 2% 0% 20% 40% 60% 80% 100% United States United Kingdom Germany India China Japan Australia Cash PRS TBRS SO Average Value Allocation by Equity Type 2010 VP Level 43% 52% 49% 50% 52% 50% 45% 41% 41% 41% 41% 34% 44% 49% 12% 6% 9% 9% 9% 4% 4%5% 3%2%1%3% 0% 20% 40% 60% 80% 100% United States United Kingdom Germany India China Japan Australia Cash PRS SO TBRS * Buck Consultants Global Long-Term Incentive Practices Survey
  • 37. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Achieving Equity Effectiveness • If this is what an understanding of global employee behavior tells us, then how do we act today? • By left-brain – Accounting – Tax – Compliance • Not by right-brain: – Perceptions – Behaviors – Culture
  • 38. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit What does this knowledge tell us about plan design going forward? One Company, One Plan?
  • 39. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Looking Ahead… One Company, One Plan? 0% 50% 100% 150% 200% 250% 300% 70% 80% 90% 100% 110% 120% 130% % of Goal Achieved %ofTargetPaymentReceived Performance Share Plans provide the flexibility to adapt to global differences Leverage can also be adjusted to respond to difference in risk profiles Performance metrics can be set to create global alignment and/or maximize line-of-sight Awards can be paid in stock, cash or a combination to maximize perceived value
  • 40. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Parting thoughts • Technical aspects of equity compensation are important, but not enough • To understand perceived value, a better understanding of the global workforce is needed • Value is perceived, not calculated • Classical rational decision-making is not the model for actual employee decision-making • Triangulate to get answers rather than focusing on the single best base of information • Design simplicity should be an imperative • More intuition, less conventional wisdom
  • 41. 12th annual international conference • amsterdam • 15-17 june 2011 Your company logo here. Go to Master Slide to edit Questions Jim Sillery Principal +1 (1) 312 846 3145 James.sillery@buckconsultants.com Ben Wells Senior Consultant +44 (0) 207 429 1033 benw@talking-people.co.uk