Total Compensation Design and Use Matrix


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This truly unique matrix provides an at-a-glance reference for all common types of pay / compensation / benefits / incentives. It is intended to be a quick guide to help executives, HR professionals and compensation committee members understand how each type of pay element is used, communicated administered and more.

Published in: Business

Total Compensation Design and Use Matrix

  1. 1. The Compensation and Reward Design and Use Matrix ©2016  Performensa0on Toll  free  877-­‐803-­‐9255  |  Direct  415-­‐625-­‐3406 email:   web:   Descrip(on Primary   Compensa(on   Use Typical   Company  Profile Typical   Recipient Key   Advantages Key Disadvantages Key  Communica(on   Issues Key   Administra(on   Issues Base  Pay Fixed hourly or salary amount providing the major component of most employee compensation structures.Guaranteed as long as service is provided and hours are worked while individual remains employed Attract and Retain All companies provide base pay for all jobs,with the exception of some sales and volunteer positions All employees Higher base pay is a strong attraction and retention element.Main pay comparison between different jobs and organizations. Fairly simple to administer once it is set.Base pay is the minimum foundation of employee compensation Base pay can contribute to an entitlement mindset.Requires strong management and leadership for long-term success.Low base pay inhibits recruiting efforts and may impact retention Communicating competitive pay when compared to internal and external peers.Must also clarify merit / market / COLA increases each year Job descriptions must support pay levels,pay grades,pay bands, market pricing and/or job evaluations,alignment to survey data and pay differentials Short-­‐Term  Incen(ves:   Bonus Variable compensation in the form of annual or more frequent cash payments based on achievement of measurable metrics and goals. Intended to motivate specific behaviors and actions for annual or more frequent payments Attract,Motivate,Retain and Engage Reward achievement of Key Performance Indicators (KPI) Public and private companies of all sizes in most industries Broad-based staff May lower compensation costs in the event of poor performance.Motivates staff to attain specific objectives. Aligns staff to common goals.Provides competitive upside with good performance Requires consistent performance management and leadership. Requires an understanding of KPI and their impact on corporate success.May demotivate if mismanaged or consistently not paid out Must keep“top of mind” presence during performance measurement period.Programs can be complex and often involve financial terms and concepts uncommon to many employees Tracking bonus targets. Maintaining consistency related to objectives and compensation philosophy.Managing line of sight between pay and performance delivered Short-­‐Term  Incen(ves:   Commission Variable compensation in the form of annual or more frequent cash payments determined by the sales of goods or services.May include payments for ongoing fees collected Attract,Motivate and Align Reward contribution to revenue and profits All companies with sales departments Professionals services firms Sales staff,market drivers,business-line owners and others where direct financial results can be associated to individuals Top performers are rewarded in a meaningful way. Bottom performers receive limited payout.Formulaic pay aligned with KPIs.Large payouts supported by corresponding results Misalignment may result in payments that are too high or too low.Prone to manipulation.Corporate or market under-performance may result in payments not meeting expectations Programs are often understood only by those who participate in them.The plan itself is commonly the key communicator of what it is designed to accomplish Often managed within the sales area and not within compensation.Many companies have multiple differentiated programs running at the same time.Require a minimum of annualized calibration Long-­‐Term  Incen(ves:   Cash Variable cash payments based on achievement of metrics and goals commonly over 3-5 year periods.Intended to motivate evolutionary behaviors or actions to achieve general or specific long-term goals Attract,Motivate,Retain and Engage Reward achievement of Key Performance Indicators (KPI) Companies with strong cash positions and the ability to set and measure long-term performance Upper Management Alignment with objectives that may be at odds with short-term deliverables.Create meaningful payments upon the achievement of key objectives or events Requires consistent performance management and leadership. Requires an understanding of KPI and their impact on corporate success.May demotivate if mismanaged or consistently not paid out.May not remain aligned with company as it evolves Plans can become complex and difficult to explain.Regular communication is required to drive performance and maintain focus on goals that span multiple years.Must provide proximity to goals and what still needs to be done to attain goals Tracking and communication are the link between behaviors and results. Accurate information for required disclosures. Timely payments must be made to avoid potential penalties Long-­‐Term  Incen(ves: Equity   Grant,award or participation in Stock Options, Restricted Stock,Restricted Stock Units, Employee Stock Purchase Plan,StockAppreciation Rights or any other direct link between compensation value and company stock price Attract,Motivate and Retain Reward growth in company value Publicly-traded tech,financial services and pharma industries High growth start-ups Private companies with potential liquidity events in the future Upper and Middle Management Broad-based in certain industries Aligns employee compensation to shareholders objectives.Reduces cash outlay during key periods.May allow a fixed compensation expense based on values at time of grant Linking payouts to only time and stock price growth may not directly align recipients to shareholders. Volatile stock prices may result in far higher or lower value than intended or desired Multi-year complex tools that are variable in size,value and changes in stock price.Vesting,transactional, income,and taxation issues are a must. Many companies also have trading restrictions and performance conditions Requires specialized software due to legal,accounting taxation and transactional idiosyncrasies. Public companies may use brokers to process transactions. Global participants increase complexity exponentially Deferred   Compensa(on Cash or equity compensation that is payable upon a specified later date with the effect of also deferring associated taxes.Payments are typically deferred at least 5 years and most commonly deferred until retirement Retain Large mature companies and small private companies Executives and Upper Management,typically in anticipation of retirement Can provide consistent retirement income at levels required to support expected lifestyle.Delayed taxation.May avoid discrimination issues found in“qualified” plans Generally subject to the claims of creditors which may result in non- payment to executives.Company payments to plans generally not deductible until employee payout Extended event horizons require consistent messaging and reminders. Communicating risks is required. Investment options and ongoing values must also be clear Management of employee contributions into the program. Management of investments of the program funds.Management of leavers and payouts Recogni(on  Programs Generally non-cash programs that reward key behaviors.Can include gifts,trips,prizes and other awards in recognition or appreciation for individual or group performance.Triggers may include specific or unusual performance achievements and project successes.Can be used to boost morale or other cultural considerations Motivate and Engage Used as an addition to other incentive programs to recognize unscheduled performance Large and mid-size public companies with mature compensation structures Small companies with strong recognition cultures Broad-based staff, exceptional performers Generally an inexpensive tool for building employee engagement and morale.Provides reinforcement of company culture,values and employee morale Can become ineffective if not actively linked to corresponding messaging and management enthusiasm.Management must be able to budget and control costs and measure results It is critical to clarify exactly what is being recognized.Recognition must be understood by both the manager and recipient.These programs are often run at a smaller group level and require managers to be trained Rewards need to be personal and meaningful to participants.Large programs require solutions that are easy to understand and accessible by managers. Monitoring of awards and their impact can be difficult Perquisites Executive rewards that extend beyond common compensation and benefits.These may include car allowances,access to private/corporate aircraft, club memberships and legal or financial services Attract and Retain Limited use by publicly-traded companies Continued use by profitable privately-held companies in certain industries Executives (C-Suite) Outside of the US these may be more expected than other types of compensation and benefits Shareholders in the US and many other countries have made it clear that these are no longer acceptable as a major component of executive pay Executives must fully understand any limits of these programs.These may include limits on total value,type of usage or persons allowed to utilize the benefit Administrative issues depend on the types of perquisites offered and the locality of these benefits Benefits Non-cash additions to compensation that provide support of health,retirement,lifestyle,education or various forms of insurance Attract and Retain Public and private companies of all size and industries Benefits offered vary widely All employees (qualified plans) Select management or executives (non- qualified) Provide ability for staff to remain healthy,plan for their long-term future and care for their family beyond basic needs Can become very expensive. Require ongoing communication and training to ensure that the programs are both utilized and valued correctly The array and complexity of benefit plans requires ongoing,targeted communication throughout the year and during specified enrollment periods Benefits are heavily regulated. Adherence to rules including eligibility,non-discrimination, limits and continuity is required. Global participants increase complexity exponentially Paid  Time  Off and  Sabba(cals PaidTime Off (PTO) programs ensure payment for a reasonable amount of missed work time. Sabbaticals are an approved extended break from services.These are usually unpaid but ensure a position upon return to the company Attract,Motivate and Retain PTO:Public and private companies of all sizes and industries Sabbatical:Small percentage of more progressive companies All employees PTO provides employees with the time and means to relax and get reenergized. Sabbaticals offer time for extended training or the pursuit of other passions Cultural expectations vary around the world.Lack of management training can result in PTO being used incorrectly or not at all.Limited staffing may make sabbaticals difficult to support The use of PTO and sabbaticals is an important component of company culture and should be communicated as such. Actions and behaviors of both managers and employees must reflect desired intent Approving and tracking PTO used.Payment,banking or retirement of unused PTO at time of termination or on a periodic basis.Sabbaticals require strong contingency planning Severance Payment received upon leaving a company.May include payment of unvested long-term incentives, continued payment of insurance premiums, payment for unused PTO and payments extended to support noncompete rules.Designed to help support former employees as they find a new job Attract Executives:Large and mid-sized publicly traded companies Broad-based:Companies with organized labor and those in unexpected circumstances Executives (C-Suite) Broad-based staff (ex. staff reductions) Provides security for executives and key staff members moving from comfortable legacy positions.Can be critical in the recruitment of well-paid executives from strong competitors.Can improve recruitment of broad-based staff in volatile markets May result in unexpectedly high payouts.Shareholders and media often use severance packages as examples of poor corporate governance and may impact Board and Say on Pay votes Care must be taken to communicate the qualifications of a severance-eligible termination of service for broad-based programs.Packages must be personalized for each terminated employee with rules and step-by-step instructions May require a third-party service center and website.Post- termination tracking of employment status. Understanding of Federal ERISA and related state rules Pay  Types Issues  and Features