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1、DESIGNASUCCESSFULCOMPENSATIONSYSTEMAugust 17, 20192TODAYSDISCUSSIONnCompensationPhilosophyWhatisacompphilosophy?Whydoweneedone?HowtodeveloponeforyourcompanynCompensationSystemsWhatmakesthemsuccessful?FourfundamentalcomponentsProgramdesignexamplesnAftertheDesignWhatsNextTipsforeffectiveadministration
2、Managingchange3COMPENSATIONPHILOSOPHYWhatisacompensationphilosophy?nArticulates what the company believes about how its employees should betreatedfinanciallynProvidesguidingprinciplesfordesigningcohesivecompensationprogramsnLaysoutwhatisimportanttothecompanynCommunicatesaconsistentandclearmessagenSh
3、ouldbebackedupbythecompanysactions4COMPENSATIONPHILOSOPHYYourstatedphilosophyshouldreflectthecompanysintentionsandsetexpectationsforemployees.Examplestatements:nEffortswillberecognized,butresultswillberewarded.nEmployees with the greatest level of sustained performance receive thegreatestrewardsinpa
4、y.nSolidperformers willbe targeted at 50th percentile. Top performers willbetargetedat75thpercentile.nBy linking pay opportunities to clearly outlined individual performanceobjectives,weoffereveryemployeeanequalchancetosucceed.nAllemployeesshouldshareinthefinancialsuccessofthecompany.nOurcompensatio
5、nprogramsaregloballyfocused,locallycompetitive.nWe want all employees to think like owners, whichis why we award stockoptionstoeveryemployee.5COMPENSATIONPHILOSOPHYWhydoyouneedanexplicitcompensationphilosophy?nManagersmightbemakingcompensationdecisionsthatarenotinthebestinterestsofthecompanyasawhole
6、nTheremaybeanimplicitphilosophythatisntconsistentacrossthecompanyLookatemployeecommunicationsovertheyearsInformallysurveytopmanagersofthecompanyWhatdothecurrentcompensationprogramslooklikeandwhatdothey“say”aboutthecompanysbeliefs?Doesthecorporatecultureofferanyclues?6COMPENSATIONPHILOSOPHYHowdowedev
7、elopacompensationphilosophy?nInterviewseniormanagementandBoardofDirectorsBusinessobjectives,currentandfutureDesiredemployeebehaviorstoaccomplishthoseobjectivesCompetitiveenvironmentanddesiredpositioningRecruitingorretentionissuesPayelementsanddesiredmixnOutlinecurrentrewardsprogramsWherearewenow?Whe
8、redowewanttobe?Howdowegetthere?7COMPENSATIONPHILOSOPHYExample:CompPhilosophyWorksheet8COMPENSATIONPHILOSOPHYWhenmightyourcompensationphilosophychange?nLeavingstart-upphasenMajorchangeinyourbusinessmodelnBusinessandheadcountgrowththatoutpacesexpectationsnFollowingamergerormajoracquisition9COMPENSATIO
9、NSYSTEMSWhatisasuccessfulcompensationsystem?nSupportsthecompanyscompensationphilosophynEnablesthecompanytocompeteforthetalentitneedstobesuccessfulnProvidessustainablecompensationprogramsnAllowsthecompanytomeetitsfinancialgoalsnFlexibleenoughtoaccommodatechangesinthecompanyormarketplacenMotivatesandr
10、ewardscomplementaryobjectivesovertheshortandlongterm10COMPENSATIONSYSTEMSFourfundamentalrewardcategoriesmakeupthetypicalcompensationsystem:nBaseSalarynAnnualIncentivesnLong-TermIncentivesnBenefits&PerquisitesBaseSalariesAnnualIncentivesTotalRewardsBenefits& PerquisitesLong-TermIncentives11BASESALARY
11、BeingCompetitivenWhatdoes“competitive”mean?WinningthetalentcontestWinningthebusinesscontestnHowdoyouknowifyourcompanyiscompetitive?SurveysofcompensationforyourparticularindustryAssociationwebsitesorstudiesOutsideoffersmadetoemployeesMakingcounter-offersExitinterviewsNewhiresalaryhistory12BASESALARYB
12、eingCompetitivenWhenisitokaytopayabovecompetitive?CheckyourcompanysperformanceLosingmissioncriticalemployeesorprospectsRemember,basesalarydecisionsaredifficulttoundonWhatifyoucantaffordcompetitivebasesalaries?ThisiswhereabonusplancanmakeadifferenceDoyouhaveanykindofequitycompensationtooffer?Whatabou
13、totherrewards?Quality-of-life:flextimeoreveryotherFridayoffCareerdevelopment:trainingoreducationallowanceCorporatecultureandworkatmosphere13BASESALARYStayingOnTargetnPutsomestructurearoundsalariesGroupjobstogetherwithsimilarmarketsalariesandinternalvalueSetaminimum,midpoint,maximumrangeforeachgroupi
14、ngLowendofrange:inexperiencedornewlypromotedemployeesMiddleofrange:fully-competentemployeeswithconsistentperformanceUpper end of range: superstars who are experts at their job and showsustainedoverachievement14Example:SalaryStructureBASESALARY15BASESALARYStayingOnTargetnConductanannualreviewofbasesa
15、lariesEnsureswestayonthemarkforourdesiredpositioningHelpsuswinthetalentweneedtobesuccessfulCrediblyreassureemployeesthatsalariesarekeepingupwiththemarketCredibly reassure management that we are responsibly managing ourcompensationdollars16BASESALARYStayingOnTargetnSystematicmeritandpromotionalincrea
16、sesLinksindividualperformancereviewtosalaryprogressEnablesprecisemanagementofincreasebudgets;lessguessworkGivesmanagerstoolstoassesstrade-offdecisionsMinimizesabuseofpromotions17BASESALARYExample:MeritIncreaseMatrix18ANNUALINCENTIVESAwell-designedannualincentiveplanshouldmeetseveralobjectives:nProvi
17、de a systematic approach to incentive pay that links company andindividual(orteam/department)performancenAllowemployees to benefit financiallywhencompany meets or exceeds itsshort-termgoalsnSupportandreinforcethefinancialplanningandgoalsettingprocessnStrengthenandsupporttheindividualperformancemanag
18、ementsystemnUsecompanyscashwiselyNotafixedcostlikebasesalariesProvidescashawardsonlywhencompanyperformswellLimitscashpaymentswhencompanydoesnotperformwell19Example:AnnualIncentivePlanHereisanexampleofasimple,three-stepannualincentiveplan.Forthisplan,therearethreethingsthatdetermineannualbonuspayouts
19、.Letswalkthroughthemechanicsofaplanlikethis.EvaluateCompanyPerformanceEstablishTotalCompanyBonusPoolDistributeBonusesBasedonIndividualPerformance123ANNUALINCENTIVES20ANNUALINCENTIVESExample:AnnualIncentivePlan1.EstablishtargetincentivelevelsforparticipantsEach participant is assigned a target incent
20、ive award expressed as apercentofbasesalary.Ifbasesalariesarebelowcompetitive,wemightuseincentivetargetsthatarehigherthancompetitive.Forprivatecompaniesthatdonthavestockoptionstooffer,wemightalsousehigherthancompetitiveincentivetargets.*Incentive targets for illustration only*PositionLevelTarget Inc
21、entive(% of Salary)Executives50%Directors25%Managers15%ProfessionalStaff10%Non-Exempt5%21ANNUALINCENTIVESExample:AnnualIncentivePlan2.DefinecompanyperformanceobjectivesTwokeymeasuresusedtocreateanawardpayoutmatrix-Netincomeornetincomegrowthyear-over-year-Revenueorrevenuegrowthyear-over-year-Pre-taxp
22、rofits-NeworrepeatcustomersPayout matrix defines the relationship between the performance targetsandtheresultingbonuspoolfundingDetermine minimum company performance required to fund the bonuspool,thetargetperformancelevel,andthemaximumorcap 22Example:AnnualIncentivePlan2.Definecompanyperformanceobj
23、ectivesAhypotheticalpayoutscheduleisshownbelow.Attargetcompanyperformance,thebonuspoolwillbefundedat100%ofeachparticipantstargetincentivepercentage.To reach the minimum performance threshold, this company needs toachieve80%percentofbothtargetedrevenuegrowthandpre-taxprofits.*Payout schedule for illu
24、stration only*ANNUALINCENTIVES23ANNUALINCENTIVESExample:AnnualIncentivePlan3.DeterminebonuspoolOncethecompanyhasassesseditsoverallperformanceattheendoftheplanyear,targetincentivesareadjustedupwardordownwardusingthematrix.Ifthiscompanyachieves95%ofitsprofitgoaland105%ofitsrevenuegoal,the“initial”ince
25、ntiveawardswillbefundedat95.3%oftarget.*Payout schedule for illustration only*24Example:AnnualIncentivePlan4.AssessindividualperformanceEarlyintheyear,managersandemployeessetthreetofiveperformanceobjectivesfortheemployee(orteam/department).Tobeeligibleforanawardattheendoftheyear,employeesmustperform
26、atalevelequaltoorgreaterthan“MeetsObjectives”.Poorperformersdontreceiveanaward,evenifcompanymeetsgoals.Eachlevelofperformancehasanassociatedmultiplierthatisusedinthefinalawardcalculation.Exceeds ObjectivesHighestlevelofperformancethatcanbereasonablyexpected.Meets ObjectivesLevel of performance the c
27、ompany expects for theposition.Correspondstothe100%oftargetlevel.Below ObjectivesPerformance falls below the minimum acceptablelevel.THRESHOLDANNUALINCENTIVES25ANNUALINCENTIVESExample:AnnualIncentivePlan5.Calculateincentiveawards$100,000x20%x110%x1.05=$23,100BaseSalaryTargetIncentiveAwardCompanyPerf
28、ormanceFactorIndividualPerformanceMultiplierIndividualIncentiveAward26LONG-TERMINCENTIVESThe goal is to designa well-balancedset of programs that motivate and rewardcomplementaryobjectivesoverboththeshortterm(oneyear)andlongterm(three-to-fiveyears).nTwocategoriesoflong-termincentivesCash-BasedLTIcas
29、hPerformanceunitsStockappreciationrightsEquity-BasedStockoptionsRestrictedstockStockappreciationrights27LONG-TERMINCENTIVESCash-BasedIncentivesnRequireabilitytosetlong-termcompanyandindividualgoals(3to5years)nGoalsareoftenexpressedrelativetoindustryorpeercompanyperformanceonvariousmeasures:GrowthRev
30、enuesProfitabilityTotalreturntoshareholdersnGoodperformancelinkage,butpotentialdrainoncashflownProvidearetentionhooklongerthantheannualincentiveplannEnableprivatecompaniestocompetewithstockoptiongrants28LONG-TERMINCENTIVESLTICashPlansLong-termcash-basedplan,designedtopayoutafter2-3yearsbasedonattain
31、mentofperformancemeasures.nPlansgenerallyhaveoverlappingcycles,whichmaintainstheretentionvalueoftheplanfromyeartoyearanddoesnotcreateadownyearafterthefirst3-year period, as payouts are made each year after the first plan cycle iscomplete.Year1:PlanCycle1starts.Year2:PlanCycle2starts,PlanCycle1contin
32、ues.Year3:PlanCycle3starts,PlanCycle2continues,PlanCycle1paysout.nThe plans can use internal metrics, external metrics, or both to determinepayouts.29LONG-TERMINCENTIVESLTICashPlansnSettingperformancegoalsthreeyearsinadvancecanbedifficult.nThese plans typically require a cash outlay, which can be in
33、timidating forcompanieswithlimitedcash.However,thecashimpactcanbemanagedby:Designingself-fundingplanswithpayoutcontingentuponearnings,amongotherperformancemeasures.Discountingthe value delivered to reflect the lack of market risk to theemployee.Payingtheawardsinstock(typicallynetoftaxes)ratherthanca
34、sh.30LONG-TERMINCENTIVESPerformanceUnitPlanLong-termperformanceplandenominatedinunitsandpaidincash.nEmployees earn “units” based on the attainment of company definedperformancegoalsoveragivenperformanceperiod.nEitherthevalueoftheunitsorthenumberofunitstobegrantedisdeterminedpriortostartoftheperforma
35、nceperiod.nPerformanceperiodisgenerallygreaterthan2yearsandlessthan5years.nEligible employees must remain with the company for the duration of theperformanceperiodtoearntheunits.nEmployeeistaxedwhentheunitsareearnedandthecompanyreceivesanequivalentvaluetaxdeduction.31LONG-TERMINCENTIVESPerformanceUn
36、itPlannExample:Target award of 10,000 units dependent on 3 year profit and revenuegrowthversusgoalActualawardcanrangefrom0to20,000unitsdependingonperformanceUnitvalueisfixedat$10.00Performanceexceedsthegoalsattheendoftheperiod,andtheemployeeearns15,000unitsAta$10perunitvalue,theemployeereceives$150,
37、000incash32LONG-TERMINCENTIVESPerformanceUnitPlannAdvantages:Linkscompanyandemployeeperformancewithlong-termpayoutsCanpayoutincashorsharesnDisadvantages:ThesearegenerallycomplexplansandcommunicationmaybedifficultAweakperformancereviewprocessmaycreateasenseofambiguityonvestingconditions33LONG-TERMINC
38、ENTIVESStockAppreciationRightsRighttoreceiveappreciationofstockpriceoverspecifiedbaseprice,paidineithercashorstock.Likeoptions,exceptthatratherthanpayingtoexercisetheoption,theparticipantispaidthegainineithercashorstock.nAdvantages:CanmimicoptionswithoutusingsharesForemployeesincountrieswithsignific
39、antregulatoryortaxburdensonoptionsAccountingchargeequalsonlytheappreciationinthestocksvaluenDisadvantages:Mayinvolvecashcosttocompany,ifgainispaidincashratherthansharesRelativelycomplexandmaybedifficulttocommunicatetoemployees34LONG-TERMINCENTIVESEquity-BasedIncentivesnAllowemployeestobenefitfinanci
40、allyfromthecreationoflong-termvalueinthecompanynOpportunityforsignificantcashgainsnProvidearetentionhookforkeyemployeesnAnotherwaytorewardemployeeswhocontributetothecompanyoverthelongtermnCangetemployeesthinkinglikeshareholdersnChallengingtolinkindividualperformancedirectlytostockprice35LONG-TERMINC
41、ENTIVESStockOptionsNewaccountingpronouncementsregardingstockoptionsarecausingcompaniestorethinktheirequitycompensationstrategies.nFinancialAccountingStandardsBoard(FASB)Releasedlong-awaitedexposuredraftonequitycompensationIfadopted,effectivedateformostcompanieswouldbenextyearCompanieswouldrecognizea
42、naccountingexpenseforstockoptionsontheirincomestatementsNowdetermininghowcompanieswouldcalculatethatexpenseBlack-Scholesmodel:currentlymostcommonmethodLatticemodels:FASBspreference36LONG-TERMINCENTIVESStockOptionsThe results of Presidio Pays recent Pulse Survey suggest a delay in makingdecisions.nMa
43、jority of the companies have not made any changes to their equitycompensationpracticesnNoneofthesurveyedcompaniesareplanningonexpensingstockoptionspriortoFASBsdeadlinenManycompaniesanticipateeventuallymakingsomechanges,suchas:ReducingstockoptiongrantsacrossallemployeegroupsLimitingparticipationinequ
44、ityincentivesbelowthemanagerlevelAttachingperformancecriteriatovestingconditionsGrantingsomeformofrestrictedstock37LONG-TERMINCENTIVESStockOptionsBeforemakingdecisionsaboutfuturestockoptionusage,lookatthebigpicture.nWhydidwestartgivingemployeesstockoptionsinthefirstplace?CreateanownershipcultureDeli
45、vercompensationorcreatewealthRecruitandretainemployeesnWhatarethechallengesassociatedwithexpensing?AchievingtheoriginalgoalsoftheoptionplanReducingtheimpactoncompanyfinancialsnAreoptionsstillpractical?Canyouaccomplishyourgoalswithfewerstockoptions?Ifnot,isacompletechangeinthetypeofequityincentivefea
46、sible?38LONG-TERMINCENTIVESCompanyConsiderationsnFinancialmodelingMulti-yeareconomicimpactofvariousequityincentivesComparevariousvaluationmethodologies,usingavarietyofvestingandstockpriceperformancescenariosProjectoverhang,run-rate,andshareusageoverathreetofiveyearperiodnDetailedreviewofplandocument
47、sMakesurecurrentorproposedplansprovidesufficientsharereservesandallownecessaryplanfeaturestoimplementdesiredstrategynReactionbytheBoardofDirectorsCompensationCommitteesarebecomingmuchmoreinvolvedinthebroadbasedcompensationstrategy39LONG-TERMINCENTIVESEmployeeConsiderationsnUnderstandhownewprogramsor
48、changestoexistingprogramswillimpactemployeesAreyouaccomplishingyourintendedgoalsforyouremployees?Reviewtheeffectvariousequityincentiveswillhaveonspecificemployeescompensationlevelsrelativetohistoricaland/orcompetitivepaylevelsReviewtaxburdensthatmaybeimposedonemployeesnRemembertheperceptionissueProg
49、rams should be consistent with the communicated compensationphilosophyCommunicatewellinadvanceofimplementation,providingdetailsonwhychangesweremade40LONG-TERMINCENTIVESRestrictedStockGrantofstockthatisrestrictedfromsaleuntilitisvested.Ifvestingrequirementsarenotmet,stockisforfeited.nWhytouseNocostto
50、theemployeeStockretainssomevalueevenifthestockpricedeclinesFixedandpreciseaccountingcost;noestimatesNeedlesssharesthanoptionstosatisfytotalvaluedeliverednWhynottouseRetentiontoolwithlittleincentivevalue(“payforpulse”)EmployeetaxedatvestingNorisktoemployee41LONG-TERMINCENTIVESExample:RestrictedStockT
51、hefollowingchartillustratestheimpacttotheemployeeofreplacingstockoptionswithrestrictedshares.Giventheassumptionsandmethodologyfordetermininganequivalentvalue,replacing7,500stockoptionswith2,000restrictedshareswouldprovideanemployeewiththesamevalueafterfouryears.42LONG-TERMINCENTIVESExample:Restricte
52、dStockThefinaloutcomeofthisexerciseleadstoanumberofconclusions.nCompanyExpenseonrestrictedstockgrantlessthanexpenseonstockoptionsUsingfewershareswillreducedilutionTurnoverfromunderwaterstockoptionsdisappearsnEmployeeEmployeereceivessamevalueattheendoffouryearsgivenmoderatestockpricegrowthMaintainsth
53、eownershipmentalitythatoptionsprovidedTime-basedvestingcreatesanincentivetostaywithcompanyOptionvaluewilleventuallysurpasstherestrictedstockvalueifthestockpriceshootswayup,buttheriskismuchlower43BENEFITS&PERQUISITESBenefits&PerquisitesThisisoneareaofmissedHR“marketing”opportunity. Fewemployeesknowth
54、eactualdollarcosttothecompanyoftheirbenefits,whichtypicallyaddanother30%invaluetothetotalrewardspackage.nHealthandwelfareprotectionHelpsattractemployees,especiallythoselookingtocoverfamilymembersMostcompaniessubsidizethecostofhealthinsurancenRetirementprogramsAssistemployeesinsavingforretirementProv
55、ideacurrenttaxbenefit401(k)plansarethepredominateretirementvehiclenESPPnProfitsharing44BENEFITS&PERQUISITESBenefits&PerquisitesnMiscellaneousperksNotjustforexecutivesCarallowancesGymmembershiporsubsidyFreeordiscountedcompanyproductEmployeecafeteriaorsnackroomgoodiesFlexibleschedulesTelecommutingNurs
56、ingmothersroom45AFTERTHEDESIGNTipsforeffectiveadministrationnArticulatecareerpathsHelps retain key employees by demonstrating clear opportunities forgrowthandfinancialprogressionnEstablishconsistenttitlingcriteria to accuratelyreflect expectedcontribution(andcompensation)levelswithinthecompanyAcknow
57、ledgeslevelsofcontributionRewardsexceptionalperformerswithmeaningfultitlesnGivemanagerstoolsandtrainingtheyneedManagerbuy-inisthekeytopositiveemployeeperceptionBelievingyouaretreatedfairlyandconsistentlyisasimportantasbelievingyouarepaidwell46AFTERTHEDESIGNManagingChangenMergers&AcquisitionsStartnow
58、,becausedealsmovefastandsometimesHRisthelasttoknowMakesuresalarystructuresarecurrentThinkabouthowtointegrateannualincentiveplansUpdateequityplanprojections:overhang,run-rate,projectedshareusageExecutivechange-in-controlagreementsnBusinessModelChangesShiftinjobsoverseasMovingfromgrowthcompanytomature
59、market47QUESTIONS?48KYLEHOLMKyle Holm is a Principal and Consultant with Presidio Pay Advisors, where heconsultsonthedesignofcashandstock-basedcompensationprogramsforavariedrange of public and private companies. His work covers all elements ofcompensationincludingbasesalary,annualincentives,andlong-
60、termincentiveswithsignificantexpertiseinstockoptionallocationmodeling.Prior to co-founding Presidio Pay Advisors, Kyle held consulting positions withWatsonWyattWorldwideandWestWardPayStrategies.Previously,Kyleworkedasaportfolioadministratorforaninvestmentmanagementfirm.Kyleearnedabachelorsdegreeinfi
61、nancefromSantaClaraUniversity.Kyle Holm(415) 438-3401kylepresidiopay49BROOKEGREENBrookeGreenisaPrincipalandConsultantwithPresidioPayAdvisors,wheresheprovides consulting advice and implementation assistance to clients withcompensationsupportneeds.Herparticularfocusisonthedesign,communication,and exec
62、ution of broad-based compensation programs within public, private andnon-profitorganizations.Priortoco-foundingPresidioPayAdvisors,Brookewasanindependentconsultantofferingon-sitecompensationprogramdesignandlaunchassistancetoBayAreacompanies.Previously,shewasaconsultantforWestWardPayStrategiesinSanFr
63、ancisco, where she specialized in the evaluation and design of executivecompensationandbroad-basedemployeeprograms.ShehasservedasaninternalconsultanttoHRexecutivesintelecommunications,technology,financialservices,andnon-profitorganizations.BrookereceivedanM.B.A.fromtheCoxSchoolofBusinessatSouthernMethodistUniversity.ShealsoholdsaBachelorofArtsfromtheUniversityofTexasatAustin.Brooke Green(415) 438-3403brookepresidiopay
