Compensation Cafe

ISO Love Stock Options

2012-02-24T04:13:22-08:00

Editor's Note: Today's post comes to us courtesy of guest contributor Judy Freides.

As the candidates pursue the Republican nomination, there is a lot of discussion around tax reform. Some of the changes being put on the table could influence companies’ stock option practices.

In the United States, there are two types of employee stock options — non-qualified stock options (NQSOs) and incentive stock options (ISOs). While similar in concept, the taxation of the two is very different.

NQSOs are the more commonly used of the two. Once an employee has satisfied vesting requirements, he may exercise the options any time before the end of the term. Assuming it’s a cashless exercise, ordinary income is realized and taxed accordingly. At the same time, the company gets a tax deduction.

ISOs offer a more favorable tax treatment to employees, but the news is not all good. When an employee exercises ISOs, there is no taxable event. At the time the shares are sold, it’s all considered capital gains. But here’s the catch – the employee must hold the shares for one year after exercise in order to get this special tax treatment. In that time, the share price could drop and turn the capital gain into a capital loss. Additionally, the company is not entitled to a tax deduction. In my opinion, these two issues have significantly limited the appeal of ISOs.

Now let’s assume the Republicans are successful in extending the Bush tax cuts, leaving the highest marginal tax rate for ordinary income in the mid-30% range. They abolish the capital gains tax and reduce the corporate tax rate to 12.5%. And let’s assume that the Alternative Minimum Tax (AMT) is also eliminated, since neither party likes it. If these tax policies were to come to pass, how do we like ISOs now?

I think they look much more interesting. From an employee perspective, any realized gain is entirely tax-free. This might make the risk of the one-year holding requirement more palatable. From an employer point of view, the tax deduction is still lost. But, is there an argument to be made that fewer ISOs have to be granted in order for the employee to realize the same after-tax gain as NQSOs? If that’s true, then the company has a potential offsetting savings from reduced stock option expense and lower shareholder dilution. And, I think there’s a case that can be made from a corporate governance perspective as well. Shareholders would certainly approve of a stock option plan that only rewards executives if stock price performance is sustained.

I’m not saying ISOs would be a silver bullet. There are some other limitations and rules associated with them that can be challenging. But if the Republicans prevail, they might be worth a second look.

Judy L. Freides is the resident blogger for CompDevil, a new company providing Human Resources professionals with on-demand access to compensation experts via live chat. Judy brings over 15 years of experience to bear in her weekly blog, which focuses on the nuances and pitfalls of compensation around the world. Her recent role as Global Compensation Director for a company with over 100,000 employees in 100 countries leaves her skeptical that there’s much out there that she hasn’t come across. But then again, she loves surprises.

Creative Commons image "Happy Valentines Day" by muffett

3 Reasons Why Bonuses Are Simply “Too Much”

2012-02-23T06:23:37-08:00

In the last few weeks, I’ve read several articles on why the bonus culture has failed. Most of the articles centered on the two areas where I believe this failure is most prominent – banking and financial institutions and the corner office.

The articles served to highlight for me three ways in which the bonuses are simply “too much.”

1) Too much weight given to bonus vs. base pay

The word “bonus” has lost all meaning when people expect to receive them as part of their base compensation (a topic I’ve written about here before).

From the UK paper, The Guardian:

Banks say bonus pools have shrunk and payouts are being capped, but outside the glitzy world of investment banking, those used to drawing just an annual salary are increasingly baffled by a system of hefty incentivisation on top of already high pay. …

For Labour leader Ed Miliband, the bonus culture has been "corrosive" for Britain's economy and its society. He argues the meaning of the term "bonus" has been lost along the years.

"Exceptional rewards for exceptional performance means million-pound bonuses should not be handed out to people for just doing their job," he said in a speech on Friday.

In fact, he concluded, the system had failed. "It has enriched individual bankers, but weakened the banking sector as a whole by encouraging a form of risk which crossed the line into sheer recklessness," said Miliband. "For all the reform of the way bonuses are paid, they remain on a scale beyond the imagination of the vast majority of the population."

2) Too much of a gap between the total compensation for those at the top vs. those in the trenches

From a CEO compensation perspective in the US, Ed Frauenheim, editor-in-chief of Workforce Management magazine, suggests the “Business Buffett Rule”:

“For a company paying the federal minimum wage of $7.25 an hour (about $15,000 a year for a full-time worker), what if the total compensation for the CEO was capped at 100 times that? That means a CEO's annual income would be about $1.5 million. As pay goes, that's not peanuts. But it also is a far cry from packages that have ballooned for many execs into the tens and hundreds of millions of dollars.”

Frauenheim goes on to outline the benefits of such an approach, including boosting employee morale, better leader selection, and a long-term executive mindset instead of “working to the quarter.”

3) Too much complexity that only encourages negative repercussions

Back across the pond, the UK Sunday Times also addressed ideas for more appropriate CEO compensation featured ideas from Bruno Frey, a professor of behavioural science at Warwick Business School:

He wants companies to drop pay-for-performance schemes and their complicated criteria. Instead, at the end of each year boards should make a simple judgment on whether a bonus is deserved.

“Most businesses think people will work better if they are offered a bonus, which is why they create a direct link between wages and performance,” said Frey. “But often this is not the case at all, and sometimes the link can actually have negative consequences.”

At its worst it can mean that people take company-threatening risks to meet the criteria for a bonus. It also means that executives may focus too much on doing what is needed to meet their performance criteria at the expense of other tasks — even if these are more important.

Do you think bonuses have become “too much?” What alternative do you see as generating a more appropriate reward and recognition for work well done – at all levels of the organization?

As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. His articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

When is the Minimum Wage Not the Minimum Wage?

2012-02-22T05:10:52-08:00

We all know that the minimum wage is the lowest hourly rate that employers may legally pay to workers. Or is it?

It turns out that there are some exceptions to minimum wage laws. The Fair Labor Standards Act contains some exemptions that apply to certain types of businesses, specific types of work, and certain individuals.

Here's the run-down on sub-minimum wages:

Young workers: employees under the age of 20 can be paid an hourly rate of $4.25 during the first 90 consecutive calendar days of employment, as long as their work does not displace other workers. After the 90-day period or attainment of age 20 (whichever is first), the employee must receive the "standard" minimum wage of $7.25.

Student learners: a student learner is a high school student at least 16 years old who is enrolled in vocational education. Employers who hire student learners can obtain a certificate from the Department of Labor that allows the student to be paid 75% of the minimum wage as long as the student is enrolled in the vocational education program.

Full time students: full-time students employed in retail or service stores, agriculture or colleges and universities can be paid 85% of the minimum wage, provided the employer obtains a certificate from the Department of Labor. The certificate limits the student's employment to 8 hours per day and a maximum of 20 hours per week while school is in session. Students are permitted to work 40 hours per week when school is not in session. Upon graduation or departure from school, the "standard" minimum wage rate applies.

Tipped employees: employers can pay tipped employees $2.13 per hour in direct wages, provided that (a) this hourly rate plus tips received are at least equal to the federal minimum wage, (b) the employee retains all tips and (c) the employee customarily and regularly receives more than $30 per month in tips. If the combination of tips and direct wages of $2.13 per hour are less than the federal minimum wage, the employer must make up the difference.

Workers who have disabilities for the work being performed: employers who receive a certificate from the Department of Labor can pay individuals less than the minimum wage - and less than the prevailing wage rate - for workers who have disabilities for the work being performed. A worker who has disabilities for the job being performed is one whose earning or productive capacity is impaired by a physical or mental disability, including those relating to age or injury. This exemption doesn't apply unless the disability actually impairs the worker's earning or productive capacity for the work being performed. The fact that a worker may have a disability is not in and of itself sufficient to warrant the payment of a special minimum wage.

Employees in specific industries and occupations: individuals employed by certain seasonal amusement or recreational establishments, seamen employed on foreign vessels, employees engaged in fishing operations, farm workers employed on small farms, employees engaged in newspaper delivery, and casual babysitters and individuals employed as companions to the elderly or infirm may be exempt from minimum wage laws.

The current federal minimum wage is $7.25 per hour. But that may not be the lowest hourly rate employers can legally pay employees. If one of these exemptions applies, employers may be permitted to pay an hourly rate less than $7.25. On the other hand, if you live in one of the 18 states (or the DIstrict of Columbia) where the state minimum wage is higher than the federal minimum wage, the lowest hourly rate legally allowed may be greater than $7.25

Be sure to comply with all federal and state minimum wage laws, and check with your legal counsel with any questions.

Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. Since 1999, she's been working with businesses and government agencies providing expert analysis. Stephanie's articles on examining compensation systems for internal equity have appeared in professional journals and she has appeared on NPR to discuss the gender wage gap. Stephanie is the founder of Thomas Econometrics and is the host of The Proactive Employer Podcast. Follow her on Twitter at ProactiveStats.

Is It the Person or the Position?

2012-02-21T05:59:36-08:00

How much value is added by the individual holding that important management post? Would those same output results occur no matter who was the incumbent? Should any person who holds a position of substantial impact be automatically highly compensated? How much of the “job worth” is truly attributable to the talents of the individual versus the normal outcomes anyone could generate from that place of power? If someone is placed in a spot whose leverage has been created by the larger organization and its systems, why do we assume they deserve so much more pay than if they were an individual contributor with limited ability to affect the bottom line? Is it the job or the person that creates value and how much comes from each?

These questions are integral to the compensation tradecraft yet are rarely discussed or even mentioned.

A recent article had an interesting take on the global compensation issues from bankers meeting in Switzerland. Most felt that their generous remuneration was a matter of disinterest to their institutional investor shareholders, because it was a relatively tiny expense compared to the profits. But a few noted that "it's the seat, not the individual," and found it offensive to see some callow young ignoramus earning millions merely because they had been placed at the head of a hedge fund which almost automatically generated billions in profits. That comment brought back memories of my compensation childhood when Robert A. Smith preached the distinctions of organizational leverage versus human capital factors (KSAs) back in the early 1970's to his four young corporate comp/org analysts named Dave Thomsen, Gerry Stern, Larry Cook and Jim Brennan.

He directed our reverse-engineering of virtually every job evaluation plan that existed at the time. Taking the most statistically reliable elements of each, we then freshly designed and validated a customized point-factor plan universal enough to suffice for the Fortune 50 multinational conglomerate we served. Besides the traditional personal features people bring to the job like education, experience and specific types of skills, we had an entirely distinct set of other categories we called “organizational factors.” The personal human capital elements specific to the individual (KSAs) could be carried from job to job and proved to have significant but limited effect on market compensation. The real money came from the leverage supplied by the organization for the application of the individual performer’s talents.

A skilled surgeon or product designer would have great value up to a certain point. The personal value of an isolated worker would not continue to increase at the same rate (it showed an asymptotic relationship) as that of a less “skilled” but more “responsible” manager or executive given a higher degree of wider impact. A great individual contributor only has one brain, two hands and so many hours to ply their trade. The market value of personal KSAs flattened out fairly quickly. On the other hand, even an indifferent manager, director or other executive operates as a conductor, coordinator or force multiplier who stirs those diverse KSAs together and applies them throughout the broader enterprise than the individual work unit. The bureaucrat who applies the creative talents of otherwise isolated Nobel Prize winners will earn his or her value from that application leverage position rather than from their personal stand-alone talents. Albert Einstein and Stephen Hawking would have had very limited values as ditch diggers but had tremendous values as teachers and publishers and innovators in the field of theoretical physics. Many a brilliant genius has starved to death in this world due to failure to find an adequate platform from which their talents could be monetized.

There are things only the person can do. And there are things only the organization can empower the position to do.

This might be fundamental Compensation 301 to some readers, well known and fully documented in every textbook, but I don’t recall seeing it discussed much, if at all. Please offer links or references that prove me wrong. Supply even better elaboration on the topic. I’d rather be wrong than right, on this point, because it is pivotal to a sophisticated comprehension of compensation tradecraft.

Whether the concept is new or old, just think about it. It might help clarify some compensation valuation questions you face on a daily basis.

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.) and will express his opinion on almost anything.

Image courtesy of shaneprigmore.blogspot.com

Is Viral Pay Contagious?

2012-02-20T06:28:02-08:00

With a name like ‘viral pay,’ it’s bound to get attention. But is it just a catchy name or is there more to it?

I was skeptical at first because having your bonus decided by your colleagues sounds a bit like ‘being judged by a jury of your peers,’ which as we all know is not always fun or fair. But reading this article at Fast Company provided an opportunity to re-think my assumptions.

Whatever your rewards policy du jour, human frailty threads through every aspect of management, team work and incentives. If you leave rewards up to managers you run the risk of centralized human frailty in the form of favoritism, whereas if you open it up to the community you risk decentralized human frailty in the form of a popularity contest.

Think about it: Who typically gets voted off the island, the least qualified person or the least likeable person? I don’t want to generalize here but the last person standing tends to be a charismatic buffoon rather than a highly competent person with an offputting personality.

What it essentially comes down to is this: People vote for people they like to the extent that it doesn’t create a threat or disadvantage to themselves.

Now let’s examine the possible impact of human frailty on viral pay. On the positive side, allowing everyone to decide about rewards decreases the impact of manager bias and may increase the likelihood ‘silent heroes’ receiving recognition. It also encourages teamwork and cooperation because personal rewards depend on garnering widespread good will.

On the downside, while relationship building is very important, we don’t want it to take a back seat to actual work getting done. There’s also a risk of employees trying to ‘game’ the system, for example by trading rewards. Finally, people do have a perverse streak and may be reluctant to reward people they think are already too popular or successful.

Getting back to the article, I liked IGN Entertainment’s approach to viral pay because it includes several checks and balances to rise above personal bias and encourage fair play:

Rewards are anonymous, so there's no currying favor.
Everyone has the same amount to allocate so it's harder to game.
Some rewards are held back for manager discretion, so collective opinion is balanced by personal judgment.

Whether you buy into all this or not, viral pay is just one more step in the direction of a more collective approach to work and leadership. As I recently wrote in Who Moved My Manager?, the modern workforce is 'global, virtual, fluid, contingent, self-managing, and project-oriented,' which impacts how people work together as well as how they are managed.

In other words, whether it sticks or not, viral pay is part of a larger trend rather than an isolated fad. For more information and great insights, I recommend listening to Ann Bares and Stephanie Thomas' recent podast on viral pay.

Interestingly, no one seems to be suggesting that employees vote on executive bonuses. . .

Picture courtesy of kool-stuffs.blogspot.com.

Laura Schroeder is a global talent specialist at Workday, headquartered in Pleasanton, CA. She has nearly fifteen years of experience envisioning, designing, developing, implementing and evangelizing global Human Capital Management (HCM) solutions and holds a certificate in Strategic Human Resources Practices from Cornell University. Her articles and interviews on HCM topics have been published in the US, Europe and Asia. She lives in Munich, Germany and enjoys cooking, reading, writing, kick boxing (well, kicking things) and spending time with friends and family. If you want to read more from Laura, check out her talent management blog Working Girl or follow her on Twitter @WorkGal.

The Compensation Philosophy Conversation

2012-02-17T08:05:04-08:00

In my experience, there is nothing quite like getting leaders around a table (literally, if you can manage it, and figuratively, if you cannot) to debate what they intend the organization to accomplish with its compensation dollars - and then committing their agreement to paper - to bring clarity to reward design and administration. This is the exercise we like to call setting compensation philosophy.

Beyond the trick of actually pulling the right people together for the conversation (What? Spend an hour of our monthly meeting time to talk about priorities for what is likely our single largest expense item?), there is the question of what content a compensation philosophy discussion should cover. Below are some examples of the types of questions I have found most helpful. I would invite readers to chime in with their own thoughts and opinions.

Business Anchors and Objectives

For me, these are the most important, highest payoff questions because they help define top organizational priorities and illuminate the opportunities for alignment between reward spend and business success. Of course, teasing them out is not always as straightforward as it should be. As noted in a recent Harvard Business Review Daily Stat, many executives (49% of those surveyed by Booz and Company) say their companyies don't even have a defined list of strategic priorities. Push hard here; you could be doing your executive team a big favor.

What are the organization's most important business and operating objectives right now? How might those change going into the future?
What do you see as the biggest challenges the organization will face in achieving these?
What major threats and opportunities might lie on the horizon for the organization?
Given the above, what should our top objectives for compensation - rewards - be?

Reward Elements and Their Purpose

I also find it helpful to parse out the different pieces of the overall reward package and to define their purpose and role in the overall "portfolio". This helps us identify any gaps or "double dipping" that might exist among current offerings. Don't overlook items outside cash rewards that might be important differentiators for your organization.

What different elements or programs are part of your overall reward program?
What is the purpose of each? What role do they - should they - play in accomplishing your objectives?

Competitiveness

I believe it is important to define what competitiveness means for your organization.

Who do you see as the organization's key labor competitors - from where do you recruit people and against whom should pay practices be set?
At what level should salaries, cash compensation and total rewards be set relative to this competition? At median/average levels? Somewhat higher or lower?

Job Valuation

I think it is important to be clear about the primary method used to establish job value, whether that be external market pay practices or some internal (e.g., factor-based) evaluation approach.

Which of the following should play the primary role in determining relative job value within the organization -- external market practices or internal job relationships?

Pay for Performance

I often find that pay for performance objectives and intent is articulated in the first two question areas (Business Anchors and Objectives,Reward Elements and Their Purpose). Nevertheless, this is usually important enough to warrant its own distinct focus. It may be helpful to ask these questions both at the level of each reward element (i.e., salary, annual incentive, etc.) and for the overall package.

To what extent should compensation reflect performance? Dramatically? To a slight degree? Not at all?

What level of performance should be considered? Individual? Work team/group/department? Business unit? Organization wide?

These should at least help you get the conversation started.

What would you add to - or change in - the above list of compensation philosophy questions?

Ann Bares is the Founder and Editor of the Compensation Café, Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting services to a wide range of client organizations. She earned her M.B.A. at Northwestern University’s Kellogg School and is a bookhound and aspiring cook in her spare time. Follow her on Twitter at @annbares.

Creative Commons Image: "ThinkingRIFD" by @boetter

It's a Scandal! Manager Training Exposed! [Implementation Part 4]

2012-02-16T04:18:54-08:00

This is Part 4 of a series on research that can help your company get better at implementation. Companies that are more effective at implementation -- of business strategy, pay for performance, change, communication -- deliver higher Total Shareholder Return.

The source of real competitive advantage is the ability to implement practices that other organizations find difficult to implement.

In my recent posts we learned that the Most Admired Companies, as tracked by Hay Group and Fortune, act as if they are more committed to achieving their business results than other Fortune 500 companies.

71% report they are effective at implementing their company's business strategies, compared to 47% of their peer group. In a related finding, 94% report that they have a clearly defined global approach to performance management, compared to 74% of their peers.

How do they pull this off? There are lots of contributing factors, but there is one implementation method that we all rely on -- managers. As we all know well, leaders may have great strategic ideas but managers are the people who actually make the strategy happen. They implement annual priorities through objective setting, communication, feedback and performance management.

How do we prepare managers? We sure send them through regular bouts of training, don't we? Towers Watson wanted to learn more about manager training in its 2011 - 2012 Change and Communication ROI Study. TW has spent 10 years comparing companies that are more effective at communications -- and as a result, delivering higher Total Shareholder Return -- to less effective communicators.

In this report we find out that more effective companies spend more time preparing managers to act in support of the company's Vision and Values than less effective companies do. No big surprise.

But, check out the bombshells here.

Bombshell #1-- Less effective companies spend almost as much time training managers on performance management as highly effective companies do. So, commitment to training is not a real differentiator. Pretty much all of us are busy getting managers to sit through the PowerPoint experience.

Bombshell #2 -- The differentiator is the effectiveness of the training. Less effective companies have barely one good word to say about their manager training, even though they are devoting a lot of attention to it. Time wasted, it seems.

The most effective companies have a relatively good level of confidence in the effectiveness of their manager training. It could be better, of course, but what training program couldn't be improved?

The point is that when you ask your managers to spend time finding out what you think is good for them, you should be very sure that you are using their time wisely. Garbage in is garbage out, and managers have a right to resent any waste of their time.

Design training so that you are targeting behavior change. e.g. writing better objectives, linking objectives to strategy, coaching employees on their role, etc. Give them training that is interactive and gives them a chance to practice and get feedback. Then measure your effectiveness in concrete ways like auditing objectives, rolling up objectives for exec review, and then adjust follow-up training/communications accordingly.

That's what the highly effective companies are doing. They have a strategy, not just a bunch of information to shovel at managers. Implementation -- of manager training, in this case -- is their acknowledged source of competitive advantage.

Margaret O'Hanlon is founder and principal of re:Think Consulting. She has decades of experience teaming up with clients to ensure great Human Resource ideas deliver valuable business results. Margaret brings deep expertise in total rewards communications and change management to the dialog at the Café. Before founding re:Think Consulting, she was a Principal in Total Rewards Communications and Change Management with Towers Perrin. Margaret is a member of the Board of Directors of the International Association of Business Communicators (IABC), Pacific Plains Region. She earned her M.S. and Ed.S. in Instructional Technology at Indiana University. Creative writing is one of her outside passions, along with Masters Swimming.

Incentives For Their Own Sake

2012-02-15T04:41:43-08:00

It's fairly easy these days to find articles written by those who advocate increasing the eligibility of employee incentives. Their recommendation is to push inclusion further and further down the organization's hierarchy. What a grand concept! Everybody wins. The argument is that all employees affect a company’s success, that each and every one will chase the almighty dollar of variable pay, and that the opportunity for ever larger rewards will motivate them to do great things. All of which would in turn deliver improved financial results for the company's bottom line.

Maybe.

And maybe it's not such a good idea after all. Perhaps it's a bit of a crap shoot as to whether the corresponding higher compensation costs will result in improved financial gains. Consider the challenges faced when you contemplate a broader eligibility for your annual incentive program.

What's The Plan?

Start with a re-examination of the basics. What do you consider an incentive element when designing a compensation program? My definition is a reward for performance that goes above and beyond the norm, or beyond what is expected. Thus it shouldn't be a reward for performance that would have occurred as a matter of course. The intent for offering an incentive is to prompt a change in behavior, to get employees to do something they wouldn't ordinarily have done, and to get them to do it solely because they have been offered a financial reward to perform both their regular tasks and to accomplish stated business objectives that go beyond the norm.

That should be the plan.

And because these objectives are noteworthy, you would expect that they would differ from year to year, as the needs of the business evolve and adapt to changing business conditions. This emphasis on annual objectives reinforces the intent that incentives should be designed to reward effort above and beyond those duties listed in the job description. They shouldn't be repetitive, year after year. That's what the job description is for.

Incentive rewards should also not be provided simply because an employee performs their job well. That particular carrot should be the role of the annual merit increase. In fact, such an exercise would be considered “double-dipping”, or paying for the same performance twice. You should not be using an incentive as an inducement to get employees to perform their expected duties. Again, that's paying twice to reinforce the same behavior. It’s also using compensation to replace the leader’s own responsibility to manage their staff.

Sometimes You Win; Sometimes You Don't

When deciding on whether to add a variable pay opportunity to an existing base salary compensation model, you need to ask yourself, "what will the company receive in return for the increased costs (variable pay) of an incentive program?" If you are planning to increase your targeted compensation costs by 5% or 10% of the base salaries of an affected group, how will you answer the ROI question?

Hint: You had better provide a business (financial) rationale, and not some subjective phraseology like “survey says” or “everyone else is doing it" or even “it’s the right thing to do.’ Management tends to frown on such trivial rationalizations.

It's also worth noting that employees lower in the hierarchy have a greatly reduced line of sight between their actions and business success. This entails having to create quantifiable objectives for performance (you are quantifying, right?) that should integrate vertically with department, functional and / or organization objectives. If you don't integrate what you’re telling employees to do, you may find yourself paying out incentive rewards when the company as a whole has not been successful. Keep questioning:

Yes, you did it, but was it important?   Did your accomplishment support the broader organization's objectives?

As a counterpoint to the eligibility question I'm often asked about Gainsharing programs. These initiatives can be a useful method of introducing incentives to select employee groups who have a direct line of sight to potential savings. They can affect real change. However, successful plans eventually kill themselves off as viable gains are achieved (low hanging fruit) and payments becomes less and less robust after the easy pickings are collected.

So to recap, let's review the business urgency for lowering incentive eligibility to below the management ranks.

Is the employee line of sight (performance / business results) direct, or remote?

Can you quantify the expected ROI?

Can you balance the increased compensation costs against hard financial gains for the organization?

Would the variable pay become strictly an added cost, or would any portion of base salary be at risk?

If you have a reasonable doubt on any of these points, I suggest you think long and hard before implementing such a program. It would be very difficult to dig yourself out of that hole.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations. He is also associated with several HR Consulting firms as a contributing consultant. Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation. He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a brood of cats.

Creative Commons image courtesy of Photos8.com

3 Reasons Valentine’s Day (and Poorly Designed Employee Rewards) Often Goes Badly

2012-02-14T05:16:54-08:00

It’s Valentine’s Day – a “holiday” equally loved and reviled. Actually, once I tune out the industry advertisements, not many people spring to mind who look forward to and enjoy the day.

I think the same is true for many employee recognition and reward programs – for many of the same reasons.

3 Reasons Valentine’s Day (and Poorly Designed Employee Rewards) Often Goes Badly

1) It’s a Hallmark Holiday.

Some think a grand romantic gesture given one day a year can make up for 364 days of mediocre behavior. Relationships – whether romantic or employee/employer –require constant nurturing and investment. Employees need to know they and their efforts are valued more often than the day of the annual performance review or Employee Appreciation Day.

I have friends and colleagues who object to Valentine’s Day simply because they don’t appreciate the greeting card and chocolate industries telling them what they should do and when. I have friends and colleagues who feel the same way about Employee of the Month programs and similar. Such programs are as inauthentic as a day dedicated to “love.” Employee recognition should be a natural part of the daily workflow – something employees at every level “just do” when they see a colleague demonstrate superior performance reflective of your core organization values.

2) Appropriate gifts are prescribed.

I’m as much a fan of good chocolate as the next guy, but my friend two offices down would be insulted by such a “gift.” She’s a Type-1 diabetic and has had to be quite careful about what she eats for as long as she can remember. Another common Valentine’s Day gift – flowers – would send some recipients into a allergic sneezing fit. And yet chocolates and flowers are two of the most common gifts given on Valentine’s Day.

This is similar to a common problem of poorly designed employee rewards programs – rewards left to the choice of the HR program manager or the employee’s manager. I’ve heard many stories of well-intended rewards gone wrong:

The gift card to a steakhouse restaurant given to a vegan employee

The engraved espresso machine given to a Mormon (who eschew caffeine)

The iPod given to a deaf guy.

A far better option is to stop listening to what the industry tells you are appropriate gifts or rewards and let your employees choose for themselves, from nearly limitless options.

3) It can create the opposite of the desired effect.

Over the years, have you ever comforted friends who were single on Valentine’s Day? True, many think the construct is ridiculous, but for many others the day highlights their single status in a way that can seem cruel.

The same is true of traditional employee recognition and reward programs that target the elite top 10% of high performers. At the annual awards banquet, it seems the same group of employees continually receives all the accolades. Yet it’s the vast majority of employees in the middle – those who get the work done day-in and day-out – who make is possible for your stars to shine. They, too, are deserving of recognition for their consistently high-quality work.

Are you a fan of Valentine’s Day? How about Employee Appreciation Day or the like? What would you prefer instead?

As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. His articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

Is it Time to Change the Equity Compensation Paradigm?

2012-02-13T04:29:40-08:00

Even with the explosion in performance-based equity, most equity compensation plans look very much like they did almost twenty years ago. Stock options, restricted stock unit and employee stock purchase plans would be familiar to a time-traveler from 1995. The biggest differences are in the size of the payouts and that many participants receive equity as an addition to base and bonus pay, instead of as a replacement for some of it. The similarities now and then are almost too numerous to list.

For the sake of a theme let’s talk about private companies.

Recently, many investors, executives and employees at privately owned companies have started thoughtfully questioning the reasons behind plan design and features, process and communication. These questions are less focused on traditional public company issues of skyrocketing CEO pay and governance issue and more aimed at how to create programs that fit the needs and patterns of the current economy as they relate to smaller companies.

Let’s start with vesting. Why does almost every plan offer 3 years vesting on full-value awards (restricted stock RSUs, Phantom Stock) and 4-5 years for appreciation-only awards (stock options, SARs, etc.)? There are two basic answers to this question.

1)     Legacy. When stock options plans were first solidified in the 1990s it was common for an exit event to occur in 4-5 years. Everyone followed the leader and an innovative idea became a dictum.
Restricted regained popularity after the Dotcom bust. The first few of these newer plans to make the headlines had three year vesting (AT&T, Microsoft). Once again an idea that had been focused on the needs of a moment became a kind of commandment.

2)     Practicality. Most companies find it hard to see more than three years into the future. Most compensation professionals see three years as being the minimum for “long-term” incentives. Conveniently these mesh well.

You’ll notice that I didn’t mention any scientific evidence behind typical vesting schedules. In most almost two decades working on these plans, I have not seen any convincing research that explained how nearly every company would benefit from nearly identical vesting norms.

More important than the initial questions about vesting tradition is the unspoken question: Why won’t longer or shorter vesting periods work? Vesting should exist to help the company meet specific goals and objectives. Awards with shorter, and much longer, timeframes do work for some companies. Why wouldn’t an eight-year schedule work if it matched the expected period for fruition of the company’s goals? Why not two years for employees with shorter-term goals? The issues with vesting schedules are that most advisors are stuck in a rut, and most executives have been led to understand that equity is bound by legacy design considerations.

What about the type of instrument? Stock options have been the “go to” resource since the late 1980s. Unfortunately, they can be a bit like heroin. The initial grants are small and have an amazing impact. In order to repeat that feeling grants must get bigger and more expensive. Participants become more dependent on them and companies lose sight of some of the critical reasons they started using them in the first place. Once addicted, it becomes difficult to wean people off of stock options.

We have also heard a lot about the growth in restricted stock shares and units, but these vehicles are seldom used beyond founders in most start-ups. After the first few people, they tend get put on the back burner until the stock is publicly traded and the price is subject to the whims of the public market (consider them a form of methadone). Stock Purchase plans are difficult to do in private companies, but there are still valid reasons to consider them. We seldom hear much about the other forms of equity compensation, or the alternatives to traditional equity.

Even if we stick with the traditional big three, why haven’t these programs evolved with the changes in the markets, types of investors, company lifecycles and more? In 1990, when most of the current program designs were locked-down phones were still attached to a wall and there was no such thing as email. We live in a smart-phone world while using tools from a time when the Internet or calling someone from your car was still a concept bordering on science fiction. We can do better and I hope to spur a discussion here at the Compensation Café on what we can change to move these plans forward.

What do you think needs to be fixed about equity compensation?

This article is the start of a discussion I hope will expand through this year and beyond. Look for future articles on this topic as we explore the possibilities of evolving compensation to meet the needs of the 21^st century.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation” and “Beyond Stock Options.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay