Compensation, Evaluation and Evolution: Set Your Own Trends for 2014

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Information about Compensation, Evaluation and Evolution: Set Your Own Trends for 2014

Published on December 10, 2013

Author: humancapitalmedia



Every company battles to balance the desire to follow trends and the need to remain unique and competitive. Our presenters, Dan Walter and Sam Reeve from Performensation, will discuss how to do just that. The world of compensation is like a box of crayons. Every company has its own color that is a special mix of its corporate strategy, corporate culture and compensation philosophy. Learn how to keep your color separate from the melted brown of generic trends and survey data.

This presentation will explain how to:

"SWOT your comp" (strengths, weaknesses, opportunities, threats) and deliver what your stakeholders need.
Calculate the ROI of your STI and LTI programs.
Learn what other companies are planning for 2014.

Reeve and Walter will also discuss industry-specific market trends that may drive changes in compensation design, metrics, goals and instruments. Industries to be discussed will include health care medical devices, energy and alternative energy, software and more.

Compensation, Evaluation and Evolution: Set Your Own Trends for 2014 December 10, 2013 ©2013 Performensation

Presenting Sam Reeve is a global certified compensation consultant (CCP, GRP) with 15 years of experience in Total Reward Strategies. He is an expert in broad-based compensation and focuses his talents on enhancing performance through the effective use of incentive and recognition programs. SAM REEVE, CCP, GRP Executive Vice President TF 1 877 803 9255 ext 702 Office 1 415 625 3088 Mobile 1 970 403 5775 LinkedIn: SamReeve Twitter: @SamReeve3 Prior to joining the firm, Sam has worked in the corporate compensation functions of notable firms such as BlackRock, McKesson and Automatic Data Processing (ADP). Sam currently lives in Colorado and aside from his professional life, enjoys numerous outdoor activities with his 4 children and wife, Jessica. Sam has a degree in Finance and Economics from California State University, Sacramento. ©2013 Performensation 2

Presenting Dan has more than 19 years of experience focused on aligning compensation to corporate strategy and culture. His work includes both executive and broadbased programs and he has provided end-to-end solutions for private and public companies both within the United States and abroad. DAN WALTER, CEP President and CEO TF Office Mobile 1 877 803 9255 ext 700 1 415 625 3406 1 917 734 4649 Skype: Performensation Twitter: Performensation His work with start-ups and established Fortune 100 companies provides his clients with an unique perspective on compensation issues. Dan is also a highly sought after speaker on a broad range of topics. He is board member for the National Center for Employee Ownership and the Institute for Human Resources, an award winning member of the National Association of Stock Plan Professionals and an active member of World at Work, Global Equity Organization and the Society for Certified Equity Professionals. ©2013 Performensation 3

Define Your Compensation “Color” Every company is has its own color for compensation Your unique color is defined by Strategy Industry, culture, philosophy, history, goals This color defines the trends that work for you ©2013 Performensation 4

Most Data and Trends Melt All Colors Into a Blurred Mess Trends are are generic market data Trends are about choosing your specific path from among the blurred colors available You create your own trends by understanding your unique color and applying your compensation expertise the the many shades that color has to offer ©2013 Performensation 5

What is the industry saying is “hot” right now? Merit increases, on average of 2.6-3.1%. BUT high performers are being reported at 4.5-5% ©2013 Performensation 6

What is the industry saying is “hot” right now? Variable Pay as a component of total compensation is remaining flat at virtually all levels. BUT Pay for performance is on the list of high priority items for a majority of companies. HOW CAN THIS MAKE SENSE? ©2013 Performensation 7

What is the industry saying is “hot” right now? Diminishing use of stock options. BUT this is mainly for companies in the Fortune 250, in large part because of: 1. Concerns from ISS and other Institutional investors 2. Rising stock prices have bitten into potential future gains ©2013 Performensation 8

What is the industry saying is “hot” right now? Growing Use of RSUs. BUT this is often communicated incorrectly since these are often performance units in disguise. ©2013 Performensation 9

What is the industry saying is “hot” right now? Growing use of Performance Units. BUT currently most at the very top of most companies. ©2013 Performensation 10

What is the industry saying is “hot” right now? TSR – Total Shareholder Return TSR as the main performance metrics for performance unit plans. BUT TSR already losing favor in Europe as a standalone metric. Combining with financial or operational metrics is the way to get ahead of the curve. ©2013 Performensation 11

What is the industry saying is “hot” right now? Growth in Realizable and Realized Pay as a metric communicate executive compensation compared to peers. BUT most companies are not using the same methodology as ISS which gives rise to new conflicts and disagreements ©2013 Performensation 12

What is the industry saying is “hot” right now? Better alignment between STI and LTI target levels and actual compensation delivered. Pricing low and paying high is far less accepted than in the past ©2013 Performensation 13

So, if the trends are not black and white…? How do we define our own trends? ©2013 Performensation 14

Critical Skill 1 – Understand How to SWOT Your Comp Team ©2013 Performensation 15

SWOT Your Comp Team The Environment for Rewards is Changing We need to Adapt Start by evaluating your teams ability to service your clients ©2013 Performensation 16

Steps 1) Understand the Changing Environment 2) Consider your Circle of Influence 3) Update your Service Delivery Model 4) SWOT your Comp Team ©2013 Performensation 17

Adapt to the Changing Environment What should your Service Delivery Model look like? ? ? ? ©2013 Performensation 18

Defining Your Circle of Influence Who provides direction? Who do you answer to? ©2013 Performensation 19

The Circle of Influence Internal The Comp Team Circle of Influence ©2013 Performensation 20

The Circle of Influence Future Candidates Shareholders Internal and External Media The Comp Team Circle of Influence Publications Associations ©2013 Performensation 21

Identify your Clients Who currently uses the services of the Comp Team? ©2013 Performensation The Comp Team Circle of Influence 22

Identify your Clients Who currently uses the services of the Comp Team? And ©2013 Performensation The Comp Team Circle of Influence 23

Identify your Clients Who currently uses the services of the Comp Team? And Who isn’t leveraging the Comp Team that would benefit? ©2013 Performensation The Comp Team Circle of Influence 24

Identify your clients Participants of your Current Programs Such as the: • Salary Program • Short Term Incentives • Long Term Incentives • Recognition ? ? ? Participants ©2013 Performensation 25

Identify your clients Managers Need Support with: • Pay for Performance • Retention • Reporting ? ? ? Managers ©2013 Performensation Participants 26

Identify your clients Finance a reciprocal relationship Share reporting: • Comp Accruals • Budgeting • Forecasting ? Finance ? Managers ©2013 Performensation ? Participants 27

Identify your clients Recruiting Need support with: • Competitive Comp for Jobs • Complex Offers • Informing New Hires Recruiting Finance ? ? Managers ©2013 Performensation ? Participants 28

Identify your clients HR Advisors a reciprocal relationship Such as: • Comp Program roll-out • Critical Talent • Benchmarking Recruiting Finance ? ? Managers ©2013 Performensation HR Advisors ? Participants 29

Identify your clients Vendors of your Current Programs Such as: • Relationship Management • Upgrades • Participant Support Recruiting Finance ? ? Managers ©2013 Performensation HR Advisors ? Vendors Participants 30

Identify your clients Business Leaders Interested in: • Clear Guidance • Effective Pay for Performance • Cost Control Business Leaders Recruiting Finance Monitor Stakeholders ? ? Managers ©2013 Performensation HR Advisors ? Vendors Participants 31

Defining Your Service Delivery Model What tools do you need to succeed? Who is involved in providing data and resources? ©2013 Performensation 32

Review Your Service Delivery Model Service Delivery Model What functions are needed to deliver your Products and Services ? ? ? ©2013 Performensation 33

Review Your Service Delivery Model Program Management Managers want to leverage programs to motivate and engage Participants want to be compensated Business Leaders HR Advisors Recruiting Program Management Finance Vendors are needed to provide expertise Managers ©2013 Performensation Vendors Participants 34

Review Your Service Delivery Model Reporting Business intelligence is critical Business Leaders HR Advisors Recruiting Finance Managers ©2013 Performensation Vendors Reporting Participants 35

Review Your Service Delivery Model Consulting Expertise where it is needed Business Leaders HR Advisors Recruiting Consulting Finance Managers ©2013 Performensation Vendors Participants 36

The New Service Delivery Model We have a plan… Business Leaders …but can we deliver? Recruiting Consulting Finance Reporting Managers ©2013 Performensation HR Advisors Program Management Vendors Participants 37

Plan for Success The company depends on the products and services that your team provides, so … Consulting Reporting ©2013 Performensation Program Management 38

Plan for Success Know the skills that are required to support the Service Delivery Model Consulting Reporting ©2013 Performensation Program Management 39

Assess your Team Does your team have the necessary Knowledge, Skills and Abilities? ©2013 Performensation 40

Assess your Team Team Member impact is a combination of: Functional Knowledge Functional Knowledge Such as: Worksheets, Executive Comp, Stock Administration, etc. Soft Skills Soft Skills Such as: Team Work, Influence, Presence, etc. EXPERIENCE ©2013 Performensation 41

SWOT Time Where do you reinforce? Where to you rebuild? Where do you focus your defenses? Where are your greatest potential successes? ©2013 Performensation 42

The SWOT Analysis Strengths Weaknesses Opportunities Threats Organize your findings into a SWOT analysis Provides clarity that can lead to an improved service standard ©2013 Performensation 43

The SWOT Analysis Strengths Opportunities Internal Weaknesses Factors that can be Controlled Threats ©2013 Performensation 44

The SWOT Analysis Strengths Weaknesses Opportunities Uncontrollable Factors but can position for success Threats External ©2013 Performensation 45

The SWOT Analysis Strengths Weaknesses Opportunities Threats Build On Strengths ©2013 Performensation 46

The SWOT Analysis Strengths Weaknesses Limit Weaknesses Opportunities Threats ©2013 Performensation 47

The SWOT Analysis Example: STRENGTHS: Reporting Dynamic Tools Response Time WEAKNESSES: Consulting Problem Solving Reactive OPPORTUNITIES: New PM System New Sales Team THREATS: Regulation Limited Bonus Pool Talent Departure ©2013 Performensation 48

Take Action If your team has gaps in Knowledge, Skills and Abilities: Consider dedicating money and effort to Training or Acquiring the Right Talent ©2013 Performensation 49

So, I know what I am good (and bad) at… Again…How do we define our own trends? ©2013 Performensation 50

Calculating ROI – Cost-Benefit Analysis Return on Investment is simple to talk about in theory, but can it be done in reality? YES Include a Cost-Benefit Analysis in every major decision ©2013 Performensation 51

Calculating ROI – What are you Measuring? Be clear about what you are spending and what you expect to get in return Attraction. Know what is costs to hire a new employee. Time, marketing, fees, relocation, replacement grants etc… Motivation. Understand how much it takes to communicate and support any pay for performance programs, equity compensation programs and sales compensation. Retention. Knows what it costs to get an employee to the expected productivity level. Understand how much it costs YOUR company to replace someone who leaves. The industry averages are irrelevant. You need to know this for each type of role at your own company. Don’t forget systems… ©2013 Performensation 52

Performing a CBA SECTION I: Capture Costs and Benefits • Current Processes Vs. Proposed Solution • Costs are segmented into human capital costs and economic costs • Current Technology Vs. Proposed Technology –Captures costs of the current solution(s) –Captures costs of the proposed solution(s) –Difference of proposed to current (if positive) is cost benefit of the proposed method SECTION II: Cost/Benefit Analysis (CBA) • Human capital and participant impact benefits of the proposed project • Economic analysis of the proposed project

ESTIMATION OF COSTS (Cont.) Types of Costs: • Upfront Costs: One time, spent right away • Recurring Costs: Keep project operating over time • Sunk Costs: Money already spent; not considered in analysis of project • Disposal Costs: Money spent to retire a project as opposed to • Residual Value: Money returned to you at conclusion of project lifecycle

Net Present Value Net Present Value • Tells you whether the project represents a net gain or a net loss over the project lifecycle ZERO NPV: –The project benefits offset the costs NEGATIVE NPV: –The project will cost more than it will bring back in benefits POSITIVE NPV: –The project’s benefits offer a net gain C/B Ratio (Discounted Benefits/ Discounted Costs) • Tells us how much you will get back in benefits. Helpful in determining if project will reach the breakeven point (ratio of 1) for the project lifecycle

Cost/Benefit Calculation Ratio of 1 – The project benefits equal the costs for the project lifecycle Ratio less than 1 – Cost outweighs the benefits Ratio greater than 1 – The benefits outweigh the costs The payback period is defined as the number of years and/or months it will take to recover the costs involved in the project

PAYBACK PERIOD Benefits Cumulative $ $40,000 (Gross Return) Costs $20,000 (Startup Costs) NOW YR 1 YR 2 YR 3 YR 4 YR 5

Calculating ROI – STI Programs Your investment in STI is not just the dollars you budget as compensation costs. You must include the direct impact on improved company performance, including intangibles A complete ROI will look into the past STI plans and any direct or extrapolated results that can be tied to pre and post-STI roll-out. Don’t assume cause and effect, prove it. ©2013 Performensation 58

Calculating your ROI – LTI/Equity Programs LTI programs require multiple measurements Cost of creating the program. Just because a new type of program is trending upwards doesn’t mean it makes sense for your company to have that program. The creation and implementation costs of a new plan, may not be worth it. Cost of the awards, per accounting methods. – Variable costs, cash accounting – Cost of equity (dollars and political) at time of grant, Vs. When it is booked by the company, Vs. When payout is made to the individual, Vs. Planned payout as a component of comp philosophy Cost of communication. – Initial roll-out – On-going systems, helpful reports and web access – Regular re-education, dealing with lower stock prices, poor company performance, poor industry performance Administration costs ©2013 Performensation 59

Merit Increases – Define Your Own Trend Retrain your managers to understand what is meant by “merit”? Understand your culture and if your define your company as “high performance” make sure you allocate better than average increases to top performers before allocating increases to average and low performers Redefine your compensation philosophy if you need to. Everyone can’t target the 50th percentile and be competitive. ©2013 Performensation 60

Variable Pay – Define Your Own Trend Don’t be afraid to push variable compensation deeper into your organization. BUT make sure you provide the training, support and systems to make the program successful. ©2013 Performensation 61

Stock Options – Define Your Own Trends If your stock price is strong, don’t be afraid to continue using options. If stock options are no longer an option consider pushing performance units deeper into the organization. (once again, ensure you provide the requisite training, support and systems) ©2013 Performensation 62

RSUs – Define Your Own Trends RSUs are a great, stable element of LTI 3 Year vesting is the average, but isn’t a requirement. Consider shorter and longer vesting periods Don’t get locked into RSUs if your stock price is rising and your overhang allows for more leveraged tools. ©2013 Performensation 63

Performance Units – Define Your Own Trends Performance units can offer the downside protection of RSUs and the upside leverage of stock options. Don’t be afraid the explore these beyond the C-Suite Take the time to do the analytical work before you finalize your metrics and goal levels. Don’t jump in the pool without some professional assistance. Start soon, but evolve at a careful pace. The biggest problem is poor design and modeling before roll-out. ©2013 Performensation 64

TSR – Define Your Trends Combine TSR with internal financial or operational metrics to get ahead of the curve. Understand the how and why of any peer group chosen. Does it work with shareholder expectations? Is it big to survive the entire measurement period? Can you get the data when you need it? ©2013 Performensation 65

Realizable Pay – Define Your Own Trends Everyone should do a Realizable Pay calculation, but not everyone should include it in their proxy. Understand the key differences between your model and the model used by your major investors. This is a first line of analysis when problems with executive pay are identified. Don’t be caught unaware. ©2013 Performensation 66

STI/LTI Alignment – Define Your Own Trends Don’t guess about your company strategy. Get confirmation from your executive team. Make sure you model Best, Worst, Mathematical and Expected Case scenarios. Wild pay swings and “lowball targets” are no longer acceptable ©2013 Performensation 67

Reminders KNOW YOUR STRENGHTHS AND WEAKNESSES KNOW YOUR UNIQUE COLOR Business Leaders HR Advisors Recruiting KNOW YOUR SERVICE DELIVERY MODEL Consulting Finance Reporting Managers Program Management Vendors KNOW YOUR COSTS AND BENEFITS Participants ©2013 Performensation 68

SAM REEVE, CCP, GRP Executive Vice President DAN WALTER, CEP President and CEO TF 1 877 803 9255 ext 702 Office 1 415 625 3088 Mobile 1 970 403 5775 TF 1 877 803 9255 ext 700 Office 1 415 625 3406 Mobile 1 917-734-4649 SamReeve @SamReeve3 DanWalter @Performensation Please visit our website at Twitter: LinkedIn: Facebook: Slideshare (presentations and documents): Quora (Q&A): 514 Precita Ave, Suite 100, San Francisco, CA 94110 69

We Align Compensation with Corporate Strategy and Culture Performensation was founded in 2006 in response to the demand for more strategic and effective compensation programs. Successful compensation requires four key elements. Each component must be carefully crafted to your unique goals and culture. Vision: We understand where you are headed and have the skills to get you there. We are respected throughout the industry for our forward-thinking perspective and our ability to execute on it. Foundation: Long-term solutions are based on evidence, not founded on gimmicks or fads. They are built to allow for adjustments to organizational and market conditions. Your program’s foundation must reflect your company and the goals it is designed to support. Design: A great program combines creativity with practicality. We utilize our broad and deep understanding of rules, regulations, processes and providers to ensure your program delivers high- performance results. Our designs are easy to understand, compliant and effective. Communication: Participants only value what they understand. Communication must be built in to every step of the process. We ensure that all program elements are relevant and make sense to your targeted audience. 70

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