Pencils! Pens! Notebooks! Fall Is The Time For New School Supplies…and Compensation Plan Redesigns

Key considerations for the painless restructuring of this important talent tool

"Don't you love New York in the fall? It makes me wanna buy school supplies. I would send you a bouquet of newly sharpened pencils if I knew your name and address." (You’ve Got Mail, directed by Nora Ephron, Warner Bros., 1998)

As an employer, it probably isn’t going to be enough to send a “bouquet of newly sharpened pencils” to retain your key talent. But, fall is the time of year where public and private companies should look at their bonus and compensation plans to see what is working and what is not, and what changes could be made. This allows the team to make adjustments to plans before launching the new calendar year objectives, and in the event of spring annual meetings, prepare a plan that is ready for shareholder vote.

What are the key questions to consider as you redesign your compensation plan?

Anything that involves money tends to invite controversy. There are few key questions to ask yourself and other decision makers to keep the process on track, and keep the focus on the plan’s role as a talent tool. For example:

• What results are you trying to drive? 

• What challenges or gaps does your current plan suffer from? 

• Do the decision-makers agree on what needs to be done, or will consensus building be required? 

• What do the employees like or dislike about the current plan? What feedback have you received from new hires or individuals who opted to go to other companies?

• Is it easy to understand and manage? 

• What options are readily available to you, such as cash or shares, or will you have to design shadow instruments or appreciation based models? 

• How should the plan work with your other compensation, including base salary, other short or long term incentives, change in control agreements, clawbacks, and sign on or other spot bonus programs? 

The organization’s culture and personality affects talent strategy and compensation design

An often overlooked key consideration is your organization’s personality - are you looking for something simple and consistent with your peers? Or, are you trying to create something that is unique in the marketplace? The latter often depends on what options are available to you, the appetite of your Board and management, and the scrutiny your company faces or may from the outside. 

Use project management techniques to achieve a better plan result

Compensation plans are not always straightforward. I often encourage clients to minimize the impact of this by taking a project management approach to compensation design.

You do not start driving without knowing where you are headed, your IT department likely does not start writing code when they don’t know what they want an application to do, and your marketing team doesn’t start writing content when they don’t have a product, so starting with drafting a plan document is probably not a great idea either. 

The illustration below illustrates some of the key steps, followed by Practice Notes highlighting additional questions related to Requirements (which is the phase that tends to be most consistent across companies).

---

Requirements Practice Note #1: What result are you trying to drive with your compensation plan?

The following are a few of the considerations that will determine design:

• Are you trying to attract talent to your organization?  

• Are competitors poaching your A-players, making retention a more critical element? 

• Are you trying to incent and reward specific performance results or operational achievements?  

• Do you have a cultural mission, such as helping your employees feel like they have an ownership stake? 

Requirements Practice Note #2: How will you structure the payouts under the plan?

• How frequently will you make grants?

• What will vesting be like?  The typical vesting for long-term incentives is between 3 and 5 years.

• Who will be eligible and how is eligibility defined for the future? Will there be different percentages for different roles or level?

• How will performance be measured?  Will you use things like fair market value, EBITDA, strategic initiative completion, growth as percentage of market, KPIs, etc? And how will you differentiate between the goals used for short term and long term programs? Keep in mind, if you are a public company, the proxy advisors and some institutional investors do not love it when the same measurements are used for both short and long term goals.

• And for companies that use stock not traded on the open market, will there be any “in service” liquidity needed? 

• Do you need a long term incentive plan or should you consider a cash based, short term program instead or exclusively?

Requirements Practice Note #3:  Consider the view of outsiders (but not too much!)

Another consideration to weigh is how will outsiders view the plan, and how visible it will be to the public.

For example:

• Have regulators or other outside reviewers commented on compensation in the past? 

• Have proxy advisors provided shareholder guidance that did not align with the plan? 

• Are there shareholders, critical institutional investors, or other constituents that have opinions about how the plan should be designed? 

• How much do these outside views matter to your business?

In short, compensation plan design is a critical element of any company’s talent strategy. By considering a few key questions and approaching the program design in a manner that eliminates rework, you will be in a great position to make next year the best performance year yet.

#compensation #compensationandbenefits #compcommittee #boardofdirectors #proxy