Opportunities and Challenges Stephanie Milliken, CHRP Milliken HR - - PowerPoint PPT Presentation
Opportunities and Challenges Stephanie Milliken, CHRP Milliken HR Consulting Jan Boase, CHRP Senior VP HR, Liberty International Underwriters Barbara Meens Thistle, CHRP VP HR, ICBC and former Chief Human Resources Officer, Emera Inc.
Opportunities and Challenges
Stephanie Milliken, CHRP – Milliken HR Consulting Jan Boase, CHRP – Senior VP HR, Liberty International Underwriters Barbara Meens Thistle, CHRP – VP HR, ICBC and former Chief Human Resources Officer, Emera Inc.
Overview of
Overview of Incentives Incentives
Practical Applications
Practical Applications
Jan Boase – Sr. VP, HR, Liberty International Underwriters Barbara Meens Thistle – VP, HR, ICBC and former CHRO, Emera Inc.
Your Questions
Your Questions
Strengthen competitive advantage Be competitive with other employers Increase retention Share success with employees with less risk Reinforce shift in strategy Strengthen a bottom-line focus Motivate increased effort Recognize achievement Encourage cooperation and information
sharing
……and the #1 reason for incentives
……and the #1 reason for incentives
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Job level
fixed?
Job focus
goals?
Performance contribution
group achievement?
Organization culture
and the employee value proposition?
Individual Short-Term Incentives
Suggestion Programs Attendance Programs
Group Short-Term Incentives
Long-Term Incentives
Stock Bonus Stock Purchase Stock Option
Other Non-Stock Related Long-Term
Incentives
Performance Criteria Weights Gates Thresholds Performance Escalators Payment Frequency Performance Period Divestiture Dilution What happens when employees leave?
Alignment with:
Financially Attractive Trustworthy
Easy to Administer Cost Effective
Effective in achieving goals of program
Effective in achieving goals of program
Jan Boase, CHRP SVP, HR, Liberty International Underwriters
Pay for Performance Pay for Performance Pay growth Pay growth through through promotions promotions Competitive to Market Competitive to Market 50 50th
th Percentile –
Percentile – Average verage 75 75th
th + Percentile –
+ Percentile – Top Tale
nt
Who are you incenting? Who are you incenting? What’s their sweet spot? What’s their sweet spot? Traditionalists Traditionalists - Boomers -
efined ed Ben enefit efit
Voluntary Voluntary Ancillary Ancillary Contribution Contribution
Every employee participates Every employee participates Bonus Triggers: Bonus Triggers: % Global/Regional Business % Global/Regional Business Quantitative – Quantitative – financial targets inancial targets (Qualitative (Qualitative) Overachieve Overachieve % Individual Performance % Individual Performance Overachieve Overachieve
Example:
Example:
Assumptions:
Assumptions: 50/50 split 50/50 split
Business:
Business: 125% 125% Personal: Personal: 140% 140%
Salary Salary: $50K $50K Bonu Bonus: : 10% 10% Bonus Bonus at 100% t 100% = $5K = $5K Trigger Trigger Impact Impact @ 100% @ 100% Calc lculations ulations Bonu Bonus $ $ Busines Business 50% 50% 2,500 ,500 2,500 2,500 X 125% 125% = $ 3,125 $ 3,125 Personal Personal 50% 50% 2,500 ,500 2,500 2,500 X X 140% 140% = = $ 3,500 $ 3,500 TOTALS TOTALS 100% 100% $5,00 $5,000 With ith accelerators ccelerators $ 6,625 $ 6,625 Bonus Bonus at at 100% 100% Bonu Bonus w/acceler w/accelerators tors $5,00 $5,000 $6,62 $6,625 $1,62 $1,625
For executive business leaders only For executive business leaders only Based on Global business performance Based on Global business performance Results over a 3-year rolling cycle Results over a 3-year rolling cycle
Payout is based on Payout is based on global bu global business results over the 3 siness results over the 3 years years Example Example: 2014 – 2014 – Enter the plan January nter the plan January 1 1 2017 – 2017 – First payment based on irst payment based on 2014, 2015, 2016 2014, 2015, 2016 2018 2018 – Next payment based on Next payment based on 2015, 2016, 2017 2015, 2016, 2017 …. and …. and so on ….. so on …..
A divi A division of the n of the Lib Liberty Mutual Insura y Mutual Insuranc nce Comp e Company any
Barbara Meens Thistle, CHRP VP HR, ICBC Former CHRO, Emera Inc.
1.
Drive Long Term Growth Strategies
2.
Ensure Market Competitiveness to Attract and Retain Top Talent
3.
Align Individual and Collective Performance with Shareholder Expectations
PSUs RSUs Option 3 years 5 years 33 33 33 20 50 30
Role Individual growth potential Competition Industry
Governance NGOs Shareholders Customers Board of Directors
A “pay for performance disconnect”; Equity award grants that are time-based rather
than performance-based;
Retention or “mega” equity grants or bonuses; Performance goals that are insufficiently
challenging; and
Insufficient shareholder outreach.
Eliminate excise tax gross-up provisions; Decrease CEO pay to reflect lagging company
performance;
Increase % of performance-based equity; Decrease % benchmark to the median of peer group; Conduct robust shareholder outreach efforts; Increase CEO stock ownership requirements; Institute a clawback policy; and Institute an anti-hedging policy.
Anticipate Intervention Understand Full Spectrum of Expectations Shape Program to meet 3 objectives Build in ability to adapt/adjust Align HR with IR and Finance Work closely with Board HR Committees –
understand their perspective in balance with “employee” expectations
YOUR TURN YOUR TURN Are there any questions we can answer to clarify this topic
information you need to move forward?
WHAT ARE MY WHAT ARE MY TAKE- TAKE-AWAYS – YS – WHAT DID I HAT DID I LEAR LEARN? WHAT TIPS DO I WHAT TIPS DO I WANT WANT TO REM TO REMEMBER ER? WHAT DO I WHAT DO I NEED TO FIND OUT MORE ABOUT? NEED TO FIND OUT MORE ABOUT? WHAT’S THE NEXT WHAT’S THE NEXT STEP I STEP I NEE NEED TO TO TAKE IF TAKE IF I I WANT TO IMPLEMENT AN WANT TO IMPLEMENT AN EFFECTIVE INCENTIVE PROGRA EFFECTIVE INCENTIVE PROGRAM? M?
APPENDIX 1: SHORT-TERM INCENTIVES – Advantages, Disadvantages and Application PROGRAM ADVANTAGES DISADVANTAGES APPLICATION Individual Short‐Term Incentives Merit Raise Increase in base pay beyond cost
‐ highly valued by employees ‐ considers all aspects of performance ‐ supports career advancement ‐ long‐term reward for short‐term performance ‐ capped by top of range ‐ differentiation between levels of performance is small ‐ non‐seniority based environments where individual contribution / value can be measured Merit Bonus Lump sum re‐ earnable reward ‐ not guaranteed ‐ self funded ‐ flexible based on financial results ‐ can be generous without long‐term risk to employer ‐ can be used to reward specific
‐ can off‐set merit raises for employees at top of range ‐ can have immediate visible impact ‐ not guaranteed ‐ may not support “collaborative” work ‐ focuses on a sub‐set of total behaviour resulting in other ‘un‐bonused’ aspects of the job potentially being neglected ‐ investment needed to develop objective, accurate measurements ‐ typically bottom‐line focused, non‐seniority based environments where individual contribution / value can be measured Commission Pay for sales volumes or number of transactions ‐ easy to set and measure ‐ unlimited opportunity for employees ‐ reduces need for other employee controls ‐ reduces employer risk ‐ clarifies performance expectations ‐ highly motivational ‐ only applicable to sales ‐ uncertain income may lead to turnover ‐ lower earnings for newer employees ‐ may encourage overly aggressive sales behaviour ‐ may cause conflict among employees ‐ may focus effort on sales volume vs. profitability ‐ may lead to feelings of inequity as a result
‐ sales organizations ‐ design depends on value, volume, and time‐ frame of the sale and sales cycle
PROGRAM ADVANTAGES DISADVANTAGES APPLICATION Piece Rate Pay for each unit of output ‐ highly motivational ‐ reduced need for other employee controls ‐ link pay to output therefore reducing employer risk ‐ clarifies performance expectations ‐ only applicable in limited circumstances ‐ only suitable for ‘non‐changing’ environments ‐ social forces may constrain effort ‐ may lead to employee conflict and poor labour relations ‐ no incentive for employees to help new colleagues ‐ may result in lower quality or accidents ‐ environments where workers can control their own production, interdependence between workers is low, each unit of production can be easily measured and priced, individuals perform a limited number
increased productivity will not cause layoffs, and monitoring quality standards is easy Special Purpose Suggestion programs; absenteeism programs ‐ focuses attention on key initiatives ‐ can results in incenting initiatives to the detriment of other important factors relating to performance ‐ dependent on focus of plan, any environment suitable for recognizing individual achievement, based on plan Group Short‐Term Incentives Gain‐sharing Sharing cost savings / productivity gains with employees ‐ self‐funded ‐ stimulates higher productivity ‐ may improve team cooperation ‐ generates cost‐saving ideas ‐ reduces need for supervisory control ‐ may increase employee knowledge
‐ can be easily applied in not‐for‐ profit organizations ‐ results in decreasing marginal returns ‐ reliance on historical baselines makes it less amenable to rapidly changing environments ‐ may result in lower quality ‐ could result in ‘free riders’ (employees who don’t work hard since they share equally in the group incentive) ‐ may cause disagreement between employees and management ‐ although it can be applied in unionized environments, it has been found to be less successful there ‐ human relations environments (where cooperation is valued) vs classical environments where individual accountability is valued ‐ participative cultures with high‐involvement Goal‐sharing Team is bonused for achieving a specific goal ‐ simple to develop ‐ more flexible than gain‐sharing ‐ may create positive group norms and cooperation ‐ reduces needs for other employee controls ‐ can be arbitrary in goal levels and bonus amounts ‐ less continuity than gain‐sharing ‐ may cause conflict in diverse teams ‐ often no incentive to surpass goal ‐ participative cultures with high‐involvement since employees need to be engaged in the design as well as the frequent reporting of results. ‐ not effective in dynamic environments where the setting of goals is difficult
PROGRAM ADVANTAGES DISADVANTAGES APPLICATION Profit‐sharing Bonuses based on achieving profit targets ‐ encourages employees to think like
‐ may result in improved group norms ‐ increases organizational citizenship behaviour ‐ self‐funded ‐ more simple to administer than
‐ supports ability to work with less hierarchy and fewer supervisors ‐ weaker ‘line of sight’ for employee given more tenuous link between individual and profit ‐ may result in ‘free riders’ ‐ uncertain in the eyes of employees ‐ employees may perceive that it can be subject to manipulation ‐ requires the sharing of financial information
achieved ‐ participative cultures with high‐ involvement, open‐book management style ‐ particularly effective when a high level of cooperation is needed across company units ‐ not philosophically compatible with classical environments where control requires that individuals be accountable (and recognized) for their own performance, or where there is a reluctance to share financial information or performance against targets Deferred Profit Sharing Profit sharing paid out in future ‐ same advantages as profit sharing ‐ offers tax and retention advantages ‐ could act as an incentive to stay depending on policy for paying out to departing employees ‐ same disadvantages as profit sharing ‐ could act as an incentive to leave depending
employees ‐ when organizations want to enhance retirement plans and/or employees are looking for tax deferrable compensation ‐ usually only provided to senior personnel Adapted from Richard J. Long, “Strategic Compensation in Canada”, 4rd edition, Nelson Publishing, 2010. Note: There are many non‐monetary short‐term incentive plans that can include perks, trips, gift cards, public recognition, awards of achievement, etc.
APPENDIX 2: LONG-TERM INCENTIVES – Advantages, Disadvantages and Application PROGRAM ADVANTAGES DISADVANTAGES APPLICATION Long‐Term Incentives Stock Plans Stock Bonus Provision of shares at no cost to the employee Stock Purchase Employees purchase shares Stock Option Employees are able to purchase shares in the future at a fixed price ‐ value realized when share price increases ‐ aligns interests of employers and employees ‐ encourages employees to think like investors ‐ requires no cash layout ‐ can improve perceptions of equity in the organization ‐ gains are uncertain ‐ employee dissatisfaction occurs if share price declines ‐ when employees do not purchase their shares at full value, there is some dilution in the equity held by other owners ‐ employees put all their eggs in one basket (employment and investment) ‐ investment risk is higher when introduced in private organizations as there is no external ‘market’ within which to sell ‐ when combined with employee involvement can be very positive ‐ more common in publically traded
Phantom Stock Cash bonus plan tied to share price ‐ incentivizes based on share performance without extending equity ‐ vesting schedules ensure retention ‐ variable liability that comes with the normal fluctuation in the company stock price can be a drawback on the corporate balance sheet ‐ privately held or closely‐held organizations
PROGRAM ADVANTAGES DISADVANTAGES APPLICATION Performance Share Plan Links distribution of shares to goal achievement ‐ incents both goal achievement and increased company share value ‐ same disadvantages as stock plans ‐ same application as with other stock plans Other Non‐Stock Related Long‐Term Incentives Performance Unit Plans Performance contingent incentives paid over time if certain financial or market value goals are achieved. ‐ links employee to long‐term goal achievement typically over 3 to 5 years ‐ usually pays out an amount relative to various levels of performance (e.g. threshold, target and maximum) ‐ difficult to quantify realistic, accurate, long‐ term goals ‐ best in cultures with high employee involvement Other Non‐Monetary Long‐term Incentives Sabbatical Time off with pay ‐ good retention enabling tax‐ deferred earnings ‐ can result in talent gap when leave is exercised ‐ large organizations where leave provides
disrupt operation in the short run Promotion Career growth ‐ excellent for retention and succession planning ‐ can stifle the acquisition of new senior talent ‐ organizations with robust career paths Adapted from Richard J. Long, “Strategic Compensation in Canada”, 4rd edition, Nelson Publishing, 2010.