Which is Better — Higher Salaries or Bigger Incentives?
Today’s Presenter: Ken Gibson Senior Vice President (949) 265-5703 kgibson@vladvisors.com 7700 Irvine Center Drive, Suite 930 ⬧ Irvine, CA 92618 ⬧ 949-852-2288 www.VLadvisors.com ⬧ www.PhantomStockOnline.com 2
To open or close the control panel: Click the red arrow For questions during Q: Are the slides available? A: Yes, more info will be provided at the end today’s presentation: Use the question area Webinar on your control panel 3
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Post Webinar Intro 5 Minutes: Who We Are What We Do How We Do It 5
Headquartered in Lake Forest, CA Founded in 1996 600 clients throughout North America 23201 Lake Center Drive, Suite 207, Lake Forest, CA 92630 (888) 703 0080 www.vladvisors.com www.phantomstockonline.com www.bonusright.com 6
VisionLink’s Focus: Help Business Leaders Build and Sustain a High Performance Culture Accelerate performance through pay strategies that transform employees into growth partners.
If you do that… • Quality of talent will improve. • Employee engagement will expand. • Performance will be magnified. • Business growth will be accelerated. • Shareholder value will increase.
Governing Thought Pay the least amount you can “get away with” to attract the best talent available and drive the maximum performance possible. 9
Questions Pay higher salaries and price out the competition? Competitive salary but higher upside? A blend of those approaches? 10 10
Is There Only One Formula for Creating a Balanced Rewards Strategy? 11 11
No, the Situation is the Boss However… 12 12
3 Principles Have a clear value 1. creation definition. Align 2. compensation with your recruiting strategy. Build structured 3. flexibility into your pay strategy. 13 13
1. Have a Clear Value Creation Definition Value attributable to the productivity and performance of human capital. 14 14
Case Study 15 15
Assumed leadership of Keith Williams UL in 2005 Company carrying considerable debt Losing market share Low employee morale UL had become bureaucratic and “ siloed ” 16 16
Core Changes Shift from “Incentives” to “Value Sharing” Took away local measurements driving management incentive plans — all paid on same metrics ▪ “We live together and we die together” Aligned everyone behind company success ▪ “I call it ‘pay the company first.’ ” 17 17
Pay the Company First Example: If UL’s target is “Basically, up to the $80 million-- company’s operating 100% of first $80 in profit target, all of the profit goes to company profits go to the The next $20 million company; and only after goes to the incentive that target is met, do we pool start funding the From there on, 50/50 incentive pool.” between company & incentive pool 18 18
Pay the Company First Once value creation is defined, compensation can follow a formula for sharing value in a way that aligns key producers with the company’s business plan and priorities. 19 19
Calculating Value Creation Focus on Productivity Profit 20 20
Value Creation Example: Item Amount Capital Account $20,000,000 Cost of Capital 12% Capital Charge $2,400,000 Operating Income $10,000,000 Productivity Profit $7,600,000 Total Rewards $25,000,000 Investment ROTRI™ 30.4% 21 21 ( ROTRI™ = Productivity Profit/Total Rewards Investment)
ROTRI ™ Example: Item Figure Capital Account $20,000,000 *Variable Pay Plans (Value Sharing) are Cost of Capital 12% financed from Productivity Capital Charge $2,400,000 Profit Operating Income $10,000,000 *Productivity Profit $7,600,000 Total Rewards $25,000,000 Investment ROTRI™ 30.4% (Return on Total Rewards Investment) 22 22 ( ROTRI™ = Productivity Profit/Total Rewards Investment)
Productivity Profit Answers… Two Questions: Can I afford to share value? How much value can I afford to share? 23 23
Define Your Pay Philosophy A written statement of what the company is willing to “pay for.” Tie it to value creation. 24 24
Compensation Philosophy Statement How value creation is defined. How value is shared — and with whom. Market pay standards. How guaranteed pay and value- sharing will be balanced. How short and long-term value- sharing will be balanced. When or if equity will be shared. How merit pay is defined. 25 25
Pay Philosophy Answers… Three Questions: Where do we want to be vis a vis market pay for salaries? With whom should value (productivity profit) be shared? What form should it take? ▪ Short-term vs. long-term ▪ Equity or no equity 26 26
Rules of Thumb Short-term value sharing should be tied to profit (specifically productivity profit) Long-term value sharing should be tied to business growth 27 27
2. Align Compensation with Your Recruiting Strategy Assumes You Have a Recruiting Strategy Define skill “categories” needed to drive business model Identify gaps Identify talent pool Form recruiting & retention strategy 28 28
Talent Alignment Align People, Roles & Business Model Have top performers working in roles that maximize their unique abilities Avoid placement in roles that don’t have a strategic impact 29 29
Recruit to a Role (Not a Position) Position: characterized by specific duties you need someone to carry out. Role: defined by outcomes and stewardship. Positions are filled. Roles are ful filled. 30 30
Talent Pool: Millennials Launchers Accelerators Catalysts 31 31
Launchers Many just left the university 1st or 2 nd career job Most are single 32 32
Accelerators Experience with more than one company Desire to rise in ability, recognition, contribution and influence. Many single but a growing number are married and are starting families 33 33
Catalysts Mid-30s Meaningful experience Unique abilities Able to affect significant (positive) change Companies are competing for their talents Have leverage Many married and have children 34 34
Understand the Employees ’ View of Pay How do employees look at compensation and what matters to them? 35 35
6 Reasons Employees Care About Pay Personal Lifestyle & Wealth 1. Accumulation Career Measurement 2. Contribution Ambitions 3. Business Roles, Expectations & 4. Priorities Partnership 5. Continuity & Fairness 6. 36 36
Financial “Hierarchy of Needs” 5 Wealth Accumulation Wealth Multiplier Philosophy Short & Long-Term Incentive 4 Value Sharing Plans Qualified & Executive 3 Retirement Planning Retirement Plans Comprehensive, Flexible 2 Risk Protection Benefits Plan 1 Cash Flow & Living Standard Salary & Bonus Clear Pay Philosophy 37 37
Hierarchy & Millennial Segments Launchers Area Orientation • Pay expectations still being Cash Flow/Standard of formed • Modest needs Living • Competitive salary and mentoring • Basic needs Risk Protection • Don’t want to pay anything • Small or little concern Retirement • More concerned about money VS/Wealth Accumulation for this weekend • Short-term preferred over 38 38 long-term
Hierarchy & Millennial Segments Accelerators Area Orientation • Context: Cash • Experience Flow/Standard of • Peer Pay Living • Life Responsibilities • College Debt • Adequacy of coverage — Risk Protection family focus • Cost sensitive • Growing Focus Retirement • Emphasis on increased cash VS/Wealth Accumulation flow • Short-term preferred over long-term 39 39
Hierarchy & Millennial Segments Catalysts Area Orientation • Prefer median of market Cash Flow/Standard of pay but with high upside potential Living • Want flexibility and options Risk Protection • Maximum Control • Two areas of focus: Retirement • Retirement accumulation • Current tax savings • Deferred compensation • Large area of emphasis VS/Wealth • Focus on long-term Accumulation opportunity • Mirror owner opportunity 40 40
3. Create Structured Flexibility 41 41
Eight Components of Pay Compensation Benefits Salary Core benefits Performance incentives Executive benefits Sales incentives Qualified retirement plans Growth incentives Supplemental retirement plans Incentives should be in the form of value sharing. 42 42
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