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02/13/2012

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The homogeneity of exec comp plans follows the same lemmingitis CYA followship pattern of most conventional compensation practices. Although you can't lead well from the back, it's a lot safer in the middle of the pack. Compensation types are not known for their innovative instincts and enthusiasm for taking chances; in fact, they are characteristically remarkably risk-averse.

More on that later....

Well the reason why we can't be able to change this? Money pure and simple. Executives are too used to getting big bucks with stock ---- and there is very little or nil pay-for-performance for them. So why would they be willing to change?

I really do not want HR to be involved in developing exec comp programs. It needs to come for a real, non-biased 3rd party. I'm afraid that it would be career-threatening for HR to be the ones to make recommendations.

BOD's now want HR to take a more visible in advising them --- once more they push their responsibility off on someone else ---- 1st outside consultants who know which side their bread is buttered on and now poor old HR. BOD's need to "suck it up" and do some reseach with the help of the 3rd party. God knows they get paid enough. They ought to work for it.

Thanks for posting Dan. I would like this topic to remain alive too. I promise to keep quiet and learn something. Why don't we start with a fresh slate? Quit "bandaiding" stock and start completely over again. Stock out ---- now what?

Exec jobs have changed SO much since the 1970s since stock rewards started. There's got to be a better way to reward them.

What do you think?

@Jim,
I think there is something to be said about the ease of following the herd. Those that do that in the would spend thousands of year building up real instinct. Those without instinct are often doomed to perish if their leader choose poorly.

@Jacque

Money is certainly an aspect at public companies. I believe it is less so at private companies. The unknowns are greater and the data thinner.There is little to defend the current paradigm for most private companies (not even loads of cash.

I think HR also tries to take the easy way out too often. Rather than understand their companies business and make cogent arguments, some HR pros simply point to the external consultant and say "Ask them!" In order for HR people not to feel threatened they need to get a seat at the table. That requires learning things, and making the type of accountable decisions that many HR people are not willing to do. (Perhaps there is a good basis for a Compensation Fear Factor article)

The consultants are a mixed group (like the population at large). Some support big pay, others support big performance. A smaller number promote bucking the system, a plan that is usually followed only when a company has been in trouble. And, some exec comp consultants make more money than an attorney for OJ Simpson, but a great number of them make very reasonable (and not huge) sums.

What do you mean by Paradigm? Do you mean more what needs to be fixed or changed?

I have seen very big changes in the stock compensation practices since the 1995 date you give above, including the big shift from stock options to restricted stock, the narrowing of who gets equity grants, and the growth of performance share plans beyond the very top executives. These were caused by many factors and do represent a paradigm shift to me.

Are you looking for a whole new way of thinking in a big picture way or more related to very specific provisions, such as vesting you discuss or grant guidelines? You mention private companies. Their grants have gone through many changes in structure, including early-exercise stock options that turn into restricted stock, and most recently two-level vesting provisions that have both time vesting and a liquidity event required.

Bruce Brumberg, Editor http://www.myStockOptions.com

Hi Bruce,

Good question. By paradigm, I mean the entire structure and use of equity as we currently know it, and as it has been for a very long time.

Vesting: Stock Options 4-5 years

Term of Grant: 10 years

RSU vesting: 3 yrs

Private companies: no dividends, time frames of 3-5 years even when it take much longer for the average company to see any liquidity to equity holders

Distribution curve: So heavily weighted to the first 5-15 employees, that it often becomes impossible to afford hiring a competent employee #20 or #50, especially if it is a tech heavy start-up.

Some of changes you mention are a good start, like the two tier vesting that I have used in several plan design for my clients. Even with those changes, someone who went into a coma in 1999 would be able to catch up with our current world in a very short time, with only a few new rules, not strategies, to learn.

While the equity strategies used by public companies have changed more in recent years, those in start-ups have remained closely reminiscent of past decades.

It is time to reevaluate and figure out if there are better/new ways to use the tools in our toolbox. We should also determine if there are tools that exist, but are not in our tools box. Many other countries have a much wider range of instruments that are used more often.

Dan Walter, Performensation http://www.performensation.com

Thanks for posting Dan. Would love to share this with my clients including the on going discussion. Lets think how.

On Feb 15, 2012 Inc posted this article (http://www.inc.com/noam-wasserman/four-myths-about-startup-pay.html

by Noam Wasserman and Furqan Nazeeri. Interesting how many people are starting to talk about this. I will be including some of their research in an upcoming post.


Dr. Noam Wasserman is a professor at Harvard Business School. His book, The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup, will be published in March. Furqan Nazeeri is a Partner at ExtensionEngine, LLC with more than 15 years experience building and managing high growth software companies. @noamwass @altgate

Linked below is a slideshare presentation of a new type of employee stock option, which I call Dynamic Employee Stock Options.

http://www.slideshare.net/OLAslideshare/desos-presentation-jan-03-2012

It substantially improves almost every aspect of traditional ESOs and is better for the grantee, the company and even better for the wealth manager. It even eliminates the need for hedging. Yingping Yuang did the cost calculations and found that the extra cost over traditional ESOs is only 3.5%.
Please tell me what you think.

John Olagues

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