Compensation Cafe

Executive Compensation and the Great Wizard of Oz

Executive compensation holds as much mystery and magic as the Great Wizard of the Emerald City.  Of course, if the curtain were to be pulled back, the real magic would be found in how a lack of information, combined with fear and imagination, have colored the pay of all executives with the same brush. Remember that when Dorothy and Toto met the wizard he was just as unhappy and scared as they were.

I find it amusing and frustrating that there is so much misinformation about executive compensation. Let’s state the givens: Yes, there are many CEOs who make more money than most people can comprehend. Yes, executive compensation is a complex arena with many assumptions and estimates being made at any given point. Yes, companies spend a lot of time and effort on disclosure. So why am I frustrated?

Everyone discussing executive compensation has some type of an agenda. Companies don’t want to upset their shareholders or fight with the media. Journalists want a story that stands out among the noise of the day. Shareholder advisory firms want to show their knowledge and ability to shift practices. Consultants want to defend their past practices or point out their superiority when compared to pay at non-clients. Survey data providers want information that can be easily understand and digested. Politicians want to look good to their constituents without upsetting their contributors.

Each perspective leads to a different approach to the positives and negatives of executive compensation. Companies tend to paint things grey and play it safe. The media tends to hyperbolize and point out the outliers. ISS and Glass Lewis point out new issues to remain relevant and gain new clients. Consultants point out their successes and explain their failures as “beyond their control,” or “not their fault.” Survey data is defended as holistic even when it is often made up of a tiny fraction of representative companies. Politicians focus on the obvious problems and talk about them like they represent the majority of pay practices (but, they seldom act in the same way.)

All of this posturing has turned the topic of executive compensation into a kind of omnipresent wizard with terrifying powers and a capricious temper. It’s spoken about in hushed terms or artificially confident booming voices. The curtain is never really pulled back, since everyone already “knows” what’s behind it.

Imagine if the wizard had simply invited Dorothy behind the curtain the moment she arrived. Consider what his life would have been like had he rejected the mysticism of his new role from the day he arrived in Oz. Of course, he wouldn’t have had the power over people that mutual fear and misunderstanding granted him. Perhaps he wouldn’t have also had a lonely misunderstood existence that made him miserable.

When preparing this year’s proxy disclosure, say on pay voting and overall communications regarding executive compensation, consider pulling back the curtain on your pay. If you give people the truth only the crazy will find a way to dispute it. If you give people the whole picture you will lose the power of mystery but, in return, gain the power of understanding.

(Dear Readers: Yes, I know that I have used the Wizard of Oz twice in recent posts. No, I don’t know why, since I have not seen the movie in several years. Who knew it was created to inspire compensation articles?)

 Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation” and “Beyond Stock Options.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter @Performensation and @SayOnPay

Prepare for Compensation Meetings Like an NFL Broadcaster

Like many of you, I have football games playing on my TV during most autumn Sunday afternoons. Also, like most of you, I  pay a lot attention to the big plays, but little attention to the broadcast itself. This past Sunday, for perhaps the first time ever, I focused on the incredible preparedness of the professionals producing the television events. It got me to thinking. What if compensation professionals prepared themselves in the same way? Our meetings with Executive Management and Compensation Committees would be short, enjoyable and incredibly effective.  More importantly, our programs would evolve more quickly and represent our companies more completely.

Consider any NFL broadcast. The announcers have spent all week studying the players and game plans of each team. Research assistants have put together statistics with such specificity that they make my wife laugh almost every weekend. “That pass sets the record for most passes to a running back, under 5’7” during the third quarter of a game in the twelfth week of an NFL season.” Cameras are set-up to cover the play from nearly every angle. They know where family members are sitting and where they’re from.

A great example of this attention to detail was a recent game in which Carson Palmer, quarterback for the Oakland Raiders, threw an interception that was run back for a touchdown. Almost immediately, there were replays from three or four different angles. There was nothing surprising here, just expected levels of great work.  Then came the doozey. Within 30-45 seconds of the play the announcers started talking about Mr. Palmer’s tendency to throw interceptions that were returned for TDs. While they spoke, a series of at least eight prior interceptions from the full length of his 8 -year career, played on the screen.

This meant that someone had just prepared for this unique opportunity. Carson Palmer has played more than 128 games in the NFL.  He has thrown 2,560 passes. Of these, eight or nine were intercepted and returned by the other team. Someone on the broadcast team gathered these into a package that was immediately accessible. The director knew the package was there. The researchers knew how to call it up on demand. The announcers were fed some statistical information to support their innate knowledge. And, in less than a minute, everything came together on screen in compelling support of this specific tendency.

Imagine if you were this prepared every time someone asked you about your compensation plans. “Hey, what’s the rule on Change-In-Control for the 2007 Stock Option Plan and does that conflict with the COO’s employment agreement that he received when we was hired at that company we acquired in 2009?” What if you had an immediate (correct) answer every time someone asked, “Why do we have that feature?” or “How much cash and equity should we offer a Senior Software Programmer, in Chicago, IL?”

If we all prepared and stayed organized like NFL broadcast teams, much of the stress of our jobs would be gone. The stress of leaving a meeting with more things to do than when you walked in.  The stress of providing the wrong, or no, answer in an executive meeting. The stress of correcting administrative errors due to assuming we knew a rule, rather then knowing the rule exactly.

Of course, we’ll never get to a point where we simply have a team of specialists to help us get prepared. We do not work in an industry where there is always accurate statistical data, or in a world where our rules are applied exactly the same way every time.  But, we can, and should, consider making this our goal and begin working toward achieving it.  You never know when that one thing that has only happened a couple of times in the past will happen again, but you would likely be compensated and respected more if you had a ready solution when it came up again.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation” , “If I’d Only Known That” and  “Beyond Stock Options.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter @Performensation and @SayOnPay

Compensation In the Eye of the Tornado

In a world of swirling regulations, opposing forces of needs versus budgets and increasingly pressing deadlines, it is far too common to get caught up in the tornado that is our everyday work. Generally, when a tornado comes the best plan is to get out of its way. When that is not possible and the tornado takes hold, our survival instincts immediately look for a way out. I am here to propose a better plan. 

Think about it. What happens as you move towards the edges of a tornado? The winds move faster and faster and eventual you get flung out in an unexpected direction. Often this causes great harm to you and/or anyone or anything near the tornado. If you stay in the swirl of the tornado, the vortex may steal your breath away and items within the storm may catch you unaware. Since we know that escaping a tornado is a recipe for disaster and being tossed about is also a great risk, we should aim for a completely different plan.

When caught up in a cyclone of work and accountability, I suggest that you move quickly to the eye of the storm. The idea may be terrifying and opposite of your instincts, but the eye of a storm is calm and focused. You can operate from the eye while reaching out plucking from the melee those things that you absolutely must get done. You can focus on critical tasks and let the storm rage around you until, like it always does, it calms down and fades away.

An Executive Compensation Tornado

Year-end is approaching. The company just hired a new CEO, and at the same time the Board has brought in a new compensation consultant. A month ago your company announced that it would be acquiring a major competitor that has operations almost exclusively in countries where you don’t. The performance equity plan from three years ago will pay out at around 75% at the end of the year and the system you use only partially supports this transaction. Since the end of the last quarter you have had changes in three of your top five institutional investors. At least one of them uses an evaluation methodology you are not yet familiar with. On top of everything else you have been told that your HRIS system is going into lockdown for 6 months for an upgrade. Inevitably, the IRS has just rolled out another of its “almost year-end” rule clarifications.  Have I mentioned your compensation analyst is out on maternity leave and the SVP of HR is going through their first year-end at your company? The tornado is almost upon you (again), what will you do? 

1. Remind yourself of your priorities.
2. Focus on your priorities while reaching out to those around you for assistance.
3. Get the key items done while keeping an eye on the lower priority items. In short, do the most important things well, rather than doing everything poorly.

As we move into the final quarter of the year and prepare for the maelstrom that is typically called year-end, it is important to have a strategy to come out the other side as unscathed as possible, while still fulfilling the necessities of your position. Of course, afterward there will be a great mess to clean up. The difference is you will be able to address the mess instead of being part of it.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues, Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter @Performensation and @SayOnPay

Compensation: The Word May Not Mean What You Think it Means

What does “compensation” mean? Those of us who work as compensation professionals consider it a positive, professional  word that speaks to people getting paid for services, effort or performance. Like many words, compensation actually means something else entirely.

From the Collins World English Dictionary

1.     the act or process of making amends for something

2.     something given as reparation for loss, injury, etc; indemnity

3.     the automatic movements made by the body to maintain balance

4.     the attempt to conceal or offset one's shortcomings by the exaggerated exhibition of qualities regarded as desirable

5.     biology: abnormal growth and increase in size in one organ in response to the removal or inactivation of another

Take a minute and read those definitions again. None of them are uplifting and positive.  In fact, each and all of them make my job feel a little unseemly.

Our starting point is a significant hurdle. If people have studied for the SAT vocabulary section (if they even still have that), they are likely to have different definition than ours. We assume that because we mean well and work to create fair pay programs, that people will just adopt our definition. Before you believe our own hype, ask yourself if your “compensation” program ever falls into any of the above definitions.

A.   Are you paying people to make amends for something?  Are your employees being asked to do something so difficult or distasteful that you owe them some sort of monetary apology?

B.   Are you providing reparations? Is your work-life balance so out of whack that pay is actually a replacement for lost time with family or passions?

C.   Are your increases and reviews so automatic that they have become just a form of balancing and correction for unexpected movements?

D.   Is your company hiding shortcomings by distracting people with extra money? If you looked from the outside would your pay be seen as “too good to be true”?

E.   Has your pay (especially for executives) increased abnormally in size in response to the lack of something else? Could you be paying your executives more than you should simply because of a lack of data or a weak Board of Directors?

This is a case where our actions must be far louder than words. We should compensate our employees not to apologize, but to thank them. Our employees should understand that we place as much value on them being emotionally, mentally and physically healthy tomorrow as we do about them getting the job done. Our pay programs cannot be defined as automatic adjustments. We must put real thought and effort into making our own performance more like a dance move and less like that head jerk that happens when you start falling asleep while sitting in an airplane seat. We must address our issues with real solutions and understand that money works only if everything else works, not in spite of it. We need to pay based on the strength of our firms, not because of poor information or limited resolve.

Compensation may not mean what you think it means, because your actions may not be reflecting your intent. Start by assessing your own definition of compensation versus the reality of what you are delivering to your staff. Once your words and actions are in sync, it will be far easier for employees see beyond their paycheck and get engaged in their jobs.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues, Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter @Performensation and @SayOnPay

Either Put Me in Charge or Let Me Be a Lackey. I'm Fine with Either, But I Can't Do Both.

A friend recently updated their status with the title to this article. Ironically, I saw it just as I got off a call with a client who  was explaining that somehow she was expected to serve as both the strategic visionary and tactical processor for her company’s multi-national LTIP programs. The simple request in my friends status update seemed reasonable, well thought-out and familiar. As we traverse the crags of an uneven recovery, companies have found it difficult to create compensation plans that perform as expected. As budgets continue to be bound by uncertainty, companies have been unwilling, or unable, to hire tactical help. This leaves compensation departments in a quandary. When should we strategize and when should we make things happen?

For those of you who are feeling like your personality and activities are being split down the middle, I'd like to suggest a small exercise. Take 4 hours and block it off your calendar. (I know you don’t have 4 free hours, but trust me this may really help.) Let’s just pretend you blocked off 10:00am-2:00pm tomorrow.

• 10:00-10:30: Spend the first 30 minutes making a list of every strategic idea you would address if you were in charge of everything, but not responsible for doing any of the tasks. Rank based on compliance, urgency, cost and benefit.  Call this your “Strategy List”.
• 10:30-11:00: Focus the next 30 minutes making a list of every process you would improve if you didn’t have to worry about planning, administration or reporting tasks. Rank based on compliance, urgency, cost and benefit. Call this your “Tactics List”.
• 11:00-11:30: The next 30 minutes make list of all the tasks you would do if you were never interrupted by other things. Think about the minutiae and get granular. Rank based on compliance, urgency, cost and benefit. Call this your “Tasks List”.
• 11:30-12:00: Go through the Strategy, Tactics and Tasks lists and mark each item that ONLY someone with your skill set or better (not you) can get done. Then mark those that can be done by someone with a lesser skill set.
• 12:00-12:30:  Look at the remaining items. These are the things that you believe ONLY YOU can accomplish. Is this list realistic? Can anything be moved to one of the other lists? When this list is down to two or three items, you are set for a promotion.
• 12:30-2:00: Go have a nice lunch with a friend.  Celebrate that you just figured out how to put yourself in charge or be a lackey.

A very smart manager once told me “irreplaceable is unpromotable.” She made it clear that as long as I was the only one who could do certain things, I would remain the only one doing those things. Turns out, it’s basic logic. If you want to stop doing things on your list, you must first figure out a way for others to do them (or to make the items go away altogether.)

Look at your lists again. Which things do you really want to be doing? Of everything that’s left, can you train, hire, outsource, bring in consulting or temporary staff to get them done? If yes, put together a business case for exactly that. If no, keep working on your lists until the answer is yes. I have seen people change things in a week or two and I have seen cases where the changes were so large or numerous that it would take 6-12 months to get them done. I have never seen company where the changes were impossible.

The key is this: If you want to be in charge, the first step is figuring out how to be in charge. Regardless of whether you want to be a lackey or in charge, the first step is to define what those terms mean. The next step is to clearly communicate to those who can help make the change. This may be your boss, colleagues, or the staff working for you. The key is to show what’s in it for them (WIIFM). If they see the personal benefit, they may be inclined to help.  If you communicate things as a plea for help, you may get short-term traction, but nothing will really change.

So, put yourself in charge or make yourself the lackey, but only you can ensure that you’re not both.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues, Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter @Performensation and @SayOnPay

How Much to Keep Your Mouth Shut?

How does compensation interact with reputation? Let me count the millions of ways.  The calculus of reputational damage can be more intertwined than we account for in our current severance agreements.

Recent news articles have discussed comments by Yahoo’s departing CEO, Carol Bartz. Famously, or infamously, she declared in a media interview that she disagreed with her termination and felt that perhaps the company had not been completely fair. You can read the far more strongly worded comments here. During this same interview, she also resorted to a little playground-level name-calling when discussing Yahoo’s Board.

We’ve all walked away from a company that wouldn’t listen to us. Maybe the company missed targets, or made clients angry, or utilized ineffective compensation programs as a result of ignoring the amazing insights we provided. We walked out the front door and silently thought, “If only people knew how dysfunctional that place was.” Then we thought of a few other things: 1. The amount of severance pay we may lose if we chirped about the place; 2. The difficulty of getting hired in an industry where you are known as public complainer or, even worse, oath breaker; 3) The fact that all the complaining in the world won’t put food on the table. Then, we shut up and moved on to our next position.

After the initial press barage it was subsequently reported that Ms. Bartz, like most executives (and many non-executives), has a non-disparagement clause in her contract. In other words, she may be in breach of her separation agreement as a result of a few words. It has also been reported that her separation package is valued at around $10,000,000 (that’s right $10 MILLION.)  Given that figure, and the fact that Ms. Bartz’s negative comments may have been less than 10 words; we are talking about $1M a word!

Maybe she can afford it. Carol Bartz made somewhere in the range of $50-60M over the past two or three years. $10M won’t bankrupt her, but it isn’t chump change either! She is a smart professional and likely understood the impact to the company and the potential impact to herself when those comments were made. Either she is willing to risk the severance pay, or she believes the company won’t stop payment on a pretty big check.

But, here’s the issue. If the company decides not to pay her severance, aren’t they also admitting that they no longer have any control over future comments? Would this new freedom result in far stronger, or more detailed, comments that can put the company into an even worse light? Is a better corporate strategy to publicly say nothing, but privately remind her that future negative statements will result in the cancellation of payment?

Some say that a contract is a contract and any further payments would not be in the best interest of the company, or its shareholders.  Others say that rigid adherence may be trumped by discretion if it can lead to less risk and exposure for the company. Either way, our compensation playbook is typically not designed to address this type of situation well.

If a company makes it a strict practice to withhold pay after a disparaging remark, then it must understand the risk of an ex-executive continuing to speak their minds after the payment has been revoked. If a company is willing to let one comment slide unpunished, are they also willing to let three comments slide?  How about six?

Of course, our exit interviews need to reiterate the rules around severance pay, but perhaps we are missing a crucial risk management component. Maybe we need to make an effort to calculate the potential cost of an executive speaking out of turn. Maybe we need to simply ask executives, “How much will it take to keep your mouth shut?”  If the amount is less than the payment planned, we are fine. If not, we have some interesting reputational calculus to work on.

How would you deal with a situation like that faced by Yahoo? Revoke, Pay or something more creative?

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues, Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter @Performensation and @SayOnPay

We is the Enemy

There is an 800-pound gorilla in the room.  Look in the mirror.  You are the bad guy. 

How did this happen?

Businesses have to wonder when they suddenly sprouted horns.  Sure, all employers make mistakes at times, and some make really big ones.  But what has private industry done to deserve this current level of apparently consistently adversarial attention from the American government?

Health care programs supplied by the private sector have been criticized and demonized.  Congressional legislation has displaced independent board of director authority over many executive pay programs.  It is the new law.

DOL has a master plan ("Plan, Prevent, Protect") to require employers to prove their efforts to comply with laws affecting pay, OSHA, discrimination, and other areas.  The steps are part of a broader campaign to stimulate more federal and state enforcement agency investigations, such as the recent Wage Theft bandwagon.  That is perfectly legal and proper.

More than a year ago, readers were alerted to a suggested minor recordkeeping change to the FLSA regulations that would create onerous documentation and "right to know" communication requirements for all worker classification determinations.  That is perfectly legal and proper.

The Wage and Hour Division of DOL has partnered with the ABA litigation bar for referral of Federal overtime complaints to private attorneys who then can access government files to pursue either individual or class action suits.  That is perfectly legal and (while irregular) can be defended as proper.

OFCCP has a new set of Affirmative Action Plan proposed regulations out since April with its comment period due to be closed in June dealing with the same kind of thing.  Federal contractors would be required to supply documented evidence to back up any physical and mental job requirements that might disqualify a protected applicant.  That is perfectly legal and proper.

In early May 2011, DOL announced an application (app) for iPhones and iPads that goes around the employer to address the worker directly.  It establishes a direct channel between disgruntled employees and DOL WHD enforcers and litigators.  "This app will help empower workers to understand and stand up for their rights when employers have denied their hard-earned pay," said Secretary Solis. This equips them with provenance to support overtime investigations, question pay determinations and maybe even stimulate class actions suit, due to DOL's deal with the ABA litigation branch.  That is perfectly legal, if rather aggressive.

Many people in the trade are concerned by all these legal and proper actions.  Some see all these actions as completely consistent and progressively more serious government attacks on legitimate employer practices.  Others see these as long overdue steps to curtail abuses visited on workers and taxpayers.  Both sides agree that just because something is legal doesn’t make it automatically proper.

Some might maintain that employers as a class have sinned grievously and all must be ruthlessly scourged and forced to do full restitution for all offences, the innocent punished equally with the guilty.  Others might say that the solutions are more harmful than the actual problems and will simply waste immense sums of money attempting to catch a few guilty parties.

Regardless, we did something that caused this confrontational environment.

The one single thing no observer expects to see is government assuming the cost of the interventions they encourage and the fixes they prescribe. One way or another, private enterprises will pay the price.  HR departments, compensation staff and total reward professionals will be deeply involved in the corrective solutions and compliance responses to the issues we created.

We did something wrong… probably lots of things wrong.  What do you think it was?  Please supply your proposed lists of employer offenses against American society, because we can’t fix problems we won’t talk about. 

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.) and will express his opinion on almost anything.

Image courtesy of londonhotelsinsight.com

Are Your Compensation Goals Getting You to the Top of the Wrong Mountain?

So often we see companies whose executives are paid handsomely only to falter shortly after.  How does this happen? Goals were apparently met. Success seemed to have been achieved. But the final result of the goals and success is a large payout followed by a sharp corporate collapse. Are we doing something wrong when we incentivize our executives?

As the evolution of Dodd-Frank and mandatory Say-On-Pay quickly impacts executive compensation, more companies are incorporating pay for performance into their executive packages. I am a huge proponent of performance-based pay. When the ‘Big 3” of compensation: design, execution and communication are properly addressed in performance plans, they represent a healthy future for compensation programs. Unfortunately, when the Big 3 are not handled correctly, these programs may fail even more spectacularly than some of our past compensation debacles.

Designing your plan requires truly understanding where the company wants to go and what compensation instruments are required to get there. 

The main goal of any compensation program is like a mountain on the horizon. Like a mountain, your key goal must be visible from many angles. It must be large enough to be seen from a great distance. It must be a challenge to reach the top in order to ward off those who do not have the strength, fortitude or passion to earn the summit. Your final goal may be reached through the use of multiple or layered compensation instruments provided over several years.

Performance compensation must be specific enough to keep people focused and flexible enough to allow for modifications as the environment changes.

Climbing a mountain is a monumental task. You start in the flatlands on a basic trail. Like all trails it is never straight and often twists and turns through trees and valleys. At each break in the trees, you must reorient yourself on the mountain and redirect your efforts to reach it. As you progress, you will undoubtedly summit smaller hills. Some will be useful and lead to higher plateaus. Others will prove to be obstacles that had to be passed in order to get the final mountain. When you finally reach the base of your final mountain the summit can often be obscured. Therefore, the path must be carefully mapped since the final climb will be very hard. 

At this point many of you are thinking, “Okay! Enough already, I get the metaphor.” You already a performance compensation program in place. It seems to be working. Results are coming in and your executives are on board. You have progressed to a point where people feel close to their goal. What’s the problem?

As you close in on your goals, perspective becomes more difficult and more important.

The fact is being near your goal at the base of the mountain is the most dangerous place to be. This is not because of avalanches, although they may occur.  This isn’t because of a lack of the right equipment. (You have planned for this climb and, undoubtedly, made sure you have the right tools.) The base is dangerous because of the excitement of reaching the top and the lack of perspective when you are so close to reach your goal.

Regardless of the plan design and compensation instruments used, execution and constant communication are required for success.

Once you start climbing the mountain you need focus on the work directly ahead of you. Each step is a challenge and you may not have a view of the summit for long periods. You may be following a path that was roughly defined long ago, but does not provide the specific details required for your ascent. Without direction, you may create new paths and trust that as long as you go up, you will succeed.  This can result in reaching the top of the mountain only to find yourself gazing across the vista only to realize “your mountain”, the one you have been aiming for all this time, is actually the next summit over. For all of your passion and effort, you have actually climbed the wrong mountain. Getting from the top of the wrong mountain to the top of the right mountain is something few of us of have the time or passion to endure and failure becomes a legitimate option. This lack of perspective, especially at critical times, requires someone be watching from a safe distance, where perspective can still be had.

Compensation pros must retain perspective as performance goals come within reach.

Compensation professionals must serve the role of guide and navigator. Our programs must be clearly designed to get people to the correct summit. We must ensure that each step is executed in a manner that keeps our employees safe and moving upward. Our communications must be clear and specific. We must be cognizant of potential missteps and confident enough to redirect our team as needed, even when the euphoria of an imminent summit is before them. We are not always part of the team that plants the flag at the summit, but we are absolutely essential to ensuring that the flag is planted on the correct summit.

Dan Walter is based in San Francisco, CA and is the President and CEO of Performensation an independent compensation consulting firm focused on the needs of companies not in the Fortune 1000. Dan’s unique perspective and expertise includes equity compensation, executive programs, performance-based pay and talent management issues, Dan is on the board of the National Center for Employee Ownership, helps create ShareComp, a virtual conference addressing equity compensation and founded Equity Compensation Experts a free networking group with more than 1,100 members. Dan is also in high demand as dynamic and humorous speaker. Connect with him on LinkedIn or follow him on Twitter @performensation.

Icing is Nice, but Frosting is Essential (Compensation is like Cupcakes)

How is compensation like a cupcake? Is it just that people crave it, or is it something far more fundamental? I’d like to suggest that it is in understanding the important difference between frosting and icing.

Think about generic plans created from stale boilerplate documents. Or, communication programs which teach little and inspire nothing beyond high-level overviews or lengthy legal documents. Or, even sales compensation plans promising commissions and bonuses, but don’t drill down into the true cause and effect of the sales process. These are examples of programs plagued by the “icing on the cake” excuse.

My wife loves cupcakes and considers herself somewhat of a connoisseur. Throughout her cupcake journey, I have studied the cupcake more than I care to admit.  When creating the cupcake there are the requirements and the extras. The obvious requirement is the foundation made up by the cake. It can be comprised of a wide variety of substances and one or multiple layers.  The common extras are the icing decorations that give the cake its unique character.  These are usually flowers, designs and piping that are strategic placed and serve the purpose of making the cupcake pretty and personalized.

However, there is confusion regarding the not-so-obvious essential, which is the frosting.  Frosting is the layer that is part of every bite. While frosting does look good, that’s not its true purpose. It helps fill-in or cover-up a cupcake’s deficiencies. It moistens the dry and sweetens the bland cake foundation.

I recently spoke to a friend about the stock options her company offers. We spent 10 or 15 minutes discussing the plan. We talked about how and why stock options work and some of the risk reward scenarios that can unfold. We also discussed how her options could have value. At the end she said, “These are great, why doesn’t my company want me to understand them?  What’s the downside for them?” I responded, “I am sure they want you to understand them, but sometimes that part of the equation is seen as icing on the cake.” I realized immediately it was a terrible metaphor.

Icing is something a cupcake can live without. Understanding the purpose and potential of complex compensation is far more like frosting. Without it your programs simply won’t work. A sales compensation program must fully account for the underlying drivers of success. A generic plan is like a carrot cupcake without the cream cheese frosting. In other words, it looks like health food, not dessert. In our attempt to navigate the increasingly complex world of compensation, we often forget to finish our cupcake.  Is it any wonder that our employees are not interested in eating it?

Spend the additional hours or money it takes to finish things up and frost your compensation plans.  We might not always have time for the pretty icing flowers and trim, but that does not give us an excuse to skip the frosting. When we’re busy we sometimes make ourselves feel better by reclassifying essentials as “icing” or “nice to have”; when they are truly “must have.” If we approach compensation like cupcakes, we may find that our employees line up for more, rather than complaining about whatever they get.

NOTE: Tomorrow, April 26, 2011 I will be writing a guest article for Robin Ferracone’s Executive Pay Watch Blog at Forbes.com. I will be discussing transparency for proxy advisory firms. Come on over a take a look! http://blogs.forbes.com/robinferracone/. 

Dan Walter is based in San Francisco, CA and is the President and CEO of Performensation an independent compensation consulting firm focused on the needs of companies not in the Fortune 1000. Dan’s unique perspective and expertise includes equity compensation, executive programs, performance-based pay and talent management issues, Dan is on the board of the National Center for Employee Ownership, helps create ShareComp, a virtual conference addressing equity compensation and founded Equity Compensation Experts a free networking group with more than 1,100 members. Dan is also in high demand as dynamic and humorous speaker. Connect with him on LinkedIn or follow him on Twitter @performensation.

Curiosity May Kill Cats, but It Saves Compensation Professionals

Do you ever wonder why you are reading this article? No one is paying you to read this. Your boss will probably never even know that you read it. Why take a few more minutes out of your busy day for something that only you truly value?  The answer is simple. You are a curious person. (Fair warning this is a “soft” article with no statistics or compensation rules)

We are always told that curiosity kills cats. The theory is that it gets cats into trouble that eventually cause their demise.  I would augue that it does the opposite for compensation professionals. Compensation is as much an art as it is a science. This means that even though there are great ways to do almost everything, there are very few absolute ways to do anything. It is curiosity that can make, or break, someone in our profession.

We all must keep up with rules and regulations. This requires less curiosity than it does persistence. Sometimes new rules require us to change processes, communications or procedures, but we are seldom forced to change our compensation philosophy or basic structure. Curioisty is much bigger than compliance.

Curiosity is the key to evolution. It’s not just learning about your peers or industry trends. It is about digging in and figuring out how you can apply a mix of new knowledge and best practices to give your company, its shareholders and employees an edge. The need to know new things and explore different paths is what allows you and your company to stay ahead of the competition.

The best compensation departments aren’t checking to see if their programs are correct.  They explore new paths so they can be better. Many of us look to justify our past decisions.The very best look for why they aren’t making new decisions. Given a choice to act on what they already know and the potential for new information and improvement, they choose improvement. These are the companies who create the next “best thing.”  They are also the professionals who we find publicly celebrating, instead of defending, the results of their programs. 

So how is curiosity inspired? While it is against our professional nature, curiosity is seldom motivated by compensation. It is most often motivated by the personal and professional change it can bring. You and everyone on your staff want to know that your ideas count.It is easy to create this culture.

Provide an open environment where the following phrases are outlawed:

1)     We’ve never done it that way.

2)     That probably won’t work.

Replace those curiosity-killing statements with the following questions:

1)     How would you see that working for us?

2)     Can you do a test run and show me the impact?

Once you have an environment where curiosity is valued and recognized, your staff will instantly seem much smarter and more engaged. You will find yourself working amongst solution creators and game changers and your own work will improve as well. Curiosity is the single catalyst that costs nothing and inspires anything. It may not be ideal for felines, but it does wonders for compensation professionals.

Dan Walter is based in San Francisco, CA and is the President and CEO of Performensation an independent compensation consulting firm focused on the needs of companies not in the Fortune 1000. Dan’s unique perspective and expertise includes equity compensation, executive programs, performance-based pay and talent management issues, Dan is on the board of the National Center for Employee Ownership, helps create ShareComp, a virtual conference addressing equity compensation and founded Equity Compensation Experts a free networking group with more than 1,100 members. Dan is also in high demand as dynamic and humorous speaker. Connect with him on LinkedIn or follow him on Twitter @performensation.