"We design our compensation practices to be competitive with the external market and to maintain internal equity."
"We design our compensation practices to be competitive with the external market and to maintain internal equity."
Let data work with its ilk – the computers.
Let humans work with theirs – other humans.
Want to be in human resources in 20 years – major in human beings today.
There is a conversation making its way (and Paul is, as usual, at its leading edge) through the HR interwebs and other forums of professional conversation. Here's the question that seems to be at its core: Have we in the people field become too enamored with technology, with analytics, with transactional efficiency, etc. and lost sight of the fact that we are in the business of human beings?
Not sure that this question is top of mind for those of us in the compensation space, though. We pride ourselves on our statistical acumen, our spreadsheet modeling and manipulation capabilities, our ability to sift through and make sense out of the immense quantities of data required to manage and updated pay structures. And that's not wrong. The employment relationship may not be an entirely financial transaction, but that is a big piece of it for most people. Getting the math in that financial transaction right is necessary and important.
But not sufficient.
Designing and implementing compensation programs that work -- that do the right things with the money used, for the organization and for the people -- will always require that the practitioner understand the humans at least as well as the data. The art as well as the science. The challenge is that many of us -- and I confess I was no exception -- are attracted to the field because of the "certainty" and the black-and-white aspect of working with data, compared to the messiness of dealing with humans. (I lasted less than six months in my only-ever generalist role. I couldn't WAIT to get back to my spreadsheets.)
Really, though, we are only kidding ourselves.
If we want to grow beyond the role of an analyst, earn the right to be considered (and not just titled) an advisor or consultant or business partner in our field, we will recognize that the data is just a tool and that we only bring real value to the table when learn to go above and beyond the data. When we use it as a tool to make work work better for our organizations and the people who contribute to them.
Spreadsheet acumen and data analysis are important, but these will be neither our distinguishing competency nor where our job security lies as the machine age marches forward. Learning to interpret the data, tease out the interesting stories it tells, and then tell those stories in a way that helps your organization and its leaders make better people decisions -- that's where your sweet spot is.
That's what I'm thinking. You?
Still trying to get your head around the people part of compensation? First thing you have to know is that Everything You Do (in Compensation) is Communication. Ann Bares collaborated with Margaret O'Hanlon and Dan Walter on the ebook; find it at www.everythingiscommunication.com. Ann is the Founder and Editor of the Compensation Café, Author of Compensation Force, and Managing Partner of Altura Consulting Group LLC. Ann also serves as past President of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and is a member of the Advisory Board of the Compensation & Benefits Review. She earned her M.B.A. at Northwestern University’s Kellogg School, is a foodie and bookhound in her spare time. Follow her on Twitter at @annbares.
Image "Collage Of Business Exp" courtesy of stockimages / FreeDigitalPhotos.net
Current American federal law only compels equal pay for practically identical work. The usually highly imbalanced disproportional pay to protected classes is the big "hidden" issue that confuses people when they confront the issue. It is different in Canada.
While Canada requires pay proportionality, the U.S. does not. Here, tiny distinctions can justify large pay variances. Minor tweaks in either job title or specific work content elements or educational criteria can result in relatively immense differences in pay. And when the Stateside adverse impact falls disproportionately on protected classes, it can be justified by "the market" and "internal equity" defenses. Grossly disparate treatments may not be right or proper, but they remain legal here.
Note that before Canada finalized its Bill of Rights, they sent analysts to attend American compensation seminars on pay equity. They told me this is their usual pattern, to let America screw things up first and then learn from our mistakes. Accordingly, they require “equal pay for work of equal value” instead of the U.S. “equal pay for equal work” standard within enterprises. Canada requires comparable pay for comparable content while America demands equal pay only for identical content.
This is just another example of the apparently minor but substantially immense differences between American and Canadian labor laws. Even though we started earlier, we still remain far behind our neighbors to the North in the pay equity arena.
Partly as a result of the continuing disparity between Canada and the U.S. in gender equity issues, Equal Pay Day was created in 1996 by the National Committee on Pay Equity where I had a long history of prior involvement. Their first Executive Director and I were the only Americans to address Canadian Crown Corporations in an Ottawa Labour Canada conference on the topic many years earlier. Unfortunately, both the NCPE and their creature, the DOL Women’s Bureau, continue to pound on the broad and misleading but emotionally engaging 77% to 78% factoid that obscures the real issue.
More information will not necessarily solve the gender equity problems in America. OFCCP disclosures compelled under the new pay transparency rules for government contractors will not shed much light. First, because they must use SOCs, which might not map clearly for understanding outside the federal ranks. The generally broad SOC occupational categories will not always match up with internal job titles or specific employer classification systems in ways that assure identical common agreements. Differing terms will create legitimate problems when comparing apples and oranges. Second, the industry matches under the rules will probably also use the new federal NAICS code which is completely inconsistent with the old SIC industry coding approach sanctified in history. SIC industry codes are still retained by credit agencies, pay surveyors and the SEC (whose excuse is that they are not a statistical organization and thus exempt from the requirement for such federal agencies to abandon the SIC codes). The two systems have contrasting base approaches. SIC codes were ranked by 1930s employment demographics and address what is made, handled or delivered. NAICS codes are assigned by the process applied by the enterprise to make, handle or deliver the product or service. Transitioning to new industry codes will also be troublesome but inevitably essential, since pay data tends to be highly specific to industry. Those are all complications that obstruct pay equity comparisons.
Employers whose whose self-audits reveal pay equity issues may want to review a guide which is a slight rewrite of the pamphlet “Job Evaluation – A Tool for Pay Equity” that I wrote for NCPE many years ago. Most of this will fall on deaf ears, however, since maybe only one comp pro in 50 knows enough to even understand the causes of the historical problem, much less how to implement effective palliative measures. If you are one, you have a high future earnings potential... if America ever embraces the concept of gender-free pay proportionality.
E. James (Jim) Brennan is an independent consultant with extensive total rewards experience, specializing in job evaluation, market pricing and pay budget distribution. After HR corporate jobs in chemical/pharmaceutical manufacturing, he consulted at retail, government, energy, IT, tax-exempt and other industries throughout North America before becoming Senior Associate of pay survey software publisher ERI until 2015. A prolific writer (author of the Performance Management Workbook) and speaker, he gave expert witness testimony in many reasonable executive compensation cases both for and against the Internal Revenue Service. Jim also serves on the Advisory Board of the Compensation and Benefits Review.
Image "Balanced Weight Scale" courtesy of scottchan / FreeDigitalPhotos.net
Outside of recruiting, Human Resources has not had much of a chance to invest in social media for communication, let alone be creative. If you are itching to kick your communications into the 21st century, I am seeing signs of change, at least by those who can afford to invest in change. I thought you'd want to take notice.
Mobile apps are becoming widely available among benefit providers. Since I am using my smartphone for just about everything, and have it with me everywhere, why not pull it out of my pocket to show my Member ID? It beats fiddling around in my wallet (if I can find my wallet in my purse). And if my daughter falls on the soccer field, better to pull up the neighborhood location of an Urgent Care Clinic that I know will be in-network (while I am trying to help her into the car) than worry my way to the emergency waiting room.
Practical solutions like these do not have age-preferences the way other social media like Twitter or Facebook do. You don't have to be 28 to enjoy feeling the confidence of having critical medical insurance support anywhere, at any time.
Which is all preface to what I want to report is happening in the compensation part of the world -- last week Mercer announced an app to enable employees to, "explore career paths with their current employer." Called "Career View," it appears to be competency driven. "In addition to providing employees with essential information to make sound decisions about their career progression, it can feature short video clips of colleagues discussing their jobs with an invitation to contact them should the role be of interest to other employees as they map their career paths."
What's all the hubbub about? I created a competency-driven career path framework like Mercer is using for Vanguard once upon a time. It was very satisfying to do because it was a way of showing employees that they had transferable abilities that could bridge them into new career areas. But this essentially three dimensional process (I can grow my current skills, I can move up in my own specialty area, I can use my abilities to bridge into another career area) had to be explained on paper at that time. Today, using an app, the navigation and interactivity is not only available to me, the eager rock star, but I can personalize it and keep it in my back pocket to pull out when I'm hanging at Starbucks.
Don't kid yourself, you will probably not be jumping into the app development world any time soon, as they take time, money and real skill to do well. But there are customizable options becoming available right now that could make you a real hero with your employees. Mercer happens to be the first out of the pack in the career development world, but that just means there will be lots more options, including some version of comp, very soon. Think incentives or sales compensation, for instance.
Good communication in 2015 is designed to solve problems (fast), be interactive and provide value so the user continually comes back for the solution. Convenience is addictive -- and it would be to Human Resources benefit to become a bit addictive, don't you think?
Summer reading or influence building? Get yourself a copy of Everything You Do (in Compensation) Is Communication @ www.everythingiscommunication.com, the convenient website where you can grab our popular eBook. Margaret O'Hanlon, CCP collaborated with Ann Bares and Dan Walter to create this DIY guide to compensation leadership. Margaret is founder and Principal of re:Think Consulting. She brings deep expertise in compensation, career development and communications to the dialog at the Café. Before founding re:Think Consulting, Margaret was a Principal at Towers Watson.
Last week Jim Brennan wrote about the recent FedEx legal ruling where a driver was misclassified as an independent contractor.
Almost simultaneously the California Labor Commissioner’s Office declared the same thing with an Uber driver. Uber is planning to appeal. In a statement, the company said the decision was “nonbinding and applies to a single driver.” They said individual cases about worker classification in at least five other states, including Georgia, Pennsylvania and Texas, have resulted in rulings that categorize their drivers as contractors.
So where does “contractor” end and “employee” begin? A refresher: The IRS has a 20-factor test to determine this. Most of the factors have to do with the degree of control the company exerts over a worker. Telling workers how to do their jobs--via training or active management--is typically one of the identifiers of an employee relationship. This is something a manager can't do with an independent contractor, at least not without worrying about the legal fallout.
The Uber case could start a domino effect that could potentially threaten the business models of the dozens of popular online labor exchanges that make up the so-called “on-demand” economy. With Uber valued at $18 billion, Airbnb valued at $10 billion, and new imitators popping up daily, the business world is clearly infatuated with the middleman model. Venture capitalists have invested $9.4 billion into these businesses since 2010.
Here are some of the new labor exchange delivery and service-work suppliers that have popped up in the past few years. There’s Drizly and Klink, which deliver booze. There’s Washio, for laundry and dry cleaning. There’s Homejoy for house cleaners; Swifto for dog walkers; Soothe for masseuses and Airbnb which allows people to list and book unique accommodations around the world.
So much for freelance work at the lower end of the spectrum. Work required here is mostly unskilled, requires management and workers should probably be classified as employees.
Let’s look at the other end of the spectrum. Here we find highly skilled workers doing software development, computer programming, marketing studies, writing, editing, photography, digital content, etc. Elance, Freelancer, Guru, Odesk and other labor exchanges are where you find these workers. Their work is not managed and their hours are not dictated. They even negotiate their own rates. They are truly independent contractors.
Our legal system is set up so that a worker is either an employee or an independent contractor --- one or the other.
In the real world, workers actually fit into three buckets. At one end of the spectrum there’s the truly independent contractors. At the other end are undisputed employees. But then there’s the group in the middle — a gray area where the line blurs between employee and contractor.
The fact is our labor laws haven’t caught up with the “on demand” economy. Even a judge underscored this when he described our current employment categories as “woefully outdated”.
The solution may have to be a compromise: a new class of workers, protected by laws that take into account emerging business models. Some advocate a new category of worker — the “dependent contractor” --- that extends some protections to those who take on project-based work but have little leverage or power in their work arrangements. Germany and Canada have special protections in place for such workers. And in the UK, Prime Minister David Cameron appointed a “freelance czar” in 2014 to help the country determine how best to support workers in nontraditional work arrangements.
This issue is not going to go away. Although the percentage of independent contractors has remained fairly constant for decades at about 10%, according to Intuit by 2020, more than 40% of the American workforce, or 60 million people, will be freelancers, contractors and temp workers.
Does anyone have any ideas on how to fix this?
Jacque Vilet, President of Vilet International, has over 25 years’ experience in Human Resources. In her current role she works with start-ups and multinationals on both domestic and international HR issues including compensation, learning/development, talent acquisition, workforce planning and mergers and acquisitions. Jacque has an M.S. in Psychology and an MBA from Southern Methodist University. She has been a speaker at conferences in the U.S., Asia and Europe. She is also a regular contributor to various HR and talent management publications and conducts frequent webinars.
Not every employee is capable of selling products or services to potential customers. The selling process requires an employee to possess a particular set of interactive and persuasion skills, as well as having a compatible personality profile (garrulous, self-confident, unafraid of rejection, etc.). While some employees enjoy the challenge, most want no part of it and only a minority are neutral about the idea. For those tasked with a selling job it’s typically a reflection of an individual personality that would generate success or struggle.
For compensation practitioners having the right person involved in the selling process can be more important than the compensation program itself, because dangling potential rewards in the face of the wrong person can be a waste of money and a lost business opportunity.
It's All About Motivation
Success in the selling process depends upon the right motivating elements aimed at the right employee personality. To do this correctly within a sales compensation program requires the design to take that into account, to focus financial rewards toward whatever engages, whatever motivates the employee to perform in the manner the organization wishes.
Costly mistakes can be made when an organization assumes that all employees will react in the same fashion to the same stimulus.
Have you considered what motivates your sales employees? Chances are that not everyone would have the same answer.
Do you really want to reward the sale of a money-losing or low margin product?
Helping others or helping a cause can be reward enough for some employees.
Employees are proud to be associated with a particular product or service. They're always wearing the logo shirt and are the organization's biggest fans.
A certain level of performance would be forthcoming, no matter what financial rewards are offered.
For such employees, the game is always afoot. They enjoy breaking down barriers, solving problems and grabbing for the brass ring.
Sometimes this motivational factor is less about achieving company goals than simply doing better than other employees. Like a loose cannon these players may have their own definition of winning, which may not be synonymous with yours.
The takeaway point here is to understand what motivates your employees and then to place your rewards in front of them in a fashion that leads and directs their behavior.
Because if you design your incentive program with the wrong assumptions about what engages your workforce, you'll risk missing your targets, misspending your financial assets and perhaps not even achieving the required level of success - regardless of the money paid out in rewards.
Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations. He is also associated with several HR Consulting firms as a contributing consultant. Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation. He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a clowder of cats.
Creative Commons image, P1010016, by epugachev
Editor's Note: Today we are starting something new at the Cafe. With more than six years of content archived here at our site, we thought it might be fun to start mining that trove and share the occasional blast from the past with readers ... many of whom may not yet have been acquainted with us in the old days.
Today's Classic post was first published on July 23, 2009, when we were trying to manage our compensation programs in the aftermath of the subprime mortgage crisis through the uncertain path of economic recovery. While nearly six years have come and gone since then, the reality of planning in the face of uncertainty is -- for all intents and purposes -- here to stay, and the "science" of scenario planning still has a lot to offer.
Enjoy this Cafe Classic!
Compensation planning - like life in general - got a lot tougher this past year or so. And as we move into what has traditionally been the pay budgeting and planning months, many of us are wrestling with where (the heck) to take our reward plans amidst today's economic uncertainty.
Perhaps we can borrow a technique from the business planner's toolkit.
Scenario planning, pioneered by the military in the 1950's and long used by some of the world's largest corporations, involves identifying a small number of "scenarios", predictions or possible paths the future might take, and defining how to potentially respond or adapt to each of them. It should come as no surprise that recent times have brought a new surge in popularity for this particular planning approach.
An article in this week's Knowledge@Wharton, Eyes Wide Open: Embracing Uncertainty Through Scenario Planning, talks about this resurgence and covers some of the challenges involved in doing scenario planning effectively.
From the article:
Trying to gain a better understanding of the trends shaping the competitive environment has always been critical for managers. In the 1970s, scenario thinking first became relatively popular as a structured way to look ahead -- to understand new growth areas, anticipate risks, spot opportunities and build a long-term vision. Perhaps most notably, Royal Dutch Shell used the approach to look more broadly at the trends and developments that could impact the price of oil and develop stories that could challenge management perceptions. Since then, however, companies of all sizes and in many industries have picked up the practice, particularly at times of crisis or dramatic change.
George S. Day, a professor of marketing at Wharton and co-director of the Mack Center, also has witnessed the recent rise in scenario thinking firsthand. "What has changed to make scenario planning so timely? Obviously uncertainty is way up. This is the main driver, because when conditions are stable it's easier to live with momentum and the projections we normally use," he points out. "The challenge is that when things are very uncertain we need to think differently, because what we project based on current momentum may be the least likely outcome. We need to start thinking about the unthinkable scenarios -- and what's new today is people are finally figuring out how to do it well, in an environment with a huge amount of uncertainty."
My point? Simply this question: Are there elements of scenario planning that we - as a profession - should be embracing as we try to position our reward plans to support success in a future that is difficult to predict?
Let's face it. The days of simply plugging a new budget number into our compensation program and rolling it forward with a few tweaks are behind us. Looking forward, we may need a dramatically different process that considers our reward structure against the possibilities the future may throw at us ... and asks questions like:
What are the boundaries of possibility for our organization in the coming year ... and beyond?
What might the possible scenarios mean for how we manage and reward our employees?
What direction should/would we move our reward plans to respond to these realities?
What, if anything, do we do today to ensure we would be appropriately positioned to make these moves, if circumstances demand them?
I'm betting that there are some forward-thinking practitioners out there who've already incorporated questions like these into their compensation planning efforts. The rest of us ... time to learn up and get on board.
Ann Baresis the Founder and Editor of the Compensation Café, Author of Compensation Force, and Managing Partner of Altura Consulting Group LLC. Ann also serves as past President of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and is a member of the Advisory Board of the Compensation & Benefits Review. She earned her M.B.A. at Northwestern University’s Kellogg School, is a foodie and bookhound in her spare time. Follow her on Twitter at @annbares.
Image: Creative Commons Photo "It's about rules and strategy" by pshutterbug
I’m a father of young children. The days are nearing where Dr. Seuss books will begin to play a significant role in bedtime rituals I’m sure. Indeed, I’ve heard from a colleague of a brilliant idea for one of Dr. Seuss’ more famous books, Oh, the Places You’ll Go! She has asked each of her daughter’s teachers to inscribe a message to her daughter in a copy of the book. She plans to present the book to her daughter upon her graduation from high school with these messages of praise and encouragement from those who helped shaped her daughter’s life, learning, and exposure to the bigger world during her formative years.
What a brilliant idea as well as brilliant metaphor for the power of messages of recognition and appreciation reviewed again long after originally given. Such messages can become a treasure to dip into when projects may run long, customers are unkind, or a quick reminder of the value of your work is needed.
And then I read about the opposite possibility, captured in a new parody version of the book – Oh, the Places You’ll Go! (As an Adult). (Read it on Huffington Post.) To summarize, adulthood is nothing more than an endless cycle of work, home, work, home, work, home… The main character ages and saddens before the reader’s eyes.
While a parody, I think there’s some truth in this book. If we allow “work” to be nothing more than “the place I go to earn a paycheck,” then the sad parody of Dr. Seuss can become more of a reality than we might like to admit. Work has no bigger meaning, no larger fulfilling purpose for us. And that is truly a tragedy. We spend more time at work and with work colleagues than we do with friends and family. That time investment should mean more than a paycheck.
The good news is, this does not need to be our reality. We all hold the power to create more human workplaces simply through expressing our gratitude and appreciation for the contributions of those around us. How does that work? Acknowledging the efforts of others invests those efforts with meaning, purpose and value. These messages convey, “I see you. I see what you do. Your work matters. You matter.” That is deeply compelling.
When those messages of thanks are also tied specifically to the core values of the organization, recipients gain further and deeper understanding of how their efforts are uniquely linked to achieving what matters most to the organization. This communicates, “What you do is not only noticed and appreciated but is also directly linked to what we’ve set out to achieve as an organization.”
The most recent SHRM/Globoforce 2015 Employee Recognition Report, “Culture as a Competitive Differentiator,” noted this as two of the key findings – one linked to the individual benefit and one to the corporate benefit:
“Values-based recognition programs are helping employers create a stronger culture and more human workplace. Values-based employee recognition is seen as significantly contributing to bottom-line organizational metrics.”
Recognition and appreciation matters. The report shows:
“HR professionals are beginning to see tangible long-term value in building a best-in-class work culture, predicated on strong relationships, an interest in employee happiness, and a strong emphasis on employee development. As they seek to create these best-in-class cultures, a majority of respondents say they are seeing strong results from their recognition and reward programs. And again, the strongest results come from those programs tied to company values.
“Employee happiness is one of the strongest results seen from recognition, with 86 percent of values-based programs citing an increase in worker happiness. This is closely followed by improvements in employee relationships (84 percent) and in adding more humanity to the workplace, overall (85 percent.)”
We have the opportunity to change our own perspective on work, of course. But we also have the power to help improve the perspective others, through the simple Power of Thanks.
What kind of culture do you have at your workplace? Are recognition and appreciation key components of your culture?
Image credit: runonsentence
As Globoforce’s Vice President of Client Strategy and Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. He is the co-author of "The Power of Thanks" and his articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.
A big back pay package is scheduled for delivery soon. It was never a question of if but always just a question of how much FedEx Ground would have to pay to settle the private lawsuit over misclassifying its drivers as independent contractors. Turns out the price is almost a quarter of a billion dollars for one state alone.
"The class settlement will create a $228 million fund to resolve claims by over 2,000 FedEx Ground and FedEx Home Delivery pickup and delivery drivers. Some claims date back to 2000 and some extend through 2007."
Most outside observers realized that uniformed drivers using prescribed equipment and following clear employer directives on methods and procedures failed the independent contractor tests. But wishful thinking (and consequent massive profits) can be very persuasive, if quite costly.
"In this case, the Ninth Circuit said that FedEx controlled the drivers and that they were independent contractors in name only. It was a major blow to FedEx, which has fought about its so-called independent contractor model of operation for many years. The financial benefit of the contract arrangement was big. For years, FedEx has been able to shift to its drivers the costs of FedEx branded trucks, FedEx branded uniforms, FedEx scanners, fuel, maintenance, insurance, and more. Drivers were not provided pay for missed meals, rest periods, overtime compensation, etc."
The now-rich attorney representing the class said, “The $228 million settlement, one of the largest employment law settlements in recent memory, sends a powerful message to employers in California and elsewhere that the cost of Independent Contractor misclassification can be financially punishing, if not catastrophic, to a business.” Well, yeah!
"The amount of this settlement is said to be comparable to what the United States Department of Labor has collected in back wages annually through nationwide enforcement of wage and hour law during the last seven years (2014: $250 million; 2013: $240 million; 2012: $275 million; 2011: $225 million; 2010 and 2009: $175 million)."
Why risk filing with slow bureaucratic government enforcement agencies that might generate penny-ante awards when private lawsuits can reap such munificent payoffs so relatively quickly?
For perspective, realize that this deal only applies to California where the workplace protection laws are quite strong. Meanwhile, there are dozens of similar lawsuits by the same “independent contractor” delivery driver groups in other states. Expect they are revving their engines in excited anticipation of their transition to regular employee status with full benefits.
What will happen to the compensation people who recommended this disastrous course of action? Maybe they have already run for the hills if not already tarred, feathered and carried out of town on a rail. Of course, those are old-fashioned consequences for negative performance results. Today, the guilty VP HR has probably opened his or her golden parachute and gently wafted to ground on a beach in Kauai or Fiji.
With this cautionary example before us, how many will rethink their formerly blithe endorsements of contractor arrangements that fail all the sniff tests? Perhaps this might mark a pause in the otherwise general trend towards the contracting and outsourcing of traditional employee functions.
E. James (Jim) Brennan is an independent consultant with extensive total rewards experience, specializing in job evaluation, market pricing and pay budget distribution. His decades of chemical/pharmaceutical HR corporate work were followed by consulting roles in manufacturing, government and tax-exempt industries that took him to most locations in North America. With many articles and other publications (his last book was on Performance Management), together with his speeches, seminars, radio and TV appearances, he has been retained for in-trial expert witness testimony both by and against the Internal Revenue Service in many cases challenging the reasonableness of executive compensation. He also serves on the Advisory Board of the Compensation and Benefits Review.
Image: Creative Commons Photo, "fxhd-truck" by David Guo's Master
The Place: Washington D.C.
The Situation: The SEC proposes rules for executive compensation claw back provisions required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The SEC has finally proposed the long-awaited rules for executive pay claw back. Rule 10D-1 describes who, what, when and how “erroneously awarded executive compensation” must be returned to the company.
Who: The net is fairly deep and broad.
Recovery would be required from current and former executive officers who received incentive-based compensation during the three fiscal years preceding the date on which the company is required to prepare an accounting restatement to correct a material error. The recovery would be required on a “no fault” basis, without regard to whether any misconduct occurred or an executive officer’s responsibility for the erroneous financial statements.
The definition of “Executive Officer” is modeled after that of “Officer” under Section 16 of the Act. This includes the company’s president, principal financial officer, principal accounting officer, any vice-president in charge of a principal business unit, division or function, and any other person who performs policy-making functions for the company.
Applies to all listed companies except certain registered investment companies to the extent they do not provide incentive-based compensation to their employees.
What: Incentive Pay, long-term and short-term (especially equity compensation).
Any incentive pay received during the three fiscal years prior to the required restatement. Incentive-based compensation that is granted, earned or vested based wholly or in part on the attainment of any financial reporting measure would be subject to recovery. Financial reporting measures are those based on the accounting principles used in preparing the company’s financial statements, any measures derived wholly or in part from such financial information, and stock price and total shareholder return.
When: Soon, There are several dates of which to be aware.
August 30, 2015 – final date to submit comments before rule is finalized
90 days after rule is adopted: The national securities exchanges and associations must file their proposed rules to the SEC.
60 days after exchange rules are final: Listed companies must adopt a recovery policy for any qualifying incentive compensation that is received after the final version of Rule 10D-1 is published.
How: Disclosure of both policy and claw backs
Companies must disclose their recovery policy in their annual report.
They must also disclose the date they were required to prepare a restatement, the aggregate incentive compensation amount that must be recovered and the aggregate dollar amount of all incentive compensation that remain outstanding at the end of the last fiscal year. (This part should be fun.)
The company must provide the name of each person that it will pursue for claw back along with the amounts due and any reasoning of why a specific individual is not being pursued for recovery.
If the executive does not pay back amounts due within 180 days of the recovery effort beginning, their name and the amount due will be disclosed in the annual report.
Conclusion: Claw backs will become formal some time after January 2016, and they will be pretty much what was expected.
Unlike many recent Dodd-Frank-related rules claw backs will apply to nearly all publicly-listed companies, regardless of size or date of IPO. If you do not have a formal recovery policy in place, now is a good time to start internal discussions.
Dan Walter is the President and CEO of Performensation a firm committed to aligning pay with company strategy and culture. Regular Comp Cafe readers may notice that it is odd Dan is posting two days in a row. He is just covering for a fellow contributor who was unable to get to an internet connection to post their own article. Things will go back to normal beginning tomorrow. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.