Compensation Cafe

Switzerland Pay - Great for Employees, Less So for Execs

In the past several months, Switzerland has made some interesting compensation headlines. Swiss voters recently passed a referendum on executive compensation that is more far-reaching and restrictive than anything we currently have in the U.S. This new set of rules was supported by a convincing 68% of voters. At nearly the same time, a UBS report from September 2012 shows that Swiss employees in Geneva and Zurich receive the highest net wages in the world. Does this tell us anything?

The highest paid employees in the world just voted for some of the most restrictive executive compensation reform we have seen to date. To be fair, Geneva and Zurich are among the most expensive cities in the world, but UBS reports they also have some of the lowest tax rates. I think it is telling when people who are doing relatively well compared to the rest of the world still have an issue with how much executives are making. I am just not sure what it is really telling us.

Are executives paid too much? Is there a misunderstanding of how and why executive pay came to be at its current levels? Has the media, or have politicians, flamed the fires of executive compensation unrest? Or are executives in some sort of compensation cold war, outspending each other to show their relevance and power? Let’s be honest, all of the above are far too simplistic, but each is believed by groups of employees, shareholders or others.

The new Swiss limitations on executives apply to publicly traded companies. Among the new rules is a requirement that pension funds vote in the interest of their members. They must also report how they voted. There are also annual say on pay votes, annual elections for directors and a ban on severance and golden parachute payments. Companies’ Articles of Association (similar to U.S. Articles of Incorporation) must add new details on compensation structure and rules for how compensation may be used for several groups and purposes. The final kicker is the potential for criminal penalties and fines if these rules are broken.

These new rules may simply be a shot across the bow in the new battle to bring executive compensation levels into publicly acceptable ranges. Several other countries, including the U.S. and a few Western European countries, have incomplete rules on the books or in the works. Executives may find themselves boxed in by the many stakeholder and influencers with different perspectives on this issue.

A decade ago when the UK rolled out its Say on Pay rules, few consultants or companies believed that similar restrictions were likely to occur in the US. They were right for almost ten years. While we will not see aggressive new restrictions on executive pay in the immediate future, the approval and gradual acceptance of these rules across the Atlantic may be writing our future. In the past, rules like this have taken 5-10 year to reach our shores, but we all know that cycles are speeding up. We may well see restrictions like this sooner than expected. Are you ready, and will you support or oppose these efforts? 

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 Know That”, “GEOnomics 2011” and “Equity Alternatives.” 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 at @Performensation and @SayOnPay.

Compensation and Education: A Broken Link?

Has the tie between education and compensation been broken?  Or is a new conflict emerging due to the inability of our educational system to close the talent deficit?  Any break in the chain linking teaching institutions and the KSAs that earn pay is troubling.

While we face a shortage of viable candidates for the critical STEM jobs vital for economic recovery, we have an excess supply of people burdened with immense debt incurred pursuing educations which do not produce suitable employment.  Obviously, college curriculum developers and placement officers are not doing a very good job.  Universities produce graduates in disciplines with no job openings.  Part of the blame rests on the flat economy, because no one can help even the most qualified candidate find employment that doesn’t exist.  The jobs available today are increasingly less middle-class and more of the low-wage type, too, and that further reduces the pool of opportunities for those with university degrees.  Arguments that more education MIGHT change that dilemma rest on the doubtful presumption that students will choose the tougher academic fields where strong skills are badly needed but qualified applicants are in short supply.  Don’t bet on it.

Workforce participation by college grads has been steadily declining, despite the fact they seem to have lower unemployment rates even if they can’t find work in their career field .  Part of that paradox exists because they are frequently willing to take any job despite being “overqualified,” probably because of the immense pressure of student loans that cannot be discharged under new bankruptcy rules.

Student debt is the next U.S. financial crisis, because it already exceeds credit card debt.   An advertorial for an auto equity loan scheme offering temporary cash flow to the typical under/unemployed grad illustrates how bad the situation has become.  Determined people who invest in higher education still have a hard time finding steady income from a suitable job in their field.

In a planned society, this misallocation might not happen because it would not be permitted.  In an openly competitive economic system, you would think that “free market forces” would operate to efficiently match supply with demand.  But this has not happened.  Or maybe it is happening, because pressure is increasing to lower barriers against importing foreigners with the skills our home-grown educational system seems incompetent to produce.  Even professional societies (IEEE) propose immigration reform for STEM talent.

Meanwhile, industry seems to be turning away from an academia seemingly unable to close the skill gaps (talent deficit) in the real world. Everyone agrees that higher education does pay off, over time, despite initial employment issues and similar problems when unemployed; but mismatches between abilities and jobs persist.

The alternatives for solutions are shrinking due to a confluence of forces.  There are fewer people sufficiently educated for the diminishing supply of skilled jobs required for modern employment.  “American workers are overeducated and underskilled,” according to one report.  Large numbers of degreed workers remain underemployed.  At the same time, there are more people literally being encouraged to disappear from the job market and become dependent on new forms of “the dole”  funded by taxes on increasingly stressed and underemployed workers.

How can this mess be fixed?  As the unprecedented number of embedded research links demonstrate, these are deep and serious problems.  What are the most promising possible options to solve them?

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.

Creative Commons Photo "060713 Tangle" by Dan4th

How the Police Are Getting into the FLSA

Do your managers expect employees to check their emails and other messaging options after hours or on the weekends? (That's sort of everybody, isn't it.) Well, here's an FLSA alert for you, taken from a recent report from Forbes.

Chicago police officers, who are expected to regularly check BlackBerrys after their regular shifts, are seeking overtime pay for "off-duty" BlackBerry time. While the former Chicago Mayor Richard M. Daly thought the suit was silly, the Feds don't. It took them two years to decide, but they approved the suit to move forward. In fact, they invited all of Chicago's Bureau of Organized Crime officers through the rank of lieutenant to join the suit.

'Unless an employer can prove that its workers who check emails are overtime-exempt professional, executive, or administrative employees, it could be liable for failing to pay for such "off duty" work,' Jim Burns wrote in this February piece, "Do After-Hours Emails Trigger Overtime Pay." He didn't have to spell out for us, did he? We can easily picture the expensive mess in our mind's eye.

If you haven't thought about this overtime issue before, here are a few suggestions for policy changes. If they don't suit your jobs or work flow, it may be a good time to have a chat with your labor attorney!

• The most straightforward -- not issuing smartphones or PDAs to non-exempt employees. But it's not an option for lots of businesses.
• Directing non-exempts to limit their reading of, and response to, emails to business hours. (And following up when you find their managers are asking for more.)
• Reminding non-exempts to avoid off-duty work and specifically mentioning that includes checking their email.

I'm sure that many of you have found more job-specific ways to deal with this, too. If you've had success with other types of practices or policies, could you please include it as a comment? This could be a big hairy one for some of your colleagues.

Margaret O'Hanlon is founder and Principal of re:Think Consulting. She'll join Ann Bares and Dan Walter of the Compensation Cafe to speak the unspoken -- Everything You Do (in Compensation) Is Communication -- in an upcoming book. Margaret brings deep expertise in compensation, career development and communications to the dialog at the Café. Before founding re:Think Consulting, she was a Principal with Towers Watson. Margaret is Deputy Director of the International Association of Business Communicators (IABC) Pacific Plains Region. She earned her M.S. and Ed.S. in Instructional Technology at Indiana University, Bloomington. Creative writing is one of her outside passions, along with Masters Swimming.

Gold in California

Public service in California can pay pretty well.  Besides the recent scandal in Bell, CA, a similar debacle occurred when the Alameda County Administrator retired with an annual income over $400,000 a year.  The cash alone exceeds the salary of the POTUS who nevertheless would seem to have a superior perquisite package. 

This latest highly visible fiasco raises the heat over public compensation packages.  Arguments about the equity of public versus private pay have raged for decades and will not end soon.  Current economic constraints have focused new spotlights on accusations of excessive public sector compensation.  Taxpayers tend to become irate when they suspect that their servants are out-earning the bosses.  Feelings of injustice are further inflamed when those who elect public officials and pay the taxes that fund government salaries find their hard-earned money used to enrich insiders.

Other commentaries indicate that such outlier cases are the exception rather than the rule.  These tempests may turn out to exist primarily in teapots, especially when these rare outrageous situations are compared to the mundane reality.  The pay at most public enterprises tends to be so badly compressed at the top, for example, that few private industry managers would be willing to take the pay cut required for a government executive position.

What should not be overlooked is that the renewed attention given to issues like this makes the transparency of pay far more important than ever before.  Taxpayer-supported entities like municipalities, counties and fire districts are frequently run by officials who have little knowledge of (or access to) compensation tradecraft knowledge.  Those familiar with the backroom deals cut in those venues realize just how easy it is to manipulate those ignorant of pay practices into decisions that no responsible rewards professional would endorse.   But much of the nonsense occurs in the light of full open disclosure.  I have witnessed public sessions at city, country, state and even national levels where any compensation person would be tempted to scream in outrage at the silly statements accepted as gospel by the officials.  The low level of pay tradecraft knowledge demonstrated in these situations can only be solved by the involvement of professionals who know their business. 

Messes like this could not exist but for the indifference of compensation professionals.  If we abandon our responsibility to monitor and review pertinent elements of public decisions in our neighborhoods, we deserve what happens to our money.

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.

Creative Commons image "grosso_coins" by dgrosso23

The Revolt Against Executive Pay

"It is difficult to get a man to understand something when his salary depends on his not understanding it." ----- Upton Sinclair

In case you didn't see the news article recently, on March 3, 68% of voters in Switzerland overwhelmingly backed an initiative to give shareholders of Swiss listed companies whose shares are publicly traded a binding say on executive pay.

It includes a ban on "golden parachutes" and any bonuses for buying or selling corporations.  Breaching the rules can lead to a fine of up to six years’ salary and up to three years in prison. 

Swiss businesses had better hope that this law goes far enough.  Says the Economist, “The country’s Young Socialists are demanding that senior executives’ pay be capped at 12 times that of the lowest-paid worker.”

But the news doesn’t stop with Switzerland.  Excessive executive compensation is also being discussed in the EU. The EU has agreed in principle to impose a strict limit on executive bonuses for banks. It would limit bonuses to one times base salary, or double that if shareholders agree by a two-third majority. These bonus rules would also be valid for branches of foreign companies within the EU.   It will affect the UK even though the UK currently has a non-binding say on pay.

The Netherlands is talking about a 20% cap on executive bonuses.  

In Germany the government has announced it will shortly introduce a law to regulate management salaries.  One possibility being discussed is capping salaries. 

OK let’s talk about the U.S.  Our “say on pay” legislation is non-binding.  Why are we not seeing changes? Let’s look at two reasons why:

1) Corporate governance

U.S:   CEO duality allows the CEO to also be the Chairman of the Board which dilutes the oversight function of the Board.   In addition the CEO/Chairman influences the selection of Board members --- some of which serve on the Compensation Committee which determines CEO pay.

UK:   There are long established norms of good corporate governance which do  not include the practice of CEO duality.  It is a rarity in the UK.

Germany:  CEO duality doesn’t exist in Germany.  Also in large German firms half of the board members must be employees which creates a wider range of interests than just financial.

France:  CEO duality exists.  However, the power of the French CEO is offset by  large and powerful shareholders represented by the Board.

Japan:  The Chairman of the Board is usually a retired CEO or retired  government official.  The Chairman’s interests are broad and represent a wider range of company interests than just shareholder value.

2)  Culture

U.S. and UK:  There is greater tolerance for high CEO pay in countries that have individualistic cultures based on pay for performance and personal achievements.

Japan:  On the opposite end of the continuum is Japan which is a collectivistic society. Boards in Japan are less tolerant of high CEO pay since it is likely to produce social tension.   The ratio of CEO base pay to worker pay here is probably the lowest in the world.

Germany and France:  Germany and France represent the middle ground with the U.S. and UK on the high end representing individualist values, and Japan on the low end representing collectivist values.

Will U.S. companies follow other developed countries and reform their executive pay programs? 

These questions might need to be addressed first:

1)  Will corporate governance rules change to ban CEO duality?
2)  Will Boards of Directors change performance measures of CEOs to include non-financial measures?
3)  Can CEOs be weaned from their entitlement mentality?

There is a lot of talk about changing the measurements used for executive pay.  But this is not likely to succeed unless the culture/mentality regarding executive pay changes first.
 
So how do we break through this logjam?  If there is no reform, it may start raising questions about the U.S. stewardship capabilities of CEOs, boards and even shareholders themselves.

What do you think?  

Jacque Vilet, President of Vilet International, has over 20 years’ experience in Global Human Resources with major multinationals such as Intel, National Semiconductor and Seagate Technology. She has managed both local/ in-country national and expatriate programs and has been an expat twice during her career.   Her true love is working with local national issues.  Jacque has the following certifications:  CCP, GPHR, HCS and SWP as well as a B.S. and M.S in Psychology and an MBA.    She belongs to SHRM, Human Capital Institute and World at Work.   Jacque been a speaker in the U.S., Asia and Europe, and is a regular contributor to various HR and talent management publications. 

20 Years Later, is FMLA Working?

It's hard to believe that the FMLA (Family and Medical Leave Act) was signed into law 20 years ago. How has the FMLA impacted employers, workers and their families?

The Department of Labor recently conducted a survey addressing that very question. According to the report, the FMLA has had a positive effect on the lives of workers and their families without imposing an undue burden on employers, and has created very little disruption in the workplace.

Here are some key findings from the survey:

• 91% of employers report that complying with the FMLA has had either a positive effect or no noticeable effect on employee absenteeism, turnover and morale
• 85% of employers report that complying with the FMLA is very easy, somewhat easy, or has no noticeable effect
• Nearly 60% of employees meet all criteria for coverage and eligibility under FMLA
• 13% of all employees reported taking leave for a FMLA reason in the past 12 months
• 24% of leave taken for FMLA reasons is intermittent leave
• Fewer than 2% of employees who take intermittent leave are off for a day or less
• Fewer than 2% of covered worksites reported confirmed misuse of FMLA
• Fewer than 3% of covered worksites reported suspicion of FMLA misuse.

Small to medium sized firms reported very little difficulty in administering FMLA. Larger employers, however, reported more problems: 3% said that administration was "very difficult" and 29% said administration was "somewhat difficult."

Half of employers surveyed reported that administration of FMLA is becoming more expensive.

Intermittent leave (two or more episodes of leave for the same reason) has been one of the key FMLA concerns for employers. Employee responses indicate that only about 3% took any intermittent leave. Employers have a somewhat different perspective on intermittent leave. Reports of the negative effects of intermittent leave on profitability and productivity were as high as 25%.

According to Mary Beth Maxwell, Acting Deputy Administrator for the Wage and Hour Division:

The significance of the FMLA is in its recognition that workers aren't just contributing to the success of a business, but away from their jobs they are contributing to the heath and well-being of their families. Our survey results show that, for two decades, granting job-protected leave has been good for employers and good for millions of workers and their loved ones. The FMLA is working.

Based on the results of this survey, "it appears that employee use of leave and employers granting and administration of leave has achieved a level of stability."

FMLA is a complex area riddled with potential pitfalls. But it seems that 20 years later, employers have a pretty good handle on administration. What do you think? Is FMLA working? 

Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. Since 1999, she's been working with businesses and government agencies providing expert quantitative analysis. Stephanie's articles on examining compensation systems for internal equity have appeared in professional journals and she has appeared on NPR to discuss the gender wage gap. Stephanie is the founder of Thomas Econometrics Inc., the host of The Proactive Employer radio show, and author of the upcoming book Compensating Your Employees Fairly: A Guide to Internal Pay Equity. Follow her on Twitter at @proactivemployr.

Is Disclosure Good or Bad for Executive Compensation?

Today's Compensation Cafe post is a bit different. It is part blog post and part infographic. In the US, disclosure of executive compensation has been required, in some form, since 1934. Survey data regarding executive compensation has only rocketed to the forefront over the last 30 years. During this period executive compensation has increased at a rate faster than corporate performance, faster than the growth in company size and faster than the stock market.  This gives rise to the question: Is disclosure good for executive compensation?

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 Know That”, “GEOnomics 2011” and “Equity Alternatives.” 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 at @Performensation and @SayOnPay.

Further Federal Furors

When the Federal Government brags about cutting spending, check your pockets.  What is given from one hand tends to be taken by the other.  Let's take time to re-examine existing proposals that could increase the employer cost of doing business. 

There has been no further action by the Department of Labor on the status of RIN 1235-AA04 as of today.  The regulatory tweak to require all employer exempt determinations to be documented and communicated to the subjects and the record retained for examination is still held under the “long term action” category.  Any change on this would be signaled by a notice in the Federal Register. A Notice of Proposed Rule Making (NPRM) then triggers a 60 to 90 day comment period before DOL reacts.

There is action on RIN 1235-AA05, dealing with domestics employed as companions, as reported in the December publication of the Agenda.  That NPRM was in a prior Federal Register.  Comments were collected; then the comment period was extended a year ago so with an effective deadline for comments now shown as 4/00/13.  It seems to focus more or less on retaining exemptions for personal friends but denying it for employees of home-care services. 

A number of other separate initiatives on worker misclassification are also being pursued. One deals with whether contractors are really employees.  Keep a close eye on that one, because someone in D.C. is thinking long term. 

A Worker Classification Survey has been commissioned, probably to generate buzz about the evils of status quo employer practices.  Challenges to contractor status have major implications due to the impending implementation of the healthcare reform act with its requirements and penalties dealing with the health benefits companies provide to employees.  Some companies have simply declared workers to be contractors and thus washed their hands of responsibility for their overtime and health care. Continued attempts by companies to carve out overtime-eligible non-exempts or workers with potentially high benefit costs from employee status by hiding them under contractor status could be blocked. Closing the contractor escape route assures that employers will continue to pay for health care and exposes them to substantial fines and severe penalties as well.  Keeping medical benefit costs as an employer duty rather than a government obligation may be essential to assure the actuarial survival of PPACA.

In addition, OFCCP’s recent abandonment of their prior guidance communications adds more confusion to employers struggling to decipher discrimination rules. 

Despite the regular impressions of chaos in Washington DC, nothing happens there without a reason.

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.

Creative Commons image "U.S. Capital" by cliff1066

Gone With The Wind (Your Guidance, That Is)

"Take a good look my dear. It's an historic moment you can tell your grandchildren about."

-Rhett Butler, Gone With The Wind 

On February 26, the Office of Federal Contract Compliance Programs (OFCCP) officially rescinded the "Standards" and "Voluntary Guidelines", two enforcement guidance documents on pay discrimination (read the News Release here).

In short, the Standards established analytical procedures followed by OFCCP when issuing a Notice of Violation alleging systemic compensation discrimination. The Voluntary Guidelines provided a methodology for contractors' self-evaluation of their pay practices.

The rescission, effective February 28, 2013, clears the way for OFCCP to use "broad Title VII principles" in its enforcement of equal pay laws. In her blog post about the rescission, Director Shiu stated the Standards forced a "narrowly defined, cookie-cutter approach to evaluating contractor pay practices" that "prevented [OFCCP] from detecting evidence of illegal pay discrimination."

The practical implication of the rescission is that contractors are now left with minimal guidance on equal pay compliance. Director Shiu acknowledged the importance of providing guidance to contractors, noting that "[the contractor community] asked, quite reasonably, that if we rescinded the old guidance, we also provide clarity on how we would evaluate their compliance."

The Notice of Rescission outlines a five-step process the agency will use when reviewing contractor pay practices:

1. Determine the most appropriate and effective approach from a range of investigative and analytical tools;
2. Consider all employment practices that may lead to compensation discrimination;
3. Develop appropriate pay analysis groups;
4. Investigate large systemic, smaller unit and individual discrimination;
5. Review and test factors before including them in the analysis. 

The lengthy discussion is non-specific, referring to tools and techniques could be used and how this new open-endedness will benefit OFCCP in detecting all forms of pay discrimination. Based on my review of the Notice of Rescission, Directive, Fact Sheet, the Compliance Assistance page and Frequently Asked Questions, the guidance available right now boils down into the following: application of broad Title VII principles on a case-by-case basis.

The Notice also indicates that the types of questions addressed by OFCCP will be expanded to include assignment and selection decisions:

Pay discrimination can be easy to spot, like a clear pattern of paying women less than men in the same job, where they are just as qualified. But it can also be complex, like a practice of discriminating against African-American sales workers in handing out territory assignments - so that no matter how well they perform, they can never have the same earnings opportunities as their white counterparts. Title VII addresses all forms of compensation differences, including those that come from channeling a favored group into the better paying entry level jobs with better long-term oppotunities, or where glass ceillings or other unfair promotion practices wrongly block advancement of talented workers on the basis of illegal criteria like race or gender.

It seems as though OFCCP pay investigations will now be akin to TItle VII compensation discrimination litigation in both content and form. This means that contractors will be facing more uncertainty. How will you prepare?

Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. Since 1999, she's been working with businesses and government agencies providing expert quantitative analysis. Stephanie's articles on examining compensation systems for internal equity have appeared in professional journals and she has appeared on NPR to discuss the gender wage gap. Stephanie is the founder of Thomas Econometrics Inc., the host of The Proactive Employer radio show, and author of the upcoming book Compensating Your Employees Fairly: A Guide to Internal Pay Equity. Follow her on Twitter at @proactivemployr.

image courtesy of Wikimedia Commons

Global Compensation Philosophy: One Brand, 31 Flavors

Multinational companies have enough complexities, why add to them? This is a refrain I hear from people who promote “global” programs in which a single tool is used across all regions to help build a corporate culture. For the sake of simplicity, let’s will call this the vanilla plan. In all the years I have been in this industry, I don’t think I have seen a vanilla plan work for more than a couple years. Tons of money can be spent in design and communication, but global markets, regulatory changes, management goals and other factors all change too fast to allow any long-term traction to this type of program.

I prefer a more flexible concept where everyone gets a similar tool. You can build in variations on the theme to ensure everyone gets something that works for their needs.  Let’s call this the 31 flavor program. Everyone gets ice cream, but there are enough flavors to keep nearly anyone happy. Some flavors are always available and in use, while other flavors are traded out as seasons and tastes change. These programs allow better alignment with current rules and an easier path for making modifications to meet future changes.

Some companies claim to have these programs, but when you look closer they actually just have many different variations of vanilla. Handling these multi-vanilla programs is nearly as difficult as those with many flavors, but without the added flexibility.

Obviously, there are tons of reasons to stay away from 31 flavor plans, but few of them are based on the fact that they don’t work. Administration can be a real issue, but systems are getting better everyday. Communication, though, is not a valid argument. In fact, designing programs to better fit local norms can allow for a far more streamlined and effective communication effort.

Company A decides to roll out equity around the world. They read that RSUs (Restricted Stock Units)are fairly easy to get approved in most countries and design a typical US-style program with units vesting annually over three years. They roll out this plan around the world without regard for average tenure of employees in different locations. They work to create competitive global market differentials, but don’t put much research into the tools and associated features their non-US competitors are using to deliver those pay levels. They spend a ton of time and money explaining how the program works, why the international employees have a plan that does not take advantage of their local tax-qualified plans and how the plan is designed to motivate and retain them for the future. Employees get similar pay offers from competitors with tax advantaged plans, or plans that simply fit their cultural norms and key players slowly drift out the door.

Company B spends a bit more time working to create a more flexible framework. Not only does the plan allow for multiple variations of features on RSUs, but they also offer locally tax-qualified sub-plans in locations with large enough, or critical enough, populations. The plans are communicated by combined teams of professionals from the corporate headquarters and locals with experience and expertise in the specific plans and local culture. Employees see no reason to leave as long as the company performs, because both their pay levels and delivery mechanisms are competitive. More importantly, they can understand the programs and talk to friends or colleagues who have similar compensation. As rules change, headquarters stays updated via the local players. Changes are made when needed and desired employees become long-term team members.

Yes, the examples above are simplified. Of course, there are implementation and administrative costs associated with the 31 flavor approach. But imagine if you walked into a store that sold only ice cream and when you looked into the freezers you saw tub after tub of slightly off-white vanilla ice cream. No matter how great it tasted, you wouldn’t want to come back often. Most importantly, its unlikely you would ever recommend the place to your ice-cream loving friends.

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 Know That”, “GEOnomics 2011” and “Equity Alternatives.” 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 at @Performensation and @SayOnPay.