Compensation Cafe

The One Equity Compensation Trend to Rule Them All

Performance equity has taken a long journey. Initially, its use was inhibited by accounting rules that made it far more advantageous to grant equity with time-based vesting. Those rules went away at the start of an incredibly volatile decade for the stock market. The path to this trend has been an adventure requiring a fellowship of disparate groups and events. Stock options lost their luster after the end of Equity Compensation’s Golden Decade™. Dodd-Frank joined the fray after the financial mess of 2008-2009. Even time-based restricted units slowed in growth as companies worked to rebound. Finally, the incredible recovery of the stock market over the past several years has all led to a major shift in how companies, investors, the media and politicians view equity compensation.

As I went through 2013 Equity Trends Report from Equilar, I found several interesting morsels of information. The report discusses some of the trends in stock options, restricted stock and performance-based equity. At more than 30 pages, I would be able to little more than summarize it here. But, there was one section where I called and requested more data.

The report shows most data in time-ranges from 2007 through 2012, the one exception was the chart on performance shares granted to the S&P 1500. This chart shows only 2010 through 2012. As you may know, Say on Pay became a reality in the US in 2010. Assuming that Say on Pay had a direct impact on plan design, I asked for the data empirically showing the change in performance equity use from 2008 through 2012.

While the data speaks for itself regarding the impact of Dodd-Frank and Say on Pay, I believe the story is far from over. Performance-based equity is entering the troublesome “tween” stage. Most of the companies with these plans believe they are almost ready to be left alone for a while, but many investors are just starting to see newly developing issues. At the recent WorldatWork conference, there were sessions trumpeting the success of Total Shareholder Return (TSR) as a metric for equity compensation. At the same time, there were sessions that explained that TSR was clearly flawed and did not reward performance consistently. I predict we will continue to see rapid evolution in the use of internal financial and operational metrics. We will even see growth in metrics more qualitatively measured, like customer service scores.

Like so many in the throws of adolescences, the full potential and fate of long-term performance awards is not yet known. What data does show is that this is the one equity compensation trend that currently rules them all.

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.

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.

Executive Pay Can’t Be Fixed! But….here are 3 things to consider

Several times a year, I see articles and presentations discussing how to “fix executive compensation”. This presumes that executive compensation is some sort of monolithic thing. In fact, executive compensation is simply a topic linked to a wide range of purposes, data, facts and opinions. You can no more fix executive compensation than you can fix sports or music. It is simply too broad and varied for any fix or fixes to apply universally.

Executive pay is effective and problematic because every company and executive is different. Yet, somehow, every magical fix for executive compensation includes a set of rules that will work for the tens of thousands of unique companies and individuals that will be impacted. Let’s set the facts down clearly. No one “solution” will work for the majority of companies. There is no “silver bullet”. Heck, there isn’t even a box of silver bullets that can fix executive pay. So, if executive pay is broken, but it can’t be fixed, what should we do?

1) The secret is there is no secret.

Focus on you. There is no special sauce that will fix executive compensation. No secret formula, no wish upon a star. The only way executive compensation can be fixed is for each and every company to understand their business strategy and how their compensation philosophy and programs can support the delivery of that strategy.

2) It’s not only about how much is paid or how it is delivered, it’s about both.

In an attempt to gain instant acceptance from the compensation community, academics, consultants, shareholders, politicians and the media frequently frame their “solutions” as either being about the volume of pay or the structure of pay. Any credible compensation professional will admit that any solution must deal with both (and many other things). Any solution that claims it can fix things on one side without impact to the other, simply doesn’t understand the complexity of compensation.

3) The solutions provided are usually solving THEIR problems, not yours.

Until Copernicus, it was generally believed that the sun revolved around the Earth. People saw the world from their perspective and created an answer that met their expectations. Executive compensation is similar. When you see an article discussing fixing pay, you probably read the first paragraph and decide if you can relate to the writer’s point of view. You won’t read much farther if you determine they don’t understand your issues.

Each company must do their best to look at executive compensation from two perspectives. First, from their unique internal perspective with the personalities, idiosyncrasies, politics and budgets that comes along with that. Second, look at it from a global perspective. This is harder since you must step back from the problem far enough to see the issue from everyone else’s perspective. You may also need to make decisions on who needs to be marginalized, or even ignored, to meet your current goals. As long as you have considered everything thoroughly, you will have a reasonable defense (or offense) for the decisions you make.

There is no “fix” to executive compensation that isn’t specific and unique to each company. Like any compromise, a good solution will leave every party a little less than 100% happy. If any stakeholder is perfectly happy, it means that another was probably too marginalized, or simply ignored, in the final solution. As every compensation professional knows, it’s never about one thing, it always about everything.

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.

ESPPs are a Dessert Topping and a Floor Wax

Employee Stock Purchase Plans (ESPPs) get a bad rap although they should be lauded in wonderment. The proof is in the number of different areas that claim full, or no, responsibility for these underutilized instruments. ESPPs are much like the old Saturday Night Live “commercial” for Shimmer (“It’s a Dessert Topping AND a Floor Wax”). Unlike Shimmer, the mythical SNL product, ESPPs are actually delicious, effective and available on your compensation store shelves today. If your company does not have an ESPP, or has not optimized the current plan, you should consider reading on.

ESPPs are a compensation tool and a benefit plan. They are a communication tool and a way to build ownership. They work well when managed by payroll, human resources or a dedicated stock administrator. Depending on the intent, design, communication and company stock price, they can also serve a myriad of purposes. How many compensation programs require employees to pay the company? How many benefit programs can directly align employee focus with the goals of shareholders? How many incentive programs allow participants to directly choose their level of engagement? How many equity compensation instruments have been expressly created for broad-based use?

I recently had someone tell me that they couldn’t see the purpose of committing $75 per paycheck to company sponsored health insurance, because there was no guarantee he would use it. While this same person may also not enroll in an ESPP, showing them the specific upside to their investment does not require them to imagine something bad happening to them. In fact, an investment in a generous ESPP and its subsequent returns may actually help cover the annual cost of their insurance. I first heard of this particular communication approach from a benefit professional who also managed their company’s ESPP. I have also heard a wide range of other creative reasons to join an ESPP from professionals managing these programs from other departments.

As a compensation tool, ESPPs are counterintuitive. The argument goes like this. Dear Employee: We pay you. You pay us some back. We use that money to make the company better. Later, we buy stock with your money and some of our money (the discount). You then make money by selling your stock, or by hanging on to it. (Note: You may also lose some or all of your money.) Let’s face it, it’s that last piece that makes these plans truly unique and causes some pause from both the company and employees.

I won’t go into a detailed risk analysis of ESPPs at this point, but when designed correctly the risk is fairly low and the reward is high enough to be compelling. The most recent plan design survey from the National Association of Stock Plan Professionals shows that plans with a 15% discount have an average of 41% participation. There are a wide range of potential features and limits you can craft for these plans. You can build a program than meets several, or only a couple, of key specific needs.

While we are giving 3% merit increases, we are also cutting other forms of equity compensation and competing in an aggressive talent market. We should all consider the potential of ESPPs. They are a dessert topping, a floor wax, a room deodorizer and powerful plant food. There are not many tools like this at our disposal. Does your company have an ESPP?  If not, why not?

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.

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. 

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.

Compensation Peer Group Voir Dire

So, I was recently doing my civic responsibility by serving on jury duty. As it happens, when I am just sitting around, my thoughts turn to compensation issues (just like yours!). A strange and crazy thought came to me. Imagine if your peer group for compensation was selected in the same manner as a “jury of your peers” in a criminal court case. Besides it being almost glacially inefficient, how would this historically proven method (even the ancient Greeks used it) for choosing one’s peers impact the world of compensation?

Let’s first review the current compensation peer selection process. A company sets its goals. Next, it decides on its peers, sometimes with the assistance of an outside professional, other times using only internal expertise. Key components usually include the industry and size of the company. There is sometimes a bias toward companies with similar compensation philosophies and/or pay levels. In all cases, companies use a combination of quantitative and qualitative factors to create a group that meets their specific needs.

Then shareholders, or their advisors, choose a peer group based on their goals. These peers are chosen more “scientifically” and often do not take into account company culture, idiosyncrasies, history or future business plans. The peers chosen by the company and those chosen by investors are often quite different. Imagine if criminal trials worked this way.

Look at it from the defendant’s perspective. The defendant would have a professional, in this case a lawyer, simply pick twelve people who have similar interests and backgrounds. Perhaps all of them would have a criminal history. Maybe all of them had been falsely accused in the past. Maybe interviews showed the group unanimously did not support the law that was allegedly broken. Justice would be easy. The charges would prove groundless and the case would disappear. People who disagreed would scream and yell from the sidelines and demand to have a voice.

How would this look if the prosecution controlled the process? The prosecutor would gather a group of citizens who had previously indicated that they not only supported the law, but also blindly trusted the people enforcing the law. The prosecution would just need to explain why the person was on trial and the verdict would likely go their way. Of course, both extremes are equally unjust.

In the world of compensation, especially executive compensation, we have both scenarios happening at the same time. Because both sides choose peer groups based on their own perspective, they both feel they are right. Because each side is 100% right, the other side is required to be 100% wrong.

Now imagine a world where peer groups were chosen through a debate between companies and investors, with a trusted overseeing figure making final decisions (the “Comp Judge”). Each side would put up its list of peers. The company and the investors would then evaluate these at the same time. Each side would be given the opportunity to remove some, but not all, of the peers suggested by the other. The Comp Judge would be able to replace rejected peers with new peers until an uncomfortable balance was achieved. Neither side would be perfectly happy. Neither side could say the peers were completely wrong. Final compensation levels and strategy for a given company would be linked to peer group market data that was specifically chosen for the current season and neither side could immediately dispute the decisions made.

Each side could appeal in future years (let’s two or three) and attempt to modify the peer group. This would only be allowed as long as a Comp Judge could be persuaded that there was a real issue with the last peer group decision.

Of course, this is all fantasy because companies would never give up their autonomy and some shareholders will always think that some companies are trying to game the system. But, you have to wonder if compensation creep (the inexorable rise of pay) and the related wailing and tearing of clothes would calm down a bit and let us put more focus into strategy, communication and business results.

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.

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.

What Do CFOs Wish Compensation Professionals Knew?

Last week I provided some insight into what your CEO is thinking when you talk to them about compensation. While it was admittedly not comprehensive, I think the post struck a chord with many professionals who have been trying to find a better way to communicate and move forward with the executive team.

It is expected that most companies will spend between 10% and 30% of all revenue on employee compensation (sometimes even more.) Revenues are money. Money is your CFOs specialty. What do they really wish you knew?

There are several recent “Top 10 lists” that discuss concerns of CFOs. Nearly every list includes most, or all, of the following: dealing with the US economic recovery; identifying the best growth strategies, avoiding execution errors, improving staff without going over budget, identifying and growing talent, retention and motivation of top talent, and improving their departments ability to be a business partner.

Stop and reread that list. It looks a lot like the lists that Directors of Human Resources and Compensation have been putting together for years. So, if we are on the same page, what can we do to make it easier for Finance to provide support for us while helping them achieve their own goals?

A Cheat Sheet from the CFO:

1. Please remember that I am a numbers person. Don’t give me vague estimates or guesses. I can probably do the math in my head, so give me real numbers.
2. Don’t oversell me on huge gains. We have a specific projected growth rate to achieve. If your ideas are in line with that, then you will have my attention.
3. When presenting, show me charts and graphs that make sense (use our proxy and other financial reports) as guides. Pretty is less important than informative.
4. If you give me charts and summaries, back it up with full data sets. I may never look at them, but they make me feel more comfortable.
5. Understand the impact of your ideas and recommendations on the finances of the company. If you don’t know, or are unsure, ask me to explain before you try and sell your latest solution.
6. When you model the expense for awards and payouts, (especially performance-based and equity-based), please use assumptions that are applicable to our company. Again, if you’re not sure, please ask before you go hog-wild with your projections.
7. We have the same goals. I know it sometimes seems like I am not hearing you, but I will support any idea that makes more money than it costs. Communication projects? No problem, show me the ROI. Pay for Performance? Sounds great, but you’ll need to prove that it will work in alignment with our budgets and business strategy. In today’s uncertain market, please be ready to discuss risk -- both upside and downside. More headcount? I’m on-board if you can help figure out where the money will come from.

Remember, many of CFO’s goals are exactly the same as yours.  Take a look at some of the Top 10 lists provided in the links below to learn more about where goals differ. Most importantly, take the time to understand your CFO’s specific concerns. You may be surprised by what you learn.

CFOs are often asked to negotiate deals. A smart finance guy once taught me two important lessons about negotiations and should be considered when working with a CFO. 1) Always argue your point from the other guy’s side of the table. This requires truly understanding where they come from. And, 2) In a great negotiation everyone leaves just a bit unhappy. A perfect negotiation requires compromise from all involved parties. Compromise means giving up something you want, or taking on something you don’t. Understanding these two rules will make conversations with your CFO far less frustrating.

I have found that CFOs are often the easiest people to work with on compensation projects. They understand numbers (like us.) They talk about money every day (like us.) They must directly link every budget decision to the growth and success of the company (like we should.) Heck, they even enjoy being compensated (like most of us!) Approach your needs and issues from their perspective and you will find a like-minded business partner eager to help you succeed.

Top 10 List Sources

http://deloitte.wsj.com/cfo/2012/06/07/top-10-concerns-keeping-cfos-up-at-night/

http://www.proformative.com/articles/top-three-issues-facing-todays-cfos

http://www.cfoglobalhq.com/what-are-the-three-biggest-issues-currently-facing-cfos-around-the-world/

http://www.masslive.com/business-news/index.ssf/2013/01/cfos_hopeful_about_their_companies_growt.html

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.

What Do CEOs Really Want from Compensation Professionals?

Let’s get the obvious out of the way. Yes, CEOs want to make sure they are paid well. Paid well when compared to peers. Paid well when compared to last year’s pay. Paid well when they do a great job. And, of course, still paid pretty well when they don’t do such a great job. But that’s not what this article is about.

As it turns out, CEOs want the same thing from their compensation leaders that they want from finance, technology, marketing, engineering and other leaders. The things they find important are strategy, customers, investors and culture. If your solutions aren’t centered on at least three of these four topics, they aren’t really solutions that address the CEO’s needs.

A Cheat Sheet from the CEO:

1. Start with something I don’t know and summarize it to a level that allows me to either make a decision or ask critical questions. Have the details at the ready, but don’t insist that I see them.
2. Give me solutions, not suggestions or problems.  If it takes you a few extra days to turn your idea into a working prototype that proves its capabilities, please let me know in advance and we will meet in a few days.
3. Please know our business and be able to speak to me in terms I use on a regular basis. I don’t want to learn your “language” of HR and compensation. Listen in on investor conference calls and read any memo you can get your hands on.  Please learn my language of success.
4. Don’t make assumptions about our business strategy.  We explain it pretty darned well in our Proxy Statement. I secretly wish you had already read and understood our entire 10K and those of our most important peers.
5. Explain EVERYTHING from the perspective of how it helps our business become more successful. It’s great if something is new, or trendy, or if you want to make employees happier, but all of that is useless if we aren’t growing and winning.
6. PREPARE. There is a great quote from Woodrow Wilson that reads: “If I am to speak ten minutes, I need a week of preparation; if fifteen minutes, three days; if half and hour, two days; if an hour, I am ready now.” Which did you prepare for?
7. Please try and tell me everything from my perspective, not yours. I know this can be tough but, trust me, it is probably harder for me to see the world through your eyes (unprepared) than vice versa.

Every CEO really wants each department in their company to be a profit center. How can Compensation, a department that is an open tap of money pouring out the door, be a profit center?  Know the business strategy and have a story that explains how the compensation philosophy, structure, pay levels and communication programs will create more value than they cost. Be specific. Use timeframes that make sense. Make sure you have backing evidence or credible opinions from consultants, academic studies or colleagues at similar companies.

If you do your homework, you will be quick on your feet. That, my friends, is perhaps the most important aspect of working with a CEO. Most are in their position because they are bright, fairly impatient and have high expectations of themselves and anyone who wants to be called their business partner. Truly understanding your preferred solution and at least two or three alternatives provides you with the simple and important function of exceeding expectations. Exceed expectations and you will be invited back to the table again and 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 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.