Compensation Cafe

Can I Play Too?

With the fall of the Autumn leaves the attention of most senior management personnel shifts to the upcoming changeover of the business year.   And that click of the fiscal year calendar is accompanied by the beginning of their new annual incentive plan cycle.  So while the left hand is busy processing performance assessments and award payouts as an end-of-year project, the right hand is getting ready for the new cycle. 

In many companies this fresh start is automatic, an administrative process not given much thought past doing what they did last year, and the year before.

Here's a thought.  Instead of issuing another rubber stamp copy perhaps now might be a good time to review your annual management incentive plan and take the opportunity to breathe new life into it.   Because if left on autopilot too long it’s surprising how many extra names find themselves added to the incentive-eligible rolls, slowly adding what can become significant costs, and all without proper review.

Eventually senior management will notice the ballooning costs and clamp down, either by reducing eligibility in a broad-based fashion, or by reducing incentive payment opportunities.  Perhaps both.  You don’t want to get to this point.

The Sneak Attack On Your Payroll

 Has your company made too many people eligible for the incentive program?  Take a quick look at a 3-year growth curve of positions and employees being included.   Would you consider all these  deserving?  Is someone making that decision, or has title or grade designation become the deciding factor?  Meanwhile, can you explain the ROI for the growing total in management incentive pay?

Employees deemed eligible for an incentive opportunity should have a line of sight between their performance against measureable objectives and award payments.   If they don’t, what are you rewarding?  Your plan shouldn't be a profit-sharing scheme, where eligible employees light a candle in the window and hope that the company does well.

Companies typically use the “Manager” title as an eligibility cutoff, but perhaps what you name a position should not be the sole criteria.  What about those whose responsibilities include managing people, versus individual contributors who manage a budget, or a non-staffed function, or a specific responsibility?  Sometimes they're all called "Manager."

Perhaps the title is a gift, regardless of the roles and responsibilities.  I'm thinking of a "First Impressions Manager."

If you’re suffering from title inflation and have granted puffed-up titles for certain employees, are these Managers actually managing at all, are they only supervising, or are they really only technical experts with a gratuitous title?

Using a grade designation can have its own problems; is everyone in a grade eligible, and if not how do you differentiate between positions, when the company has already deemed each to be similarly valued?  Slippery slope here.

Have a care that your pay-for-performance management incentive program doesn’t evolve into an entitlement program.

Where's My Check, Please?

Something else to look at: is the incentive award at risk?  How many of your eligible employees do not receive an award each cycle?  If practically everyone receives an award, perhaps instead of an incentive plan what you have is a delayed reward program; managers put in their twelve months and expect a bonus payment.

Does your incentive program require behavior above and beyond, with individual objectives linked to broader company goals?  Or are your objectives only finalized at the end of the cycle, simply to comply with some Human Resource assessment form that must be completed?

At the lower limits of incentive eligibility some companies start with an incentive target of 5%.  However that low a reward opportunity is not a carrot for anyone.  For that small amount of reward you won’t change anyone's behavior, never mind maintain their attention for 12 months, so why bother?   If behavior isn’t going to change, if you’ll receive the same performance as before, but now for an additional  5%+ cost increase, what is your return on your investment?  In my view this money is often wasted.

Now is the time that you should have a look-see at the effectiveness of your annual management incentive plan - and to suggest meaningful improvements.   Because once the current payment processing cycle is complete the pressure will be on to roll-out the 2012 program.  And at that point the die will be cast until the following year.

It will be too late.

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.  With over 30 years Rewards experience 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 brood of cats. 

Creative Commons image courtesy of Ft. Meade

Differences in Variable Pay Plans Around the World - and Trends for the Future

Editor's Note:  Today's post comes to us courtesy of guest contributor Jacque Vilet.

What do we mean by variable pay?     Simply put ---- variable pay is pay that fluctuates over time as opposed to fixed pay which remains the same.  Base salary is an example of fixed pay.  There are lots of different examples of variable pay plans but the major types are:

• Pay linked to output ---- piecework like Nike would pay for the number of shoes produced
• Individual/team awards ---- pay for achieving pre-set performance goals
• Share in company’s profits ---  employees share in company profits
• Sales commission plans --- salespeople are paid commission (bonus) based on quota achievement

Variable Plans by Country

Variable pay plans are found worldwide in almost all countries.   They are not the same worldwide --- there are differences as well as similarities.  For the sake of this article we will define a variable pay plan as an annual or short term plan.    Let’s take a look at how variable pay is viewed and designed in various countries (click to view the table below in a pop-up window).

More global corporations across the world today are using bottom-line results for their performance metric as opposed to individual goals such as "management by objectives", which were popular in the 80’s and 90’s.     Variable pay plans have grown in popularity with 86% of global corporations in all countries having at least one variable plan:

• 91% in Asia
• 90% in U.S.
• 85% in Europe
• 81% in Latin America
• 80% in Canada

Future Trends in Variable Pay

Due to economic uncertainty around the world as well as quickly changing global market activity, the following are being discussed as possible future trends:

• Less cash for salary budgets
• Zero to very small salary increases may continue for the foreseeable future
• Fund “virtual pay increases” with variable pay results
• Focus rewards on total corporate results and ROI
• Matching competitive practice may not be the primary concern
• No payout if corporate results do not meet target --- threshold of financial performance
• Increase employee “line of sight” to corporate goals for increased chance of payout

The top three drivers in variable pay taken from a 2010 Hay Group global research study are:

• Better alignment with corporate strategy
• Improved corporate performance
• Better alignment or “line of sight” between corporate and individual performance

Rethinking variable pay strategy may involve:

• A move toward a global corporate variable pay approach rather than division or business unit plans
• A single plan with the ability to serve as a global driver of behavior, marshall the collective strength of the global workforce and unify divergent geographies
• Provide a global focus on corporate results
• Increase “line of sight” between employee goals and overall corporate goals

Jacque Vilet, President of Vilet International has over 20 years’ experience in International Human Resources with major multinationals such as Intel, National Semiconductor and Seagate Technology.    She has worked with both local nationals and expatriates and has been an expat twice during her career.    Jacque holds the CCP, GPHR and SWP (Human Capital Institute).  She is a member of WorldatWork,  Society of Human Resources Management and the Human Capital Institute.   She is co-chair of the Global HR professional emphasis group for the Dallas chapter of SHRM.  She is a regular contributor to HCI, HR.com and IHR Forum.

Image: Creative Commons Photo "Old Globe" by ToastyKen

Goldilocks and the 3 Broad-based Stock Plans

There once was a dedicated professional who was tasked with creating a company-wide stock plan at her new company. Henrietta Rachel Goldilocks (let’s just call her “HR Goldilocks”) had years of Human Resources and Compensation experience, but little interaction with broad-based equity compensation. She searched the web and spoke to some experts on the topic. Each expert had a ton of information, but many tended to discuss general trends rather than HR Goldilocks’ very specific needs.

You see, HR Goldilocks worked at a company that had been publicly traded for many years. They had tried stock options and restricted stock in the past, but currently only used these for management-level staff. There weren’t many internal notes on why the company had stopped granting lower-level grants and awards. When she brought the topic up finance simply said “too expensive”, the CEO said “didn’t work”, the head of engineering said “worthless” and several staff members simply looked confused when asked.

HR Goldilocks knew that her company’s stock price had a history of volatile ups and downs. She also knew they depended on a purchase cycle that lent itself to periods where bonuses were strong and others when they were nonexistent. As a company that built most of its own goods and supported their own customer service center, she knew her staff was both broad and deep. As she continued her search she finally found a blog article that had a story that covered the main equity compensation issues at a high-level. The story went something like this…

HR Goldilocks stumbled upon a house in the woods that was filled with compensation instruments. Cash hung from the ceiling. Bonuses wallpapered the walls. The floor was covered in check stubs and total reward statements. And, on the massive desk in the middle of the room, there were three equity compensation plans.

She first saw a stock option plan. HR Goldilocks read how the employees recevied no compensation until they chose to exercise. They paid what the stock would have cost at grant and the company expensed the amount that was determined using a mathematical model. The staff received any gain. She also read that if the stock price went down (as her company’s often did) these grants had little retention value. However, if the stock price soared, values also skyrocketed often to unsustainable levels. These grants generally carried vesting restrictions of four or five years, far longer than some of her employees planned in advance. HR Goldilocks looked at the risks and rewards and decided that stock options were too hot for her company.

The second plan described restricted stock units. HR Goldilocks liked that they had value from the date of award. She read on to find that employees often viewed these awards as “gifts” and devalued them accordingly. She also found out that they often resulted in such small award sizes for lower level staff that communications became difficult. “Imagine,” she thought, “trying to explain a 3-year vesting of 17 shares!”. HR Goldilocks decided that RSUs were to cold for her company.

The third plan was an IRC 423 ESPP. It stated the rules were designed to support plans for broad-based participation. HR Goldilocks read that these plans require the employee participants to purchase stock from the company. The caveat was that the employee could be offered a discount of up to 15%. Even better, this discount could apply to both the start of a grant period or the purchase date. This gave the employees some value at the start and, if the stock price rose, an even better value at the end. And, this plan virtually ensured some value even if the stock price fell. She read how requiring the employees to make payroll contributions during each grant period helped them have some “skin in the game” and stay engaged.  She also liked that fact that she could structure the plan to limit the number of shares purchased by any one employee and that even the highest compensated employees were limited by the plan to $25,000 in value each year. All this and purchases could be scheduled frequently, usually in six-month intervals. This plan was flexible enough to meet her compensation needs while limiting expense to meet the needs of the company. HR Goldilocks decided an ESPP was JUST RIGHT.

HR Goldilocks worked with a consultant and her internal team to create an ESPP that was custom-fit to their needs and everyone worked happily ever after.

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

Who's More Disengaged At Work? Survey Says Highly Educated Men!

Do these kinds of comments sound familiar? They're the hallmark of disengaged employees, and more than 70% of American workers share these attitudes.

By now, everyone is familiar with the concept that engaged employees are "better" employees, in terms of productivity, customer satisfaction, and the company's bottom line (do a Google search on "employee engagement" - you'll get about 5.4 million results). You're probably not surprised by the latest findings of the Gallup Employee Engagement Index: 

Currently, the percentage of engaged employees is similar to the historical high of 30% in 2006 and 2007. Despite the gains we've made through communicating clear goals and expectations to our employees, encouraging innovation, and cultivating a strong team environment and a sense of belonging, we still have an engagement problem. The percentage who are actively disengaged - perhaps the most dangerous of the disengaged - is near the high of 20% recorded in 2007 and 2008.

Where do we need to focus our employee engagement efforts? According to the Gallup Index, on highly educated men between the ages of 30 and 64:

 

 

 

If we stop and think about the results, they make sense. There are several possible explanations for why men are more likely to disengage. Some are empirical (men typically work more hours during the week than women) and some are sociological (many men believe that the purpose of work is to earn money and support their families, regardless of whether they like their jobs or not). 

Looking at age and employee engagement, the differences in engagement appear at the ends of the spectrum. The higher engagement of employees under the age of 30 could be attributed to a "honeymoon" phase - they're early on in their careers, and they're enthusiastic and optimistic about their contributions. As they "settle in" to their careers and become jaded, they're more likely to disengage. The higher engagement of employees 65 and older may be due to the fact that retirement is in sight, some have already retired from their "careers" and are now working at jobs they truly enjoy, or they're finally in a position where their voices are heard and their opinions matter.

When it comes to educational attainment and employee engagement, some of the causes may be beyond our control. We may be seeing disengagement because of structural underemployment. In the current labor market, people are taking jobs wherever they can get them. This means that there may be a lot of people out there who are overqualified for their jobs - but they took the position because they need to be working and generating some kind of income. There are a lot of highly educated people out there who currently have very low-skill jobs. They're likely to disengage because they're not intellectually challenged by what they're doing. If you're a scientist who's used to poring over data alone in your lab all day, and now you're in a job requiring very little brain power but lots of interaction with people (the horror!) you're probably not going to be that engaged. 

The takeaway from all of this? You're not going to be able to completely eliminate disengagement in your workplace. So rather than spread your engagement efforts thinly throughout the entire organization, think about concentrating those efforts on highly educated men between the ages of 30 and 64 - you may get more bang for your buck!

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 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 and is the host of The Proactive Employer Podcast. Follow her on Twitter at ProactiveStats.

Dream of Becoming Senior VP, Global HR?

The leading privately held global executive search firm, Spencer Stuart, just told us what they look for in an HR resume. They are the people who would know, as they claim to have unrivalled access to leading executives around the world. It's a pretty grand claim but I happen to know it's true because a close friend is a Global Practice Leader for Spencer Stuart.

Buried on page 70 of November's workspan, from World at Work, is a sidebar by Steven Blackman and Claudia Lacy Kelly of Spencer Stuart. In it they tell us how us HR practitioners can prepare to, "speak your CEO's language . . ." by developing business intelligence and acumen.

Take this good advice but also recognize the coded message. It's another way of saying, "This is what we look for when we go searching for HR executives."

Here are some take aways:

Signs of Executive Mindset and Experience

• Haven't relied on what you already know -- have moved around, gotten out of your comfort zone and succeeded
• Stayed focused on outcomes
• Showed dexterity in dealing with a complex, matrixed organization
• Designed organizations and organizational change
• Recorded international experience (early in your career is better)
• Pursued cross training in finance, operations and/or general management

Valued Competencies

• Uses skilled judgment as a guide to thought and action
• Accurately distinguishes and identifies critical objectives
• Analyzes relevant information adeptly
• Chooses the most effective path to achieving goals
• Develops clear strategies to achieve outcomes, anticipating likely obstacles and applying creative problem solving 
• Understands how the company makes and loses money

Impeccable Add Ons

• MBA
• Broad-based business credentials (think Wharton or other business school Executive Development Programs)
• Applied psychology degree in business specialty

No more insider secrets. Now you know what to shoot for.

Margaret O'Hanlon is founder and principal of re:Think Consulting.  She has decades of experience teaming up with clients to ensure great Human Resource ideas deliver valuable business results.  Margaret brings deep expertise in total rewards communications and change management to the dialog at the Café. Before founding re:Think Consulting, she was a Principal in Total Rewards Communications and Change Management with Towers Perrin. Margaret is a member of the Board of Directors 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. Creative writing is one of her outside passions, along with Masters Swimming.

2002-2012 Salary Increase Changes

Ten years ago, the lockstep movement of salary increase budgets ceased and the course of payroll increases split into two separate paths.  Small firms cut increases; big organizations did not.  The effects still haunt us.  Here is an insert from the January 2002 ERI Update report:

Now, in 2011, as the compensation planners consult their tea leaves, study the stars and gaze into crystal balls to predict the future, we would be well advised to remember what happened to salary increases exactly a decade ago.  In the Fall of 2001, salary increase budgets bifurcated.  They split into two different tracks.  Plans set at year-end 2001 for calendar year 2002 were drastically revised at a lot of companies.  But the changes were variable, concentrated among the smaller employers of America.  The large organizations blinked but continued with their pre-set and tentatively approved salary increase plans.

Nevertheless, the news of the day at the time trumpeted the panic of small companies as 2002 began.  As the year proceeded, more and more firms reacted a decade ago by trimming or even completely cancelling budgeted pay increases, feeding an increasing spiral of negative expectations that encouraged owners to hoard their payroll increase dollars even more tightly.  At the end of 2002, cash-rich companies showered top management and owners with large rewards while rank and file employees received smaller incremental raises, if any.

Those changes from a decade ago still flow through the salary increase percentages reported in surveys.  It continues to affect the policies adopted by top management committees.  The generous pay practices of large employers were hidden behind surveys that reported simple averages rather than weighted averages or medians.  That problem still remains, so be careful to compare your enterprise to comparably sized peer firms that follow pretty much the same absolute pay practices that you do.

Remember that budgeted increase rates are relative metrics that can mask true absolute realities.  If you pay 10% above the average and plan increases that are less than “normal,” you will still lead the competition next year; only, your lead position will drop to maybe a relative 8% lead.  Remain confident that, regardless of what anyone else does, your salary increase budget will be proper if it is right for you.

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.

The Rise of Capitalism 2.0 and (Yet) the Fall of Employee Gainsharing

There is a puzzling phenomenon at play. 

Recent years have seen movement toward a re-visioning of capitalism - Capitalism 2.0 - which Harvard Business School strategy guru Michael Porter describes as the concept of shared value.  Charles Green does a wonderful job of describing and examining this movement in a series of posts at his Trust Matters blog: Is Capitalism 2.0 a Mirage? (Part 1 and Part 2).

More than 70 years ago, a new kind of pay approach was introduced in the U.S.  Gainsharing is a program of employee participation in the financial performance of a company - also referred to as "shared capitalistm" - by which employees are directly involved in improving the productivity and performance of their employer, and then have the opportunity to share in the financial gains they help create.

My friend Brad Hill has deep expertise in employee gainsharing, having served on the Board of Directors of the Scanlon Leadership Institute, a nonprofit organization whose members pioneered the concepts of gainsharing, open-book management and servant leadership. Brad's exciting work in the field of gainsharing was highlighted in a Fast Company article a couple of years back.  The article Bonuses Aren't Just for Bosses described Brad's work teaching rank and file employees how to devise their own incentive plans.

In a pork-processing plant in Milan, Missouri, amid the hog carcasses and pig fat, workers who operate fast-moving disassembly lines are assembling a new approach to compensation and motivation. The 900 people who work at Premium Standard Farms, many of whom are paid $10 an hour to perform some pretty old-fashioned jobs -- slaughtering, slicing, and cleaning -- are working in some pretty new ways. They have instituted changes that are saving their company tens of thousands of dollars a month. They have improved employee-retention rates by more than half (in an industry where 200% annual turnover is common). And they are being rewarded for their efforts through an incentive program that is yielding substantial payouts.

The central lesson of the article - and behind the notion of gainsharing overall - is about the power of such efforts to do good, for both workers and the companies that employ them. 

Isn't this the core of the idea behind Capitalism 2.0?

And yet, data showcased in a recent Aon Hewitt webinar (drawn from Aon Hewitt salary increase surveys and 2011 VCM report)  on variable pay suggests that gainsharing plans are practically on the verge of extinction.

So what gives?  Does this strike anybody else as a missed opportunity?

My theory is this: Despite the recent surge in popularity of broad-based variable pay plans, employers still harbor a strong preference for simply dropping an incentive plan into the picture, rather than deal with the significant commitment to employee education and involvement that a gainsharing plan demands.  Short-term, low investment thinking, I guess.

What's your take?

Ann Bares is the Founder and Editor of the Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and is a bookhound and aspiring cook in her spare time.  Follow her on Twitter at @annbares.

The Role of Financial vs. Non-Financial "Incentives" in Employee Motivation

I’m a fan of the weekly “Corner Office” Column in the New York Times. The CEOs invariably offer insightful lessons from their own experiences in management and leadership.

This week’s column featured Lynn Blodgett, president and CEO of ACS, a Xerox company. Mr. Blodgett explained the key punch machine business his mother started in their home. He and his siblings all joined in, raising the question of how to pay the kids without relying on hourly pay methods that would require verification. The solution as Mr. Blodgett explained it was quite simple:

“So they [his parents] came up with an incentive system that was essentially self-policing.  I believe that a really important management principle is that if you get the incentives aligned, people will motivate themselves far better than you’ll ever motivate them. But, again, you have to get the incentives right.”

Mr. Blodgett goes to on clarify it’s not just financial incentives:

“It’s being able to feel like they have a level of control over their destiny, that they are valued in what they do, that they’re being successful, that they’re contributing.  Those things are actually probably more important than the money.  But you’ve got to get the money right, too.”

Regular readers of Compensation Café know I strongly advocate the position that base compensation must first be correct before employees can properly enjoy additional incentives. But there is no doubt that Mr. Blodgett is correct about the importance of employees having a sense of meaning and purpose in their work.

Mercer’s October 2011 What’s Working survey report reinforces this with their finding that these “soft” factors are much stronger influencers of motivation and engagement. As Mercer Senior Partner Colleen O’Neill explains in this SHRM article:

“Without a doubt, financial factors like pay and benefits are a vital part of the employment deal, especially in the U.S., but employers need to consider and manage the full range of factors to ensure that their workforce is engaged. When financial resources are limited, organizations can leverage these nonfinancial factors to effectively boost employee commitment and productivity.”

What are those most influential non-financial factors? As the chart below illustrates, respect, work-life balance, meaningful work, leadership and team members are the most critical – a near perfect research mirror of the real-life experience Mr. Blodgett describes at ACS.

Factors Influencing Motivation and Engagement at Work: The Americas

Source: Mercer What’s Working survey, 2011

Mr. Blodgett expanded on his leadership style, emphasizing the importance of focusing on these areas often dismissed as “the little things”:

“Nobody is above being moved, being touched, being influenced by a small gesture.  … So it’s the little things.  Like writing a note that says, ‘You did a great job,’ or: ‘I’m sorry I got after you.  You’re a super performer, and I lost my patience with you, and that’s my error, and forgive me for doing that.’”

Do you agree with Mr. Blodgett on the importance of the small gesture and the need for respect? Considering Mercer’s research results illustrated above, what would you rank as most important to your engagement and satisfaction at work?

As Globoforce’s Head of Strategic 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. 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, Montreal and Boston. Follow Derek on Twitter at @globoforce.

Equity Compensation Data for Start-ups and Other Private Companies

During the month of November I’m going to focus on my equity compensation roots. With both the IPO and M&A markets once again starting to gain attention, we can start by discussing a recent survey on equity compensation at private companies.

The National Center for Employee Ownership, (www.nceo.org) just released their 2011 Private Company Equity Compensation Survey. This survey is unique because it focuses exclusively on data from more than 200 privately held companies. Given the focus of the compensation industry on market data, this unique data set gives us a rare glimpse into companies that provide very little in the way of public disclosure.

The participant companies were fairly well dispersed in multiple industries. 42% were from biotech, software and other technology sectors; 16% were professional services firms; 12% in manufacturing and the remaining 30% spread among a variety of industries. More than 80% of the responding companies have been in business more than five years.

Given the direct impact that exit strategy has on equity compensation design, it is interesting to note that only 10% of companies expect to go public, while 56% are planning on being sold to another firm. A surprising 27% currently have no exit strategy. 47% of firms have VC investors, 29% have family investors and 25% have Angel funding.

More than three-quarters (77%) of these companies give all of their C-level officers some form of equity compensation. 56% of respondents give equity to at least some hourly/technical employees. While these numbers show a broad application of equity, the amounts awarded tell a slightly different story. 56% of equity is awarded to C-level officers, while only 4% goes to hourly/non-supervisory employees.

The mix of equity instruments used is also telling. 66% of companies use stock options for some or all of their participants. 29% use restricted stock shares. Just 10% use one or more of phantom stock, stock appreciation rights (SARs) and restricted stock units (RSUs.) Non-founders held a mean of 15%, while founders owned a mean of 38% of the outstanding equity at responding companies.

So, what does this all mean?

First, accounting practices seem to be driving equity design more than management concerns about creating new shareholders. Restricted stock has a fixed accounting expense and avoids the need for 409A valuation. Stock options require 409A valuation, but have a fixed, predictable expense. Phantom Stock and SARs usually pay out in cash and result in a need for both a 409A valuation and regular adjustments to the compensation expense on a company’s books. While the accounting issues are important, plan design should first focus on the big-picture goals of the company. Many companies can benefit from the addition of synthetic equity to their programs.

Second, private companies are not being impacted by the current push for performance-based equity seen at public companies. This is likely due to the generally unpredictable nature of both company valuations and predictions on future performance. While many management teams would like to have more robust and defined performance hurdles, plans have not yet caught up with aspirations. Between 75% and 90% of public companies in the US now use performance criteria for some or all of executive equity awards. The number of private companies in this survey using performance equity did not even register in the final data.

Third, more than a quarter of companies have put equity plans in place with no clear idea of how those plans will have value to the participants.  With 27% responding that they currently have no exit strategy, it is likely that most of these firms have not been able to clearly communicate a realistic potential value, or event horizon, to their employees. Without this communication these companies lose much of the value of equity as both a motivation and retention tool.

Finally, companies are not simply using equity as a spark to obtain the holy grail of an IPO. In fact, only one out of ten companies considers an IPO in their future. Equity has become a fairly ubiquitous compensation tool that is being used regardless of the potential future of the company. Participants and employers see a value in equity even when they cannot express how that value will be obtained. It is important that companies continue to communicate the processes, potentials and values of equity awards as they evolve. As I have said in the past, in the absence of information, people will use their imagination.

The survey is available from the NCEO for $150 to members and $250 to non-members. NCEO introductory memberships are available for $90.

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

Are Your Employees Costing You More This Year?

Does it feel like your employees are costing you more this year? It might, given everything that's been going on in the economy. Like many companies, your revenues may be decreasing while your costs are increasing. You may be tempted to blame the increasing costs on labor. But you'd probably be laying the blame on the wrong area - the average cost of employee compensation has increased less than $0.50 per hour during the last year.

Private industry employers are currently spending an average of $28.13 per hour in employee compensation, up 49 cents from $27.64 a year ago. Wages and salaries are about 70% of this, averaging $19.81. Benefits account for the remaining 30%, averaging $8.32. 

The Bureau of Labor Statistics just released the latest Employment Cost Index. The Employment Cost Index measures the change in the cost of labor, free from the influence of employment shifts among occupations and industries.  Data from the BLS indicates that the cost of total compensation for civilian workers increased only 0.3 percent during the last three months, and the rate of increase is slowing down.

The chart below compares the three-month percentage change in the cost of employee compensation for the periods ending September 2010 and September 2011. I've broken the data out into the five major occupational categories. Within each category, I show the percentage change for total compensation, wages and salaries, and benefits.

In all but one occupational grouping, the three-month rate of increase in the cost of total compensation fell or stayed the same relative to last year:

• Management, professional and related occupations: decrease from 0.4 percent to 0.3 percent
• Sales and office occupations: no change
• Natural resources, construction and maintenance occupations: increase from 0.4 percent to 0.6 percent
• Production, transportation and material moving occupations: decrease from 0.7 percent to 0.2 percent
• Service Occupations: decrease from 0.4 percent to 0.1 percent

The increased rate of growth in natural resources, construction and maintenance occupations is due to a higher rate of wage and salary increase:

• Management, professional and related occupations: no change
• Sales and office occupations: increase from 0.3 percent to 0.6 percent
• Natural resources, construction and maintenance occupations: increase from 0.3 percent to 0.6 percent
• Production, transportation and material moving occupations: decrease from 0.5 percent to 0.2 percent
• Service Occupations: decrease from 0.3 percent to 0.1 percent

The rate of growth of benefits in all occupations fell, and in fact the cost of benefits in service occupations actually went down:

• Management, professional and related occupations: no change
• Sales and office occupations: decrease from 0.6 percent to 0.3 percent
• Natural resources, construction and maintenance occupations: decrease from 0.7 percent to 0.5 percent
• Production, transportation and material moving occupations: decrease from 1.1 percent to 0.0 percent
• Service Occupations: decrease from 0.7 percent to -0.1 percent

What all of this means is that even though your costs for total compensation are increasing, the cost is increasing at a decreasing rate. The growth rate is slowing down. So even though you may be feeling pinched between falling revenues and rising costs relative to last year, it's probably not entirely due to payroll costs.

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 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 and is the host of The Proactive Employer Podcast. Follow her on Twitter at ProactiveStats.