Compensation Cafe

Q4 Turn On: Tips To Give Your Equity Awards More Charisma This Year

There are a lot of decisions to make in Q4 2012. This is the fourth in a series designed to turn you into the lead strategist on your team. Earlier posts provide tips on: Planning this year's total reward statements, organizing a seamless focal rewards implementation, planning the script for an encore performance of mini merit increases and delivering it to your employees.

Just to make this clear, I'll be talking about the equity programs for senior managers and executives today. Broad-based equity plans for employees are a different kettle of fish, especially when it comes to communications!

OK, reality check. How dare I? How can I possibly imply that equity doesn't shine with charisma just by definition? After all, few execs make employment deals without belaboring what the right award level might be.

As for mid-management, isn't equity the holy grail? An award that they often (but not always) slay dragons to capture. When the quest is completed, doesn't equity signify that these managers have made it onto the round table?

All of this is part of equity's charisma and I'd be crazy to challenge it. But there is another reality, too. The parallel universe -- the excitement of getting an unexpected "box" of equity delivered, followed by the downbeat of finding it full of tax and legal forms. Then in short order finding out that equity awards are all about delayed gratification.

So equity bestows status but really how much fun is it? And where does engagement fit in if I have to hold my breath for so long before I get a payout?

With those thoughts in mind, here are some tips to help you shine up any dimming charisma before 2012 ends:

• Oh, did I mention those years of underwater awards? If that's your company's recent history then you need a good message platform ASAP. Participants in equity awards are typically closer to discussions about the business strategy but like all of us, they don't automatically connect the dots. Don't just assume they've got it. Talk often and in detail about company performance with them. You can never make promises but you can provide insights and be candid. After all, one of the goals of equity awards is to keep the participants focused on their future with the company. Talk with participants like you really want to keep them close. 
• Resolve administrative complexities or take time explaining how to breeze through them. How can you identify all of the things that participants find complex and confusing? Make a list of all of the problems and misunderstandings you've run into.
• If you typically give an award then hold off any additional communication until a vesting event, look at the engagement opportunity you are missing. After a few months, those stock units may not feel like money or opportunity to participants as much as listings on yet another spreadsheet. Keep in touch with your participants. Think about opening your telephone lines for questions as a special event. Or get further down into the nitty gritty. This doesn't have to turn into advice or hand holding, just better communications.

In short, don't stick to the dusty approach of just the facts. I know that's always been the safest way to go with equity but what does that say about this form of compensation? And why give the cold shoulder to these participants when they should be the popular guys?

Margaret O'Hanlon is founder and Principal of re:Think Consulting. She joined Ann Bares and Dan Walter of the Compensation Cafe to speak the unspoken -- "Everything You Do (in Compensation) Is Communication" -- at the WorldatWork 2012 Conference. Margaret brings deep expertise in total rewards communications and change management to the dialog at the Café. Before founding re:Think Communications Consulting, she was a Principal in Total Rewards Communications and Change Management 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.

Competitive Compensation Without Stock Options

I recently did a webinar with Comp Café colleagues, Ann Bares and Margaret O’Hanlon. During the Q&A after the presentation, one of the attendees mentioned she works for a small company that’s owned by a global business that doesn’t offer stock options.  She asked what Long-Term Incentive (LTI) instruments existed that would allow her company to compete against those who offer stock options. Employee Stock Options can be powerful tools, but I am also keenly aware of the many situations where stock options cannot, or should not, be used. The following is my detailed answer to her question.

Long-Term Incentives (LTIs) are a broad category of compensation that generally includes any form of payment that stretches out two or more years. While stock options are the LTI that make the news most often, they are not the most common LTI delivery mechanism. Long-term cash incentives, in the form of both performance-based programs and various deferred compensation programs, are far more common than stock options.

Long-term cash programs have the upside of being based in “real” money. People love and understand cash. Using cash as both the measurement and delivery mechanism can simplify some aspects of communication. If the goal is to provide the same upside potential as stock options, cash programs must incorporate significant variability that can increase compensation expense. There is also the issue of making sure you actually have the cash when the payout comes due. If a company wants to deliver cash compensation in form of a percentage of the value of the company and stock options are not an option (no pun intended), synthetic equity programs may fit the bill.

It is possible to create programs based on units or rights.  These programs can have a value based on underlying stock or some other fraction of enterprise value. It’s common for these programs to payout only in cash with no actual ownership being delivered. With each type of program there are significant legal, tax and accounting considerations that must also be weighed along with compensation issues.

Most stock options provide only the appreciation in stock price over the period from grant date to exercise date. Stock Appreciation Rights (or “Unit Appreciation Rights” for those without access to stock) provide virtually the same return. Like stock options, SAR’s compensation expense is based on a valuation at the time of grant. This value incorporates the potential risks inherent in both the time and corporate value increase required to deliver income to the participant. SARs also have similar vesting, termination and change-in-control provisions to stock options. Unlike stock options, cash-settled SARs must be revalued on a regular basis like other forms of cash compensation. This can make them more expensive to the company. In the end, the participant voluntarily exercises and cash equal to the spread at exercise, less required tax withholding, is delivered.

Compensation can also be based on the full value of an underlying share or unit (Phantom Stock and Restricted Stock Units/RSUs). Full value unit programs are excellent vehicles for combining performance criteria to determine award eligibility, size, vesting dates and/or final value delivered. Since these instruments have the full value of the underlying shares or units at the time of award, they have a higher compensation expense per unit than SARs. Due to this fewer units are issued, providing potentially less upside, but also a more protective downside. These programs become taxable income at the time they vest. Given the recent unpredictability of the stock market full value programs (usually under the generic heading “restricted stock awards”) have become more popular than at anytime in the past couple of decades.

In addition to the programs listed above, there are several other tools that may allow your company to level the playing field against companies with stock options. You can see that this is too extensive a topic to fully cover here at the Café. I will cover other long-term compensation tools such as profit sharing, employee stock ownership programs (ESOPs) and deferred compensation in upcoming posts.

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

Tardigrades and Total Rewards

What can the tardigrade, a one-millimeter aquatic arthropod, teach us about compensation? 

They are masters at surviving extremely harsh conditions. As we officially enter Q4 of 2012, compensation pros are going to have to survive some harsh conditions as well.

Tardigrades (a.k.a. "waterbears" or "moss piglets") can survive temperatures ranging from -328 to +300 degrees Fahrenheit, pressures more than 6,000 times Earth's atmosphere, and radiation doses thousands of times stronger than what humans can survive.

Companies are facing their own extreme temperatures and pressures, even as the economy slowly recovers. According to Jeff Blair, Hay Group's U.S. Productized Services Leader, annual salary budget increases of 3 percent may be the new normal. Blair says this is not a "sustainable strategy, especially for hot jobs or hard-to-fill positions." 

In light of this "new normal," compensation pros are going to be making decisions in a pretty harsh environment.  Being creative with your total rewards may be the answer to stanching the exodus of talent and keeping employees engaged. Here are three tips from tardigrades for your total rewards strategy:

1. Stretch out and relax. When the oxygen content of their water gets too low for respiration, tardigrades stretch into a long, relaxed state. The relaxation of their muscles allows as much water and oxygen to enter their cells as possible. If you're stuck with a three percent or less budget increase, don't panic! You can use non-cash rewards like flexible work schedules and telecommuting to help your employees stretch out and relax. Some companies are also offering longevity leave bonuses and sabbaticals for longer-tenured employees to help them refresh and refocus.

2. Sweeten it up. Tardigrades are able to survive environmental stresses by producing trehalose, a special protective sugar that preserves their cells. When cash rewards are tight, use your own protective sugar to preserve your employees: say thank you. As my Cafe colleague Derek Irvine points out, "simply knowing someone noticed - knowing that what you do every day matters - is key to motivation, engagement, and loyalty." Don't wait until annual review time to say thank you - do it in response to specific accomplishments and achievements. Be careful to show appreciation genuinely and authentically; real sugar tastes great, but artificial sweetener has a bad aftertaste.

3. Dehydrate and rebalance. Tardigrades also have the ability to "super-hibernate" - they can enter a dehydrated state, reducing metabolic activity to as low as 0.01 percent of normal levels. While in this dehydrated state, a tardigrade curls up into dry, lifeless ball called a tun. If you are facing an extremely harsh environment this Q4, you may have to dehydrate base salaries and re-balance your rewards mix. Dehydrating base salaries and relying on other elements of rewards - variable pay, for example - avoids permanently ratcheting up pay levels when increases in company performance may not keep pace. Tardigrades can survive for decades in this dehydrated state, and return to normal once immersed in water. If - and when - annual salary budget increases return to "old normal" levels, you can re-examine your rewards mix and rehydrate where appropriate.

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 Eye Of Science/SPL/Solent