Compensation Cafe

Cafe Classic: The Age-Earnings Relationship Is Not What You Think

Editor's Note: In this Classic post, Stephanie Thomas draws on an impressive array of research to challenge some common assumptions about older workers.

You know the workforce is getting older, right?

Whether it's because of improved health care allowing us to live longer and healthier lives, advances in assistive technology, eroded financial positions delaying retirement, or a shift in preferences, the worklife of the typical American is getting longer.

Even though I probably don't need to convince you of this, here are some statistics on labor force participation rates by age group for the years 2000 and 2009:

Among people between the ages of 55 and 65, the labor force participation rate has increased 5 percent. Among those 65 and over, it's increased 4.5 percent. (You'll also note a decrease in labor force participation rates among the 16 to 24 age group - we'll hope it's because more of them are taking advantage of educational opportunities!)

What does the aging workforce mean for employers? It means that they need to consider the full spectrum of challenges and opportunities presented by this demographic shift. Research conducted by Towers Perrin, on behalf of AARP, suggests that

    ... organizations that adhere to the conventional wisdom about older workers - specifically the notion that older workers are more expensive and less productive than younger groups - may miss a critical opportunity to maximize their talent base.

One of the "conventional wisdom" assumptions that this research addresses is that older workers are more expensive than younger workers because of higher wage and benefits expense. It turns out that this is, in most cases, incorrect. The Towers Perrin research found that cash compensation (including bonuses) for older workers were typical for the positions held.

The research also points out that "while average pay tends to increase initially with service and age, this increase in pay can also result from gains in employee competence or movement up the career ladder in an organization." This finding can be demonstrated empirically. Using data from the Current Population Survey, we can map out the relationship between age and earnings. The chart below shows the average weekly earnings - across all industries and occupations - by age group:

The chart above shows the age earnings profile for ten different years (2000 through 2009). While there is some variation from year to year, the general pattern we see is that earnings increase rapidly in the earlier years of the worklife, from the late teens / early 20s through the mid-40. From the mid-40s through the mid-50s, earnings are still increasing, but the rate of increase slows down: earnings "flatten out". After the mid-50s, earnings actually decline.

What explains the overall shape of the age earnings profile? On the "front-end" of the profile, earnings in the late teens / early 20s are increasing very rapidly as younger people transition from a "job" to a "career". Earnings are also increasing during this period because we are rapidly learning new skills, becoming accustomed to the way things are done in our profession, being promoted and moving up the corporate ladder, or even leaving our current position for the greener pastures of better compensation and more opportunities with another organization.

But one of the most interesting parts of the age earnings profile is the "flattening-out" of earnings in the mid-40s to mid-50s range, and the decline of earnings. What's causing this pattern?

Different explanations have been offered, ranging from the biology of aging, labor market dynamics, human capital theory, organizational dynamics, and outright age discrimination. Maybe it's because we can't continue to move up the career ladder (and continue to be financially rewarded for doing so) indefinitely. We eventually reach an upper limit, either because we are utilizing our potential to the fullest, or because there's simply nothing above where we currently are. Maybe it's because of bias on the part of those evaluating our performance and determining our pay increases. Some have argued that this pattern is simply an artifact of measurement error in the self-reporting of earnings, which may be larger for older individuals who work non-standard hours.

An interesting potential explanation for the decline in earnings after the mid-50s relates to what we're measuring. Terrence Clauretie argues that while earnings decline, total compensation (including benefits) declines much later and much less. He argues that fringe benefits - and specifically health insurance - become a "more valuable component" of total compensation as one ages.

Can this whole thing be explained by including health care? No. Clauretie calculates the value of health benefits two different ways in his analysis: (1) 5.8% of wages, and (2) the difference between the total amount of reported medical expenditures and the portion reported as self-paid by the employee. Neither measure completely eliminates the decline in earnings, not to mention that "older" doesn't automatically imply bigger health care costs for the employer. While there is some difference in health care costs between older and younger workers, there is significant variation in health care costs among individuals within the same age group. In fact, the University of Michigan Health Management Research Center found that indivdiuals' specific health risks are a better predictor of health care costs than age.

So health care doesn't explain it away. What's the answer? Unfortunately, I can't give you a definitive single reason for why earnings flatten out in our mid-40s to mid-50s, and then decline. For some readers, this may be a less-than-satisfactory explanation; if you're one of them, I apologize. My shortcoming is shared by many - no single explanation has ever been found in all of the empirical research that's been done on this issue. The truth is I'm not sure there is one right answer- I think it's a complex combination of a lot of different things. And the conversation takes on a whole new level of complexity - and becomes emotionally charged - when we introduce productivity into the mix (which is exactly what we'll do in my next Cafe post!)
What I can definitively tell you is that this pattern is not limited to the 21st century. This relationship was present in the 1970s, 1980s, and 1990s; it's likely that this relationship will continue into the future. And even if we don't fully understand the underlying reasons, this empirical pattern has poked a lot of holes in assumptions about older workers.

What's the upshot for compensation managers and designers? Older workers aren't more expensive workers. Real cash compensation does not increase indefinitely. At some point, usually around the age of 50, plus or minus five years or so, earnings begin to flatten out, after which they decline.

The biggest challenge of the aging workforce is designing the right rewards mix. It's not all about cash compensation. It's about offering flexibility, the ability to work as long as the employee wants to work, and an environment where all employees - regardless of age - have the opportunity to have new experiences, learn new things, and continue to grow.

Stephanie Thomas, Ph.D., is a Lecturer in the Department of Economics at Cornell University and the Program Director for the Institute for Compensation Studies (ICS) at Cornell’s School of Industrial and Labor Relations. Throughout her career, Stephanie has completed research on a variety of topics including wage determination, pay gaps and inequality, and performance-based compensation systems. She frequently provides expert commentary in a media outlets such as The New York Times, CBC, and NPR, and has published papers in a variety of journals.

 

Get Over Yourself

Over the span of my career I've interacted with any number of Compensation practitioners, but also with a host of wannabes, career transients and dabblers, along with more than my share of HR generalists thinking that "Anyone can do this."  But the hardest profile I've had to rub shoulders with is the self-proclaimed expert who thinks that they know all and see all.

They have the right answers.  Even if they're not a Compensation pro.

You've seen this type of individual before; they're the "answer man" for every challenge that an organization can throw at them.  They always seem to know what needs to be done, and how it should be done, and their supreme confidence in themselves allows no reluctance in letting you know how proficient they are.  To put icing on the cake they typically compound their arrogance by insisting that their approach, answer, stratagem is the right way. The only way. And that other suggestions or perspectives are simply . . . wrong.

These people can be technically effective at what they do, but they often think too much of themselves and want to make sure that everyone else knows how effective they are as well.  Which irritates, doesn't it?   These are the types you see at professional conferences, blog sites and association gatherings, arguing over issues like the Cost of Living vs. the Cost of Labor, lamenting over the death of the performance appraisal process and debating the right steps to solve the latest hot topic compensation issue.  They also are convinced that the solutions they used in the past are definitely the right course to take with today's problems. 

They're not the personality type I'd like to have a drink with.

But I can forgive all of that (ok, most of that), if only they would show a bit of humility. If only they would get over themselves.

Management Come-Uppance

Presenting a personality of arrogant expertise in the face of any and all challenges can sometimes blind you to the particular realities of the situation being faced.  To the point where you start to force fit so-called solutions in order to match the problem.  These folks forget that when you're dealing with people, not simply with figures, formulae and spreadsheets, what is the correct solution becomes less of a cookie cutter "let's do this again" methodology and more how to handle a unique manifestation of specific challenges grown out of the organization, the culture, the demographics and even the management biases within their business.

So that what worked somewhere else yesterday may not work here, today.

Long term, the problems faced by these self-proclaimed experts are that;

• They alienate lesser mortals (staff and colleagues) with their arrogance, self righteousness, stubbornness  and know-it-all demeanor.  Which is not a good recipe for building an effective team effort.

• They tend to lecture senior management on what is the (only) right course of action.  Which can be a career limiting move.

• They are not good losers, believing that a decision going against them is a major mistake.  They can then become passive resisters.

Take a Lesson

No one likes to be lectured, to always be told that their ideas fall short of the proper way to do things.  If that behavior describes how you approach working with others, stop it!

When you were young and first started school your mother likely told you, "Try to get along with the other kids," or words to that effect.  In other words, don't stand apart but become part of the group.   In later years, by the time you gained a leadership role that admonition can be converted into "Learn the environment and listen to the employees - only then should you speak."

Show a little humility by listening to others, by planning for unintended consequences and by anticipating "gotcha" questions and the doubt of inevitable nay sayers.  Try to understand that others, even subordinates can have effective ideas and possible solutions that are worth considering.  And that senior management may have a more complete view of an issue than simply the compensation perspective.

But most important - get over yourself.

 Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a clowder of cats.

Free Digital Photos image, "Confidence," by petesimon

A Chrome Panda Predicts Demise of Stock Options

On May 7, 2016, it was reported that a giant chrome panda predicted the imminent crippling of stock options in the Silicon Valley. Dropbox has been a star of the unicorn sector. But, in October of 2015 and again in April of 2016, their value was written down by major mutual funds, including Fidelity. With their unicorn value and subsequent write down, they have become a high tech “canary in the coal mine” for employee stock options.

Just last month Dropbox moved into new digs in San Francisco. In their lobby, they installed a giant chrome panda (their mascot) that is meant to welcome guests with an iconic Bay Area flair of irreverence. The bad news is commissioning and installing an expensive statue does not show that you understand or agree with the recent write down of your value. The good news is that DropBox understands this and added a sign next to the panda that explains the panda wasn’t “the right call”.

In the name of responsible spending, the company has announced it is cutting back on a range of non-cash perks and conveniences. These are smart moves but we compensation professionals know the real money is in base pay and long-term incentives. Base pay is the last thing to be touched, so that leaves LTI if the current measures aren’t enough.

The purchase of the panda and the recognition of it being a mistake are pretty accurate metaphors for the over-reliance of stock options and other forms of equity in the tech sector specifically in the San Francisco Bay Area. (You may notice that since I grew up in San Jose, I often distinguish between San Francisco and the Silicon Valley, which are two fairly different places that share VC money, equity compensation and little else.) As I have mentioned throughout this “Stock Options on the Precipice” series (earlier articles: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10), equity compensation often relies on suspect survey data and company values. This is never more apparent than when the funding dries up, IPOs slow to a trickle and pre-IPO companies become easy acquisition targets for those companies who have already survived the gauntlet.

What most people don't discuss is that the fairly easy gains that come from IPOs often help drive the growth in values of publicly traded companies in those same sectors. When the IPO pace slows it usually takes about a year for the same pressures to drive down publicly traded stock prices. This can be devastating to compensation programs that have been built on the expectation of long-term continuous growth. The current bull market has pushed forward for around 7 years. Historically, these types of markets seldom last more than four years.

When these boom periods end, we see compensation programs implode and companies scramble for foothold in a world where survey data means nothing and history provides no indication of the future. Smart companies are currently working to determine how they will handle underwater legacy equity, compensation philosophies that depend on data that no longer exists and equity plans that have never been used in a down market. Thought is being put into how to protect current Employee Stock Purchase Plans and create new ESPPs that are better suited for a different environment. Performance metrics are being tested and plans are being reviewed for flexibility.

But, mostly, stock options are being scrutinized. Do you stop granting them now in anticipation that they will just end up underwater? Do you shorten the lives of new options so they expire and return to the plan much faster if they do fall underwater? Do you change your method for determining grant sizes since processes based both in dollars and numbers of shares may not work when your stock price is half, or even a tenth, of the current price?

Just think, all of this predicted by a chrome panda that probably should have never been created in the first place. I can't wait to hear about the fun and maybe ridiculous things that your companies (current or former) threw money at when it turned out not to be a good idea. Even better would be the stories of escaping from equity compensation that was no longer compensatory and likely demotivational.

Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and has been deeply involved in equity compensation for a long, long time. Dan has written several inustry respurces including the recent Performance-Based Equity Compensation. He has co-authored “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives” and a few other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.

Attitude is Necessary but Insufficient by Itself

The right attitude won't be enough to guarantee success.  More is needed.

Since compensation deals with rewards for proper work results, how people accomplish their responsibilities and tasks is worthy of discussion. Performance appraisal and merit ratings are frequently (un)popular, immensely complex topics; but I simply want to address the widespread myth that a positive attitude (a favored evaluation factor in primitive management systems) will always prevail.

The inspirational message that if you keep trying you will eventually succeed is a popular dramatic meme in novels and movies. There, we call it fiction.

Victory over adversity through self-confident persistence is also a common theme in media interviews of sports stars. It may be true for the few winners who ultimately reach the spotlights and microphones, but most of those who compete fail to capture first place.

Compensation professionals need to understand that there are many reasons --some of our own making -- for performance outcomes that fall short of expectations. Confidence does not equal competence nor do aspirations assure accomplishment.

A positive personal attitude is only one of the useful ingredients in a complex recipe for goal achievement. While it certainly helps if you BELIEVE in your abilities, you still must objectively possess the relevant competencies. You also must operate within a working context that enables success. Many work environments block proper performance efforts despite the initial positive enthusiasm of the employees.

For two years in a row, while reviewing all the performance reviews in a large corporation, I read, "She never completed that night course I ordered her to take." Remembering that same depreciating comment about the same worker by the same boss last year, I checked to see why the supervisor never supplied effective contingent support to correct the deficiency. The employee did enroll in the night course repeatedly, but was forced to drop out each time. Her evening attendance was constantly prevented by unpredictable late-night overtime demands imposed at the last minute by that very same supervisor. He continually thwarted her legitimate attempts to comply with his instructions. Then he downgraded her merit increase because she obeyed his work schedule orders rather than disobeying those orders so she could comply with another order.

Never happen to you? Ha. Just wait. Contradictory orders are Catch-22 or Hobson's Choice dilemmas eventually experienced by almost every worker.

No matter how firm your conviction that you will accomplish your mission, your success is generally not under your full and complete individual control. Organizations exist to leverage group efforts, but the friction of human interactions can generate toxic byproducts with potentially destructive consequences. Many obstacles regularly impair the effectiveness of even the most confident and able performer:

• conflicting orders
• unclear instructions,
• absent or misleading feedback
• inadequate resources
• imbalanced consequences
• simple task interference

All those elements above that interfere with performance are external circumstances controlled by the organization. How many times are people punished for obeying our commands? "Finish that complicated report right now. Hey, answer that phone on the first ring!" Or placed in situations where failure is virtually assured? Sternly ordering a new hire to report any theft of company property will not overcome the peer pressure to ignore a veteran employee's flagrant pilferage of a handful of paper clips. Examples could fill large libraries.

When highly skilled workers who could perform properly if their lives depended on it fail the assignment, you can be sure there is something wrong with either the support system or the reinforcement scheme. Performance management is an evolving art rather than a rigid science, but there are still good principles that enable improvement.

Hope this inspires some ideas for better compensation practices.  

E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience, specializing in job evaluation, market pricing and pay budget distribution. After corporate HR posts, he consulted to virtually every industry throughout North America before becoming Senior Associate of pay survey software publisher ERI until recently returning to consulting. A prolific writer (author of the Performance Management Workbook) and speaker, Jim gave expert witness testimony in many reasonable executive compensation cases both for and against the Internal Revenue Service and also serves on the Advisory Board of the Compensation and Benefits Review.

Creative Commons image "White Water" courtesy of Ben Salter

When You're Cornered, Why Not Step Aside?

We're all familiar with the "deer in the headlights" experience. You know those days that you're sure everything's finally going smoothly then, without warning, you're staring at a speeding car bearing down on you. It could be as simple as a call from the CEO.

Here are a few tips from organizations that have learned about the ugly combo of panic and compensation. I promise they'll come in handy when you find yourself in a pinch.

Case #1: [Select an option: IT, Sales, Research, Production] department head is running amok.
"We need those five [select an option: Engineers, client managers, project managers, shift supervisors] or we'll go under. We have to give these guys better, more up-to-date salary offers TOMORROW or they'll get poached. I'm sure of it."

If you find out that your leadership team is suddenly faced with rocky financials, with the Board bearing down on the execs, rushed decisions may seem reasonable. These are serious situations and it's natural for execs to be tense. You'll feel tense too, since you want to understand, move as quickly as needed and help in any way that HR can. But, but, but.

Those with experience know that knee jerk reactions don't hold up over time. More importantly they often distract you from much more productive triage work when you're in a serious situation. In the case study that inspired this article, HR called me because the CIO wanted to talk over salary agreements with incumbents before there was any type of turnaround strategy. Fortunately, the CEO stepped in and got the IT leader to face facts. There were far wiser actions to take than throwing money at these guys right now. Especially if the whole leadership team hadn't conferred yet on future staffing needs.

If HR had realized it was being cornered, it could have handled the situation differently. HR could have asked the CIO some tough questions and demanded good answers before equipping him to make offers. Or, HR could get the ear of someone influential who sits in on the daily emergency meetings to get staffing issues on the agenda and organize a systematic organization-wide approach.

Case #2: We haven't checked our salaries against the market in [select an option: 3, 4, 5 or more years].

"We've got to do it now, don't we? But we don't have any money for surveys. Let's call around to see what other companies are paying for a few of our job titles." There is no question that many surveys are expensive, but why ignore reality? You need to confirm pay rates on some regular schedule. Why not work with your CFO to create a way of putting an amount aside each year until you can fund a good survey. Acting with intention like this will give you a schedule, a budget and no drama. 

Case #3: "It's been [select an option: 3, 6, 9, 12 months] since we tried to fill that C-suite position. Let's try again with a bigger [select an option: salary, sign-on bonus, incentive, equity offering, loan opportunity and, and, and]."

I've seen this happen a number of times, especially with smaller organizations. They hire an executive recruiter, make their way through the list of candidates but get turned down by their best choice while the other candidates move on. Stuck and a bit embarrassed, it's likely that the executive team's next move is to hide out for a while, then improve the rewards package.

I often wonder why HR doesn't advise them to do a deeper analysis. The executive recruiter has some responsibility for how this turned out. Review the process you followed with him or her and identify key events that may have contributed to the poor outcome. In-house candidate assessment might also be off. Was the exec who walked away overqualified, overconfident or perhaps dismayed at what s/he was told about the company's current status? None of these problems could be solved by handing out more compensation.

And recognize, if your solution is only more compensation, the odds go up that candidate who is eventually hired could be overqualified, overconfident and/or underwhelmed -- but getting paid a really expensive total compensation package.

While deer can slip through your yard without being noticed, you have no such camouflage. Everything you do in compensation is communication, so why not do everything better? Start now by getting yourself a copy of the popular ebook, Everything You Do (in Compensation) Is Communication @ https://gumroad.com/l/everythingiscommunication. Margaret O'Hanlon, CCP collaborated with Ann Bares and Dan Walter to create this DIY guide to compensation leadership. Margaret is founder and Principal of re:Think Consulting. She brings deep expertise in compensation, communications and leadership to topics like the CEO Pay Ratio and performance management discussions at the Café. Before founding re:Think Consulting, Margaret was a Principal at Willis Towers Watson.

Cafe Classic: I Deserve a Raise

Editor's Note: In this Classic post, Jim Brennan takes a close look at the talents and tactics of the expert raise-getter.  Do the Serious Seven that Jim notes still reign today -- or are you seeing new and different approaches and arguments?  Take a moment to share your own experience.

Reasons cited to support a request for a raise usually include the Serious Seven:

1.merit
2.scope
3.competition
4.peers
5.irreplaceability
6.COL
7.offer

The really proficient raise-getter shoots all seven at you in a concentrated stream of information, typically right after you have complemented them on a really good work result.  “Since I personally perform my expanded unique job so much better than the competitive market norm that exceeds my pay and don’t make as much as my poorer-performing less-experienced co-workers even though I have more in-grade seniority and have no backup, at a time when I’m struggling to buy a house and put my kids through college while constantly rejecting all these attractive offers of higher pay from recruiters, don’t you agree that I deserve a big raise?”

The person who hits you with all those without hardly pausing to draw a breath knows what they are doing.  Pretty hard to simultaneously deflect all those shots when you’re not well prepared with a stock quick answer.

Did personal performance output results exceed reasonable expectations?  Were original job duties expanded enough to warrant extra compensation?  Do competitors really pay more for the same work?  Is the hybrid position so unique you can’t pin down its value?  Are the co-workers paid in any way that can be construed as so inequitable as to support a demand for parity due to superior merit, seniority or experience?  After cutbacks and staff reductions, can you afford to lose someone who straddles diverse tasks?  Has the worker actually experienced a loss in purchasing power or an increase in lifestyle costs so that their income no longer covers their reasonable family expenses?  Is it possible that you could lose them to a headhunter dangling other job opportunities (always a fatter title for more money)?

If a shiver goes down your neck, they may have succeeded in persuading you that if they walk, you may never be able to find another suitable replacement of their unique quality in one person at such a bargain price.

Even if every single one of those conditions doesn’t apply, you still have to admire the clever approach. 

What other major classes of justifications have you encountered?  After recalling the Big Five standard excuses from The Day, I realized that modern times have added two more:  scope of work and irreplaceability are relatively new reasons, in my experience.  So I offer a “Serious Seven.” But I still doubt that I have a comprehensive list of every rationale that exists. 

What is missing?

E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience, specializing in job evaluation, market pricing and pay budget distribution. He worked in every phase of corporate HR, consulted throughout North America and served as Senior Associate of pay survey software publisher ERI . A prolific writer (author of the Performance Management Workbook) and speaker, Jim gave expert witness testimony in many reasonable executive compensation cases both for and against the Internal Revenue Service and also serves on the Advisory Board of the Compensation and Benefits Review.

Have You Thought About Former Employees Recently?

It is becoming increasingly important for companies to think more broadly about employment boundaries, particularly the impact that wide-reaching “alumni networks” of former employees can have.  One of the critical prerequisites though is maintaining positive relationships with departing employees- prior, during, and after their transitions.

Compensation professionals can have extraordinary impact across all three timeframes through well designed total reward portfolios that drive positive financial and emotional experiences. The most powerful drivers, like moments of recognition, will be able to touch upon both simultaneously.

One study published recently has examined this phenomenon of positive relationships between departing employees and their former employers. The researchers found that employees who felt good about their former employers can have a number of positive benefits, including serving as ambassadors, future customers, or strategic partners. They may also become “boomerang” employees, and bring their knowledge of culture and process to get up to speed much more quickly than new hires.

In order for these benefits to be realized, employees need to have had a positive experience leading up to and following their departure. Two aspects contribute to a positive experience from the former employer’s perspective:

• Financial, influenced by existing compensation levels, as well as additional inducements to retain the employee. To the extent that both are perceived as fair, transparent and authentic, employees are likely to perceive the relationships more positively.
• Emotional, influenced by the interpersonal treatment leading up to the transition and whether the value and contributions of the employee have been acknowledged and communicated back. These messages, from bosses and colleagues, have a strong effect on the goodwill of former employees.

Both sets of perceptions will be important in contributing to the positive outcomes listed earlier. If we look across the total rewards portfolio, one aspect in particular stands out in terms of its ability to touch upon both simultaneously and drive positive experiences: social recognition.

Each moment of recognition communicates a financial investment in the form of an award, as well as an emotional investment in the accompanying message of the employee’s importance and value within the company. Moreover, these moments can be sourced from anywhere in the organization, amplifying the potential for a positive experience.

This ongoing process positions a company well to create positive experiences for employees, including those who may eventually leave for other jobs or careers. When that happens, recognition moments can present a timeline of all the contributions an employee has made, the relationships shared, and the investment the company has made in the employee.

Attempts to retain the employee or re-attract the “boomerangs” can also be built around these recognition moments, in discussions that identify potential shifts and pivots in career development plans based on work that was most meaningful in the past. Recognition moments may also provide a company with insight into unique skills and abilities that former employees have should strategic direction or talent needs shift in the future.

In this new, fluid world of work, companies need to be more flexible and perhaps creative in creating positive relationships with their employees, financially and emotionally. Through these relationships, companies can position themselves to more effectively retain and re-attract key talent, as well as build thriving alumni networks.

How has your company handled departing employees, and what has been most successful?

As Globoforce’s Vice President of Client Strategy and Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. He is the co-author of "The Power of Thanks" and his articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

Why is it SO DIFFICULT to Get Equity Amounts Right?

Let me start this by saying that there is little new in this post. If you have been a senior compensation professional during a market downturn, this should sound familiar. If you have not had this exciting and seldom pleasant experience, buckle up and let’s go!

The main selling point of equity compensation is that it provides unequaled compensatory upside through its extreme variability, while allowing a predictable and fixed compensation expense. This can be frustrating when things don't go as planned.

Compensation professionals prefer to be confident in the values they give management for approval. They also like to provide employees with easy to understand communications that describe things in black and white. Lastly, they like to use round numbers and simple growth rates whenever possible. With equity compensation, you can either be confident, easy to understand and use simple numbers or you can be right.

Let’s start with a simple table that will be the basis for arguments among long-term compensation professionals. This table is a basic reference. The numbers are wide-ranging. Many people will disagree with it.

There are many ways to look at the value of equity compensation. These reason equity is so hard to value is that all of the methods provide inaccurate results at some point. Given the uncertainty in the markets, it’s probably a good idea to discuss some of the ways people assign value to equity.

The Black-Scholes Merton (BSM) model. This is the most common tool for companies to determine stock option value. It’s a mathematical formula created by people far smarter than me. They were even awarded a Nobel Prize for it. It is also always wrong. The model usually values each stock option share at between 30% and 50% of the underlying stock price. Shorter or longer grant lives can change these numbers a bit. A volatile stock price is also a major driver of additional value. Volatility and value can be confusing, as shown below. The Growth Stock obviously provides more value to anyone holding stock options, but it has far lower volatility and therefore a lower BSM value.

So, how do you deal with Black Scholes? First, don’t try to explain it. You know how people always say their job “isn't rocket science?” In this case, it is. The BSM model uses math created to determine the trajectory of rockets to help determine the trajectory of potential values. Just tell people that the BSM generally ranges from 30% to 50% of the stock price and you will let them know if they fall outside this range.

Second, understand its purpose in compensation. Models like BSM are used to ensure that some level of expense (Fair Value for ASC 718) is included for shareholder consideration. It is not a predictor of your future stock price.

Realized and Realizable Value. These are the actual amount paid (realized) and current intrinsic value of vested and unvested equity not yet transacted. Realized pay can only be determined when the value is finalized. It is sometimes reported in public company filings, but not in survey data. Remember that your survey data doesn’t tell you what equity will really be worth in the future, but we often treat it like it does.

Risk Adjusted Return. This is a method for comparing the potential return of your awards by looking at a stable resource and factoring in the riskiness of your company. Sounds great, huh?  But, the trick is finding a suitable predicable source to use as the basis of the comparison. I haven’t found that this method works consistently enough for employee equity to give you any traction.

Perceived Value. This is the most important value up to the moment someone does a transaction. It is also both very tricky and deceptively easy to find out. If you want to know how much value your executives or employees feel their equity is giving them, simply ask. But, you need to be prepared to hear two kinds of values. The first, some super crazy inflated value that is unlikely to ever become real. The second is nothing. Absolutely nothing. The first usually occurs when the market and your stock price is hot. The second occurs when things turn sour.

Luckily, perceived value is the one thing you can impact in a positive way. Education programs and great data sources can help modulate individual perceived values into ranges that you find more acceptable. Without a reasonable perceived value, your equity program will never meet its objectives.

Once again I find myself (and you) running out of time and space for the day. I will continue this equity series at least through the month of May, so let me know what topics you wish I would cover in the next two or three posts. This is the tenth installment of my “Stock Options on the Precipice” series (earlier articles: 1, 2, 3, 4, 5, 6, 7, 8, 9)

Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and has been deeply involved in equity compensation for a long, long time. Dan has written several inustry respurces including the recent Performance-Based Equity Compensation. He has co-authored “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives” and a few other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.

Superficials Over Essentials - Compensation and Metaphysics

A corporate co-worker friend used to complain about the dirty looks he got sitting in his office reading The Wall Street Journal. As the corporate media relations manager, he was charged with the responsibility of knowing current industry trends, responding to business publicity developments and personally handling stockholder relations. That duty required keeping up to date on financial news so he could respond appropriately with his subsequent communications; but he appeared "lazy" to others. They judged without full knowledge, letting an impression based on false premises bias their assessments.

Passersby disapproved of his apparent neglect of Important Business (whatever that means). Many suit-wearing people found in stiff-necked corporate headquarters seem to jump to conclusions based on quick superficial judgments. After all, anyone with an office in the C suite must be focused, intense and harried ... right? Well, such self-important executives certainly expect their peers to be seen acting a certain way in order to be deemed worthy. It is not enough to be effective; you must also LOOK busy.

Arriving early and leaving late in order to be witnessed "working" on site might be passé in this era of remote access and virtual office relationships, but the old attitudes about appearances trumping reality still linger in many organizations ... and are increasingly reflected in labor laws. As discussed before, American employers face increased pressures to substitute the superficial external accidents (in metaphysical terms) of work for the fundamental essential necessities that create economic justifications for compensation.

Government prefers that wages should be decoupled from productivity output and based on process inputs like time instead. That kind of thinking can usually be ignored when it is merely theoretical (unless you are deeply immersed in transactional communication or philosophical debates). But when the context is a rule controlling the compensation element of human resource management, it demands our close attention.

What counts for worker compensation is an important question. Modern management theory has emphasized results produced, but the American regulations governing worker payments require (with limited exceptions) that remuneration be rationed by time spent rather than related to the production generated from that work time. Business values work results; government insists pay be based on time spent working. When regulators order employers to ignore results in favor of measuring methods, it creates a dramatic dissonance in occupational job evaluation priorities - and perhaps even in worker behaviors.

This resonates in certain cultures where compensation is based on behaviors rather than on objective productivity. In some societies:
· how something is done is more important than what is accomplished;
· external trappings outweigh essential elements;
· academic theory displaces practical experience;
· style takes priority over substance; 
· and appearance trumps reality.

Those are not the principles found in the reward programs that have successfully created the major economies of the world. Cultures that place primacy on input methods over output results tend to flounder and struggle in their futile attempts at prosperity. Similarly, enterprises that value worker inputs more than outputs find it difficult to survive. Managers who routinely confront these issues understand what is at stake. Evaluation concepts are relevant to business decisions like what skills are needed for mission accomplishment, how individual employee performance is evaluated for adequacy and what is required for correction/improvement.

Take a moment to consider what we value, because it is not always what we pay for. Have we lost sight of where we want to go? Can we find our direction any more?

E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience, specializing in job evaluation, market pricing and pay budget distribution. He worked in every phase of corporate HR, consulted throughout North America and served as Senior Associate of pay survey software publisher ERI . A prolific writer (author of the Performance Management Workbook) and speaker, Jim gave expert witness testimony in many reasonable executive compensation cases both for and against the Internal Revenue Service and also serves on the Advisory Board of the Compensation and Benefits Review.

Image courtesy of Ambro at FreeDigitalPhotos.net