Compensation Cafe

Show Me the Money

Contrary to popular belief, what if the total rewards package is no longer what it has been set up to be?  With the rise of inflation (specifically here in North America) and employees on the move, one is left to wonder about the totality relevance of each reward element.

The complete package has always been a key ticket in capturing the attention of potential candidates and a mechanism of keeping talent.  The suite of offerings and allocation of base salary, incentive, benefits, career development, etc. became the generic narrative of how we articulated compensation and sold our value proposition.

Times are changing.  The demands of employees, employers, consumers, and businesses face a new paradigm with harsh expectations to satisfy basic needs and meet deliverables.  Where the total rewards “pie” may have been distinctly portioned by a set of unique offerings,  we now face a more obsolete trend of just one element, that being salary.  People want the cash; they want it now and are seemingly willing to jump ship to where it's being offered with limited strings attached.

The external market thus far has already painted a projected outlook of salary increases to rise to pre-pandemic levels.  For some, preliminary forecasts are further being revisited to ensure the right talent is attracted and notably retained for the year ahead.

As rewards professionals, we know, we cannot satisfy everyone.  Our reality has always been one to counteract the perceptions that more money is better and things are always greener on the other side.  Albeit a little naive on my end, but what if it is?!  Could it be that today’s demand requires recalibrating to a higher base salary, with the 60^th percentile being the new “market median” of target positioning?

Over the next number of years, the workforce will be predominantly be made up of millennials. As the distribution of the workforce shifts, their reward preferences and what is seen to be motivating and rewarding will too.  The cost of living, owning a home, starting a family requires more immediate access to pay.  The rich pension/retirement plans may have been a draw at one time, but today and tomorrow’s outlook is seemingly more nearsighted in satisfying immediate short-term goals, whether in life, work, or both.

For years now, we have tried to achieve the elusive dream of “flexible” rewards. What if the most flexible of them all is having a higher base salary?  Doing so, in part gives the employee the ultimate power of deciding how they allocate, expense, and prioritize their “spend.”  This all sounds great, but we cannot be immune to the fact that there will (of course) be give and take; inadvertently the organization's benefits budget will increase too.  To offset this, organizations will need to consider how they adjust employee and employer costs.  In retrospect, this may very well be another “flexible” decision, where responsibility resides with the employee in determining how they ultimately slice each segment of their total rewards pie.

While pay is not the ultimate “fixer”, as we have yet to consider career development or performance management, this sentiment is simply food for thought in how we continually shape, reimagine and communicate total rewards amidst an ever-evolving work landscape.

Reena Paul (CCP, GRP) works as a Senior Compensation Consultant.  She is passionate about all things “total rewards” and has experience in dealing with all stakeholders of an organization and strategizing optimum client-focused solutions.  A lover of data and the story it tells, Reena enjoys the exploration of presenting and discussing compensation with a fresh perspective.  Connect with Reena directly on  LinkedIn. 

Image source: iStock image with credit to Pablo Varela

Cafe Classic: Don't Know Where You're Going? Then Any Plan Design Will Get You There!

Editor's Note: There are some (Classic?!) mistakes that seem destined to remain with us for the long haul. Call in the Cat!

I feel like the Cheshire Cat many days.  Not because I skulk around with an insidious grin (at least, not so far as I am aware), but because I find myself repeating the reward plan version of his famous quote so often.

Especially with respect to incentive plan design.

It is enormously tempting - for executives, managers and HR pros alike - to simply convene a meeting of the right people and jump straight to the business of incentive plan design.  Why not?  Everyone's got their pet idea as well as the latest scoop on what the cool employer in town is doing.  Hitting the brakes in order to devote time to discussing reward strategy or defining specific plan objectives - well, that's just an academic exercise, right?  Not the sort of thing that busy people in the real world spend their time on.

And then they hit the wall.  How do I know?  I know because this is when they call the consultant or send long emails to the compensation blogger.

Why?  Because, to paraphrase the Cheshire Cat, if you don't know where you're going, any plan design will get you there.  Incentive plan design, in particular, flows directly from your identified plan objectives (which, incidentally, should tie to your overall reward strategy).  If you aren't clear about exactly what you want to achieve with the incentive dollars spent, it's very difficult to choose from among competing design choices.  You have no real basis for knowing whether the EBITDA-based model that the CFO is pushing is better than the balanced scorecard approach favored by the head of HR.

Without clear plan objectives, any plan design is as good as any other.  Then it just comes down to who has the political clout or persuasive skills to ram their preference through.

No easy way around this, I'm afraid.  Not if it matters that your money is well spent.

And if it doesn't... then the Cat and I wish you best of luck.  You're going to need it.

Ann Bares is the Founder and Editor of Compensation Café,  Author of Compensation Force and Partner at Altura Consulting Group LLC, where she provides compensation consulting and survey administration services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and enjoys hiking, reading and hanging out with family in any spare time. 

Image courtesy of jrscm.com

Pre-IPO Equity Compensation: Refresh or Change Course?

It’s getting harder to know exactly what to do about equity compensation at pre-IPO companies. Values have been soaring (there are currently over 800 “Unicorns”, or pre-IPO companies worth more than $1B). There is so much money available that companies can stay private longer and grow bigger than ever before. All of this is challenging long-used models for equity compensation.

Companies and their consultants are rightfully questioning the efficacy of 4-year vesting schedules. Employees are asking for more equity as they become fully vested. Competitors are poaching the best people as they near the end of vesting for their original hire-on grants.

The following is a recent exchange from LinkedIn. The individual asking the question is a very experienced, and very good, compensation consultant who works for a major firm in the space. My answers are simply my opinions, and I am sure others will have different perspectives.

Questioner:

“HI - I am getting more questions about those high-level execs or engineers that are creeping up on their 3rd or 4th year of vesting. If the stock has really taken off since then, what kind of retention strategies are working for companies? Annual refresher grants pale in comparison to some of those original grants or new hire grants. Anything you've seen help people stay interested?”

“Specific follow-up question - does a large amount of unvested stock mean you could be ineligible for an annual refresher. I don't think I've seen that happen before. You?”     

My Response:

“There is so much to cover here...”

“Pre-IPO grants that follow the now ubiquitous 4-year vesting schedule are a real problem in the marketplace. We are often recommending two grants at the same time: 

• One grant with a shorter (2-3 year) vesting)
• Another with a much longer 6-8 yr) vesting.”

“There is no great reason to grant smaller equity awards at hire and then grant refresh grants in the future (for most companies).“

“There is very low risk when using larger, longer-term grants since the company gets the shares back if the person leaves. The refresh concept does not work with current skyrocketing valuations. If a high valuation company must refresh equity, we often recommend RSUs since they get rid of the high exercise price that comes with stock options (but, they have their own issues with prescriptive taxation and other considerations).”

“And yes, the level of “unvestedness” often drives potential refresh grants. When unvested values are really high, it doesn't make a lot of sense to give more unvested equity.  When they are low, something needs to be done ASAP. We often recommend designing a refresh program for grants that will become 75% vested or more in the next 12 months.”

This topic is far more complex than a blog post can cover. The models for granting pre-IPO equity are broken. The “market data” you’ve been using is based on people generally adhering to those broken models. Equity in those models never considered companies worth billions, or staff sizes of several thousand before an Initial Public Offering. Those models do not account for SPACs, Direct Listings, Reg A offers, or IPOs worth $20, or even $50, Billion dollars. Your VC investors have little motivation to change. Your PE investors want to see more performance criteria. Your employees want to see a return to more equitable equity (as long as they make a ton of money). As a compensation professional, you have both a unique challenge and a unique opportunity.

You can follow the path that isn’t working, or you can do the hard work to determine the right path for your company. The process requires some brainstorming and education, but the results can be impressive.

P.S. Please stop using the notional value from your most recent preferred stock to value your equity against market data. That’s not how it’s correctly done.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is a leading expert on incentive plans and equity compensation issues. He has written several industry resources including a resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or follow him on Twitter at @DanFutureSense.

Stubborn Is as Stubborn Does

I share my house with five cats (a clowder, it's called) and it’s been that way for as long as I can remember. One or two fur balls has never been enough for us. I love them, they are part of my family, but I recognize that they are stubborn, stubborn, stubborn creatures, and at times it seems like they’re the ones who run the place.

Have you ever tried to change the brand of a cat’s food, or what goes into their litter box, or even their water dish? They don’t react well to the new and different, and when they don’t react well their loud voices and sometimes unpleasant behavior can really disrupt your day. 

These felines are creatures of habit, preferring a daily pattern of repeated behavior that in their view creates a safe and reassuring environment – where they feel the most comfortable. Break that pattern and you get the look, or worse. I can attest to the fact that dealing with the stubborn and the habitual can be a real trial.

In the business world, many companies are populated by managers who possess similar inflexible behavior, an aversion to breaks in pattern. Those who like things left just the way they are. Whoever coined the phrase “if it ain’t broke, don’t fix it” was probably a charter member in that "blinders on, head in the sand" leadership cadre who likes the comfort of repetitive action.

While it’s a truism that continuing to use yesterday's strategy and operating principles is rarely a recipe for future success, how often do you see managers hang on to what used to work - until the signs of failure become so visible and so painful that they can no longer be accepted?

Comfort

These folks with their heads in the sand are not necessarily bad managers or even poor business leaders. What they are is comfortable, and when we’re comfortable we feel safe, relaxed in our surroundings, familiar with what needs to get done and perhaps a bit overconfident about our control of the work environment.

When we feel comfortable and confident we prefer to repeat those same actions that brought us to our present state of mental ease. In other words, we don’t like to rock the boat, we don’t like what we consider “change for the sake of change,” and we’re skeptical of new and unproven techniques. We get stubborn and dig in our heels.

"It’s worked before, it brought us success. Let’s leave it alone."

However, when someone or some event breaks that comfort level (new competition, weakened economy, technological advances, etc.), the first thing we experience is anger that our warm cocoon could be shattered by new business realities. Soon enough though, that anger will convert to a sense of fear, whether we admit it or not. More than likely we’ll act out in an aggressive fashion that disguises the panic we're feeling.

Fear

People can be fearful of change, especially leaders. Because they don't know the new rules, because there are risks when implementing new strategies, and those who stick their head above the crowd can get it chopped off. We’ve all seen that happen.

When you must get yourself up and out of your comfort zone it’s a natural reaction to feel defensive and unsure about what you should do next. A relaxed and comfortable leadership may not have the competencies or the experience to adapt to new business challenges. Because it’s not difficult to lead when things are going well. But when the going gets rough, when the pressure is on to change course, to implement new strategies, not so much.

"I’m not sure about what to do; everything has changed."

Pushed from their safe environment management can find itself unsure, defensive and unsettled about the correct way forward.  And until matters settle down again they can be difficult for us practitioners to work with.

You Can Help Them 

You may consider managers stuck in the past as living dinosaurs, but have a care because these beasts have teeth.  Because they don’t like this uncomfortable new world some will tend to shoot the messenger.  In order to offer assistance to a leadership challenged by the unfamiliar, practitioners need to step up and provide steady, confident and reliable advice.

• Acknowledge the past:  Yes, previous strategies have worked well and brought the company success and financial strength, reputation, and a strong foundation for the future.  You should acknowledge a well-deserved pat on the shoulders for management.
• Focus on the why:  Whenever advocating change, focus your message, your research, your examples, and your entire business case on why your recommendations lead to solutions.  Keep your eye on the goal, not the changing patterns of behavior.
• Dangle the carrot:  Always point toward the business and personal success that would be the result of implementing your recommendations. Besides highlighting the achievement of business success, emphasize that leadership will gain credit for managing the organization through these difficult times. Stroking the ego doesn’t hurt here.

The next time someone comes to you with an idea to build a better mousetrap, listen to them. Keep your eyes, your mind and your options open. Maybe there's something useful here.  Instead of being afraid of change, embrace the possibilities presented. New thinking that takes in the new realities surrounding you can make for a better tomorrow. Perhaps you’ll even shake off that tag of “stubborn.”

Chuck Csizmar CCP is the 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.

Creative Commons image "Cat," by aoizip

Cafe Classic: He Sells, She Sells... But Why and How?

Editor's Note:  Gender was a less polarizing topic a few years ago when I first highlighted the research noted below.  What are your thoughts on this Classic "gender and reward" post?  Would the findings of this research differ if it was conducted today?

On the heels of the interesting comment conversation that followed by my recent Classic post on gender differences in response to rewards, where I was quick to footnote that the research and its conclusion as not applicable to sales compensation, I stumbled into this study.  Naturally, I had to share it with you here.  I don't mean to continue diving too deeply down the rabbit hold on gender differences - but I did think this an interesting bookend to that conversation.

The original intent of the study, The Similarities and Differences Between Men and Women in Sales by Steve W. Martin, a sales linguistics expert who gathered data via an extensive survey from over 1,000 sales professionals, was to understand the specific traits, actions and habits associated with sales performance.  It was not designed to compare male and female sales pros.  Rather, the gender differences jumped out as the data was analyzed, prompting the development of this research report.

Here are a few interesting findings (there are many others as well, if you're willing to dig into the 50 page report).

Why I'm in Sales

While the motivations that lead to a career in sales probably vary as widely as the people themselves, the author notes that the answers to a question about the fundamental reason they are in sales generally fall into four categories.  Below we see where the responses women and men gave differ.  Men are more likely than women to select "the harder I work the more money I make" and women more likely than men to state that the career choice "just happened." This may jive somewhat with the findings highlighted in my earlier post, that men are more likely to pursue a role with pay based on competition (hopefully, in the case of sales, it's inter-company rather than intra-company).

How Important Money Is To Me

Whether pay explicitly led them to a career in sales or not, the chart below shows - surprise surprise, right? - that the majority of male and female sales pros are motivated by money.  62% of men and 54% of women agreed with the statement “Money is extremely important to me and how I measure my personal success."  Only 14% of men and 15% of women disagreed.  So while there is a small observable difference in "money importance" between the genders, it is less significant than their motivation to get into sales (above) might suggest.

  

The Difference a Mentor Makes

This is the one I really found interesting - the difference that having had a mentor makes to actual sales performance, as measured by previous year's performance against quota.  Women who've had the benefit of mentorship significantly outperformed their no-mentor female peers - a finding that was not nearly as striking for men.

Some thought provoking takeaways for sales recruiting, retention, development, performance management and role definition here - less so (to my thinking) for sales rewards. But still.

What say you?

Ann Bares is the Founder and Editor of Compensation Café,  Author of Compensation Force and Partner at Altura Consulting Group LLC, where she provides compensation consulting and survey administration services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and enjoys hiking, reading and hanging out with family in any spare time.