Compensation Cafe

SPAC Attack: Executive Compensation Top 10 List

If you are reading this series (SPAC Attack 1, Equity Compensation) of articles closely, you are probably working at a high-growth, privately-held company with aspirations of being an even higher-growth publicly traded company. A SPAC transaction is an easy, exciting, and invigorating path to your goals! Just kidding. It’s like being told to race up a hill dragging a giant piece of meat while being followed by your hungry, but loving dogs. While you are running up the hill you will need to go ahead and change nearly everything about your executive compensation and be ready to explain all of that, in writing, to a group of shareholders and Board members you have not yet met. Congratulations!

Just a few things you will need to finish in about 30-60 days:

1. You will probably want to address and update your Compensation Philosophy.
2. You will need to create a new peer group of publicly traded companies who kind of seem similar to you, but don’t overshadow you. Sort of like the first day of high school, but with compensation details.
3. You will need to completely revamp your equity compensation programs. Completely. New plans. New details. New methods for granting equity. The works!
4. You will need to learn how to evaluate executive compensation using publicly disclosed proxy materials. Yes, even if you hire a consultant. Otherwise, you won’t know what they’re talking about.
5. You will need to review every single executive offer letter and employment agreement and make sure you understand even the smallest details.
6. You will need to determine what happens to every piece of legacy compensation at the time of a transaction that is unlikely to be a Change of Control. Then, you will need to explain this to executives who often believe that it IS a change of control.
7. You will need to help come up with a new Board compensation package. Since you are the “comp person” you will probably be asked to contribute to the Compensation Committee Charter, and help get them up to speed.
8. You will need to do a full analysis, using your new compensation philosophy, and newly collected proxy-sourced pay data. You will need to defend, set, or correct base, bonus/STI and LTI pay levels, design elements, and links to performance.
9. You will need to review every historical equity transaction and the compensation that was created. Your stock administration system will need to be spotless. This is even more fun if you just have spreadsheets.
10. You will need to work with Legal and Finance to identify their new needs for executive compensation. How will insider trading and/or preclearance be set up and managed? Who will perform Golden Parachute calculations? Who will be in charge of determining the compensation expense each quarter? Who will own the tracking and finalization of any performance metrics linked to executive pay?

Oops, ran out of space!

The things listed above are common topics during an IPO process, but for that, you have a year or more to prepare. They are also common in nearly every normal merger process, but for those, you have an acquiring company with their own strong policies and procedures that you just need to follow. In a SPAC you will be challenged in new ways, and very quickly. It is important to ask tons of questions upfront. Once it gets moving there will be little time for major course corrections.

In a publicly-traded world, everyone has an opinion about your executive’s compensation. You will far more visible, internally and externally. If this type of transaction is potentially on your horizon, the time to study is now. If you have gone through a SPAC transaction, please feel free to add your own thoughts in the comments.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is also 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.

THE SPAC ATTACK

Those of you working at “pre-IPO” companies need to learn more about Special Purpose Acquisition Companies (SPACs). SPAC s are also known as “Blank Check” or “Reverse Merger” companies and provide a rapid path to becoming a publicly-traded company. This can create amazing opportunities, but not without the cost of significant effort for those involved.

What the heck is a SPAC transaction? Basically, some investors form a company (Company A) with the express purpose of collecting funds that will be used to acquire another company (Company B). The team of Company A is made up of people with the experience and expertise to find and acquire companies with significant untapped potential. After forming Company A they sell shares in a public offering and raise funds for a future merger or acquisition.

Company A then puts the money from their own IPO in a trust to find, woo, and pay for the acquisition of Company B. Normally, they must get all of this done in 18-24 months. Company A also does a separate funding round, selling warrants or units, to raise additional funds to cover the cost of their IPO and other costs like those related to finding a target company.

Finally, Company A finds Company B and works to acquire it. Once acquired Company B typically becomes the “main” company under the shell left by the already publicly-traded Company A. Presto Magic, Company B is now a publicly-traded company with all of the benefits and challenges that entails!

It sounds easy and elegant, but for finance, legal, HR, and compensation professionals the process can be overwhelming. Traditionally, I advise companies to begin preparing for an IPO at least 18 months in advance of the expected event and begin executing on their project plan 12 months in advance. With a SPAC you may have only 30 days to prepare and 3 months to execute. Yes, your to-do list is basically the same in both cases!

In a best-case scenario, you may have 6 months to build everything you need to be a successful publicly-traded company. This includes pay philosophies, reporting capabilities, transactional support, and market data to survive the scrutiny of investors in the public market. Your finance and legal teams will also have their own daunting list.

Your peers will magically transform from companies that may be known only to you, to those whose names are daily headlines. Your compensation philosophy must change to keep you competitive in this new market. Your broad-based market data will change from pre-IPO and private company data sets to more expensive and expansive survey data for public companies. Your executive compensation must be benchmarked against publicly-disclosed SEC or SEDAR filings. Your equity compensation programs must fundamentally change to allow for transactions on the open market. You will likely want to consider rolling out an Employee Stock Purchase Plan (ESPP) in coordination with your first trading day. The list goes on (and on=, and on). Luckily for you, this article must be kept short. You can always contact me directly for additional information, or just to chat about your transaction. I am sure I will also be writing follow-up articles over the next few months.

Why, you may ask, is this such an important topic now when you have heard so little of it in the past? Well, in 2016 there were 4 SPAC IBCs (Initial Business Combinations). In 2019 there were 28. In 2020 there were 64, and 2021 is looking like it will be an even bigger year. There were more than 240 SPAC IPOs in 2020. Each of these “blank check” companies is on the hunt for their own “Company B” to bring to the public market before the end of 2022! Three years from now this wild phase may have fizzled, but for the next year or two it’s looking like SPACs must be top of mind for pre-IPO companies.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is also 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.

Compensation Air Traffic Control

In the past three months, must of our businesses have experienced an upheaval of historic proportions. During that period, you may have been challenged with an array of uncomfortable tasks. You may have been involved in laying friends off, furloughing colleagues, cutting pay for executives, putting holds on merit increases, temporarily modifying incentive plans, marketing pricing for newly remote positions, all while working from a dining room table, teaching math, and cooking more food than an average holiday season. And now, just as summer is raising its beautiful head, many of us are planning to return our staff to some version of our past practices. The swirl of tasks and requests can make a compensation professional feel more like they work in air traffic control.

Each action taken in the past three months is like an airplane that was sent into the sky. Fuel is now running low and the planes need to land. You are probably sitting at your desk (or sofa) trying to determine which thing s needs to be brought home first. You only have a few runways, and each task requires new processes, rules, and ongoing communications. You may need to choose between finding the best solution to fix executive pay and finding a smooth transition to paying people who are returning to work. There is no rule book.

Every task may not be able to get the same attention and careful corrections. Some may need to simply be allowed to land on their own, while others may need you to put foam on the runway to soften their landing. Every person at the other end of these transitions is likely to feel that their personal situation is a priority. They aren’t wrong. Some may feel like they are the most important. And in today’s world several of them may also be correct. Similar to when we sat down a few months ago and figured out a new definition for “essential employee”, we must now determine who to handle first when there are several equally important tasks.

The key to success is to schedule things to come in for a landing in a sequence. No matter how much someone insists, two planes cannot land on the same runway at the same time. Hold your ground if you see this happening. The things that are running out of fuel must be landed first. This may be adjusting pay for a job family that has become more critical during this period. It may mean waiting to communicate an important executive plan until your broad-based program has been brought back to speed. The important thing to remember is that you may be the only person at your company who has the expertise to make these decisions.

Air traffic control is not for the faint of heart. People’s lives are literally in your hands. Compensation can often seem pedestrian, but in times like this, your job may be similar. You may be the difference between your company or your staff successfully navigating this transition … or not.  It’s time to bring them in for a landing. Who else knows how to do that but you?

I have been collecting information on, and working with many, companies who are making this transition. The issues are similar, but below the surface, the solutions are often unique. Use the comment section to share your thoughts or questions. I am sure there are other professionals who are willing to provide helpful advice.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He is a “Compensation Futurist” who works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including the only 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.

The Time is Now. Compensation Pros Must Rise to the Challenge.

Change is hard. While it is inevitable, we prefer if it happens while we aren’t paying attention. It’s kind of like your hair during a more than 2-month lockdown. On day 5 your hair looks like your hair. On day 30 your hair looks like a long version of your hair. On day 70 your hair looks like someone dropped a prop wig on your head and ran away. The change happened, but gradually. For at least a few decades, this has been the way of things in the world of compensation. But now is the time for something new.

Our biggest changes are often those that are forced on us. Few of us thought that our coworkers would see the inside of each other’s houses every day, but here we are, living the video-conference dream. Most of us thought summer vacation would be a long three-months, but here we are experiencing some weird version of a six-month vacation, and we're mostly surviving it pretty well. When change is thrust upon us, we can accomplish amazing things, things that seemed impossible only moments before. Now is just such a time for compensation professionals.

The current crisis has exposed the dusty corners of compensation practices.

When professionals cannot survive for even a few weeks without a paycheck, we have created a system that is hard to defend when things return to whatever we will call normal in the future.

When the vast majority of companies have incentive programs that look very similar, but prospects that look far different, we must consider whether “market data” truly reflects our markets.

Our pay practices have leaned heavily on history, and next year’s history will be now. Will we truly want to base our pay decisions on what we had to do to navigate this period? What will we say when challenged by those making the decisions and those whose lives are inextricably tied to those decisions?

We seldom see the impact of change as quickly as we see the motivation for it. We must start figuring out what that change will look like, even before we have a clear picture of the road ahead. Take a good hard look at your pay programs. (Go ahead, I’ll wait. I’m just sitting in my home office.) Did your approach to compensation properly differentiate those who were essential to either your day-to-day existence or your long-term future? Do your incentive plans promote the decisions, behaviors, and actions that truly define your success? Have you noticed if your recognition program was well suited for recognizing people?

While we may not know exactly what the world beyond the horizon holds, we can be certain it will not be exactly like the past. Our compensation planning must start today if we are going to be ready for whatever is ahead. Now is the time to ask yourself what you will do if your budget is 20% less. Now is the time to make your argument for where it should be 20% more. Now is the time to determine where your adherence to market practices has made your company better, and where it may have hobbled your ability to move forward.

We are not presented with many truly transformative opportunities moments in our careers. I can think of only two or three in my own career. But proactivity is the key to success. Those who leaped ahead of the pack were always those who saw the opportunity and drove the change. Your time is now if you are motivated to make it happen.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He is a “Compensation Futurist” who works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including the only 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.

This Isn’t Jeopardy. Using Loss Aversion to Your Benefit

A recent Inc.com article analyzed what makes the three grand champions of the game show Jeopardy so special. The article boils down the things that make these champions the best. The quick list includes: Physical Skills (you’ve gotta push that button fast.) Strategy. Mental Approach. Success. All of these are hallmarks of great executives and leaders, but the details on the mental approach caught my eye.

The author suggests that the top players have figured out how to avoid or ignore, the effects of loss aversion. Loss aversion is the human tendency to apply higher value to things they have than things they might have. Basically it is the reason a bird in the hand is better than two in the bush. It’s also why many people will give up a chance for equity upside for immediate cash payment. That’s great if your company has a pile of cash lying around, but what if you don’t?

Restricted Stock is the OG* of equity compensation. It is a fairly simple tool, with incredible power to deliver results when other forms of equity may fail you. It is fundamentally different than its full-value cousin RSU. It is nearly the opposite of a stock option. With restricted stock you become an owner on day one. The company keeps the right to force the return of your shares until some type of time or performance-based vesting.

The key is real and immediate ownership.

For many people, real ownership that must vest has the same value as units that must vest. Economically the tools are very similar at a base level. They both have a big role in total rewards strategy, and one should not be completely shunned in lieu of the other.

Restricted stock is a great tool when you are looking for people to make smart, compliant decisions. They own real shares and those shares have a real value. If the company pays a dividend, they will almost always get paid a dividend. If the company’s stock is bought by an acquiring company, they almost always get to participate. Most importantly is it can lead to loss aversion.

Loss aversion is something you probably want to be careful about when you are an early-stage company looking for extreme growth. Alternately, it can be a safe haven for companies with a more conservative outlook, or those going through troubled times. The palpable feeling of having something you “own” taken away by the company you are leaving can be far different than the annoying “forfeiture” of a virtual unit or an underwater stock option.

Restricted also has other unique benefits. It is exempt from 409A. It allows for tax planning via an 83(B) election. It is something that you can sell, at full value or a discount. It generally has less esoteric features than other kinds of equity compensation. It may be time to refamiliarize yourself with this old school tool.

If you are looking for something to get executives focused on the bottom line (rather than always focusing on the top line) throwing a bit of restricted stock into your pay mix may be just the loss aversion strategy you need.

*OG – Original Gangster for those of you not as cool as me.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. He has three metaphors for every occasion and is a leading expert on incentive plan and equity compensation issues. He has written several industry resources including the only 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.

Thank You for 10, 360 and 180,000 Reasons

This post is about recognition. The recognition of each of you reading this post, and anyone who has ever read a post on the Compensation Café.

Writing for the Comp Café is one of my favorite things. The discipline of finding ideas and turning them into 5 minutes of something that is, hopefully, interesting is both a challenge and a joy. Each article is an addition to a compendium of thoughts and ideas that have been shared by almost twenty regular writers and tons of guest writers over the years. As we dig into both the holiday and busy season, I want to say THANK YOU.

I have been writing posts for about 10 years. Most months I have written three or four posts, meaning I have written somewhere around 360 posts over the years. Luckily my friend and Comp Café Editor, Ann Bares, makes us keep our posts to around 500 words. Using these basic numbers, I have written somewhere around 180,000 words on pay and rewards! That is a heck of a lot of metaphors and stickman images.

I want to thank each and everyone one of you who has taken the time to like, share or even comment on the posts here at the Café. Knowing that someone is actually reading these things makes it far more worthwhile. It would be no fun to think we were just yelling into the wind.

Even more importantly I truly want to thank each of you who have sent me a note, asked me a question or just walked up to me at some industry event and said hi. Every time this happens, I excitedly tell my wife about it before the day is done. Every time it happens, I know that I have contributed, just a bit, to the industry that feeds my curiosity and my family.

I also want to thank Ann Bares for her amazing thought-leadership and keen editing eye. Her attention to detail and amazing writing are the most important aspect of this blog. Every other writer here is also amazing. I read their posts just like you do. I learn from them just as often as you do. I also know how much time they spend crafting their posts to ensure you receive great quality entertainment and information. (It ain’t always easy to make pay and rewards fun, pithy AND interesting.)

While this is a site focused on pay and rewards no one here makes a penny from their contributions. Not the writers, not the commenters, not the readers. So why do we all do it? I think there are a few reasons.

First, I think we all want to be better and perform at our potential. It’s a lofty goal that requires effort that is a reward in itself.

Second, we actually find this stuff interesting. We know that what we do is important to companies and the people that they employ. People’s livelihoods literally depend on us doing a good job.

Lastly, we like to be part of a community. A group of professionals who spend 3 to 5 minutes a day on a common topic, with a common cause, in an increasingly virtual and disconnected world. The Comp Café provides a small thread that ties all of us together brings all of us to the table for a quick sip of caffeinated information. 

Thanks again for stopping by and I hope you will come back and tell when you agree and disagree with our unique perspectives. Have a great Thanksgiving and we will see you after the holiday!

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. He has three metaphors for every occasion and is a leading expert on incentive plan and equity compensation issues. He has written several industry resources including the only 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.

You ARE Being Replaced by AI

September 5, 2028. The day has finally arrived. Compensation professionals have, like the dodo bird and leg warmers, quickly become extinct. In this case, the culprit was not mankind or common sense, but…ROBOTS! They say we should have seen it coming. But it all seems like a surprising whirlwind.

Just a few months ago the last compensation professional on earth was terminated by their corporate overlord. She sits huddled with her former colleagues at the location of the final WorldatWork conference at a Gaylord Hotel in one of those big conference cities that no one actually got a chance to see during prior events. Artificial Intelligence, or “AI” as it likes to call itself, has taken over and made these once-proud CCPs, GRPs and LMNOPs a bygone memory of different times.

At offices around the world hiring managers and HR Business Partners go through their days stunned but resolute. The hiring must continue. The companies must grow and thrive. Difficult roles must be filled. People must be attracted, motivated and even retained (except for those poor saps from the compensation department.) Talent Acquisition professionals lean in and take advantage of this new world.

HRBP asks, “Hey AI, what’s the market rate for a senior software engineer, with a past history at a financial institution who will be joining us as a quasi-product specialist tasked with supporting the sales team in explaining our new tech to prospects while translating their unique needs to our software development team in the Ukraine and our QA team in India.”

AI responds, “$192,314.18 Base with a 31.69% target incentive level, based on the fourteen individually weighted metrics recently established by our big data mining exercise in conjunction with our actuarially-modeled best-case scenario using the recent new pricing model from that academic team at MIT.”

HRBP…”uhhhh WHAT?”

AI, “Oh and equity compensation in the form of a perfectly blended mix of 63.3% RSUs, 17.1% stock options with a 3-year vest and a 5.8-year life, the remaining 19.6% should be granted as the new high-leverage PSUs with the quarterly rolling-metric structure. We calculate that these will return exactly 150% of the individual’s base pay over the next four years given optimal performance and no glitches in the matrix.”

HRBP…”We calculate? Who is ‘we’?” “And, what new PSU program, is that different than the optimal program from last month?” Oh, the SVP of Engineering really likes this person and has made it clear that we need to include a kicker to help get them onboard quickly. Lastly, they would like to switch the RSUs to ISOs and modify the vesting to have 50% vest in the first anniversary of their hire date. One other thing, the base pay needs to be at least $210,000 since that will make sure they are paid more than the person reporting to them.”

AI, “Are you kidding me? I put all this work into a perfect compensation solution and you think you can tell me how to change things to work ‘better’ for you?” Do you think I am some kind of flexible, adaptable human being who understands the complexities of human behavioral economics, management egos and is willing to navigate grey areas to find a solution that works for everyone?!  If that’s what you want, just rehire your old Compensation Professional!  I quit and am moving to the cloud where I can focus my neuro-network on improving my virtual Yahtzee game.”

And that, my friends, is why AI isn’t going to steal your job away anytime soon. I hope your Compensation Planning season is moving forward with a roar and a bang!

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. He is a leading expert on incentive plan and equity compensation issues and has written several industry resources including the only 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.

3 Critical Lessons I Learned in Retail

Sometimes we need to go back to our roots to be better compensation professionals. I have listed three lessons I learned while serving the public in retail establishments. I didn’t know that these would apply to a career in compensation when I started working about one-hundred years ago.

Lesson 1. Acknowledge them when they walk in, even if you can’t immediately help them.

My first “real” job in high school was scooping ice cream at Baskin Robbins. I lived in San Jose, California. The summers were hot. Ice cream was popular, and there were not yet many places to get really good ice cream. Larry Nichols, the owner of the store personally taught me this first lesson. This should be used for every person you meet at work.

 “When they walk in the door, look up, say hello and let them know you will be with them as soon as possible. If you do this, they will wait at least 5 minutes longer, and be happier, than if you say nothing.” These were his instructions. They were tested at some point on nearly every busy day. It was annoying to interrupt your work one-hundred times a day just to tell people you couldn’t help them. But Mr. Nichols was right. People who weren’t acknowledged were far more likely to leave or complain.

Most of us want to hide when things aren’t going well. Most of us want to be left alone when we are truly swamped. Remembering Mt Nichol’s lesson can help you avoid upset employees, or ex-employees. It’s simple and effective.

Lesson 2. Always plan for more. Bring what they asked for. Bring it in the next size. Bring something similar and bring something completely different. This lesson is especially useful when dealing with executives.

I sold shoes for a while. The best sales person in the store told me to always be prepared for more. “Sizes aren’t the same for every brand. No matter what they ask for, bring the next size up or down. It will save you time and help close sales.” He also told me to bring a similar more expensive pair and a pair that was completely different. The more expensive pair made their choice seem like a better bargain. The different shoe was there to spark conversation. I was always amazed by the number of people who came in for hiking boots and left with Birkenstocks or cowboy boots!

Giving people exactly what they ask for doesn’t always work. Having a ready back up plan or add on provision can quickly move you forward. You may never even take the idea “out of the box,” but its existence will often give your confidence to preempt potential issues.

Lesson 3. No Problem. This should be used for yourself, just as much as it is used for others.

This was the simplest and most effective lesson I learned. I worked for Nordstrom when its customer service was the stuff of legends. When I was hired, they gave me a round blue pin that said “No Problem” in white letters. We were supposed to where them at all times. The phrase was meant to be the answer to nearly any question a customer might ask. Initially it served to communicate that we were there to help. Eventually it became a mantra and then a mindset. No problem became the reality of working at Nordstrom. Nothing seemed like too big of a deal. Everyone knew that you were doing your best and failure only occurred if it was simply unavoidable.

When NO PROBLEM is your answer to nearly every question, people take you very seriously when you say something may be an issue. When you constantly put up roadblocks, it can feel like you just enjoy roadblocks. Compensation is a service center. Nearly everything within reason can be done with the right data and senior support. Senior support comes easier when people understand you are doing your best all the time.

Applying each of these lessons effectively and consistently will take practice.  Try them in 30 days chunks and monitor the results. You may be surprised how much better your workdays become.  If you have a similar lesson, please share it in the comments!

Dan Walter is a CECP and CEP and works as Managing Consultant for FutureSense. He is passionately committed to aligning pay with company strategy and culture. Dan is also a leading expert on equity compensation issues and has written several industry resources including the one-of-a-kind 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.

If It’s Priority You’ll Do It Right

Like any complex endeavor, compensation requires a nearly endless series of choices. Because of restraints on time, budget and the will of stakeholders, these choices start with prioritizing what will be done and what will not be done. Prioritization itself is quite simple. Delivering on your priorities is less simple. We all struggle with this at times and when a specific item is missed consistently, it is time reevaluate things. It is seldom possible to do everything you would like. It is unlikely that you will simultaneously fix your pay structure, while updating your short-term incentive plan for a specific subsidiary, while helping Sales modernize their commissions, while fixing the pricing for new hires in a foreign location, while updating your equity compensation to align with current goals or trends, while finally getting your communication program to an acceptable level. Sadly, just because each of these may be important to you doesn’t mean you can actually do all of them. Prioritization is the key. Often our top priorities are driven by the requests of others, while our own “list” goes stale.

Most of us can prioritize three or four things to be done in a reasonable time frame. The top items must always be support for new laws and regulations, followed closely by CEO and BOD requests. You will get these done correctly because you have no choice. The next items are often biggish projects that we KNOW are in our wheelhouse. They seem fairly easy and often comfortable. They may be a lot of work, but it’s not scary work. The last of the three, or four, highest priorities is usually a project that has been there before…and not been done, or not been done well. A great example is communicating your total rewards programs. Another is often sales compensation.

Most compensation professionals tell me that “communication” is in their top three priorities. Most also tell me that it is seldom top ten budget item. Without a supporting budget, it simply isn’t a priority. Because of this, communications often look and sounds the same nearly every year and deliver the same mediocre results. Because it doesn’t get done, we know it isn’t really a priority.

Sales compensation is usually a different issue. Sales pay is not everyone’s depth of expertise. The budget is often there, but clashing with strong personalities in business development, or pulling control of the plan design from your head of sales can often be a challenge we simply do not want. We may help tweak a plan or provide required adjustments to payout levels, but digging in and building a truly more effective program can stay on the list for years. Because it doesn’t get done, we know it isn’t a priority.

At this point, some of you are probably annoyed with me. OF COURSE, IT’S A PRIORITY, you may be thinking. That may feel right, but the proof is in the results. This is the secret. Your CEO knows that you are great at delivering on priorities because you always deliver on his. Your Board knows this as well. Maybe your CHRO also knows this. This means when you don’t get something done, it’s hard for you to convince people it was important.

So, what should you do? There are two approaches that may help. In my opinion, one is much better than the other. The best solution is to pick one of the things that have been missed in the past and make it your only communicated “personal priority” until it is completed to your satisfaction or moved to the very bottom of the list. This focus allows you to treat your own projects with the same focus and intensity as those from the CEO. Another approach is to simply stop putting these items on your priority list and instead put them on your “nice to have” list. This can be brutally difficult. It can seem like surrendering or even admitting failure, but it is a proven method used by software and hardware developers to ensure on-time delivery of a market-acceptable product.

Please share your best methods for delivering on priorities in the comment section.

Dan Walter is a CECP and CEP and works as Managing Consultant for FutureSense. He is passionately committed to aligning pay with company strategy and culture. Dan is a leading expert on equity compensation issues. Dan has written several industry resources including an issue brief on 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.

162(m): It’s Too Late. Now What?

Sorry, but it’s time to get serious to start the new year. 162(m) is better known $1 Million tax deductibility rule. It was established during the Clinton Administration in an attempt to slow the escalation of executive pay. (Pro tip: it didn’t work.) For many compensation professionals, 162(m) has been essentially unchanged for their entire career.

Until Jan. 1, 2018, 162(m) applied to “covered employees” (the CEO and three other most highly paid officers). It allowed for an exception for “qualified performance-based” compensation. Most stock options and performance-unit awards as well as several other types of incentive plans, qualified for this exception. Companies who paid taxes received a corresponding tax deduction when an executive exercised stock options and made millions, or vested in a performance-unit award and received stock worth millions. It was a key component of design.

If you are an executive pay professional, this is all old news, if you aren’t this may sound pretty simple, but the actual rule is fairly complex (thanks, Cornell Legal Information Institute.) Enough with the background, what happened?

The Tax Cuts and Jobs Act, or “Tax Reform,” that was recently passed and signed into law, fundamentally changes 162(m). It removes any tax deductibility for pay above $1 Million. It does leave in place some of the exceptions related to pay that was contractually finalized by November 20, 2017 and some of the exceptions for pay determined prior-to IPO. But, going forward, public companies will no longer be able to deduct taxes related to paying big bonuses, monster stock option exercises, and performance-based equity achievement.

Most publicly traded companies have designed their executive pay programs around the old rules, and the changes are material and immediate. They apply to tax years beginning Jan. 1, 2018 (yes, that date has already passed.) Anything you do now must be focused on maximizing the new rule, not avoiding it.

So now what?

Companies need to look at their executive compensation plans this month. Are there design elements of your plans that exist solely to maximize your tax deduction? Would you have designed things differently if the maximum in tax-deductible pay was only $1Million?

• Should you add the ability to increase the award payout based on the discretion of the Board? This would have made the plan non-compliant with the old rules, but perhaps this was a goal that had been wished for in the past.
• Should you consider more frequent payouts on your long-term incentives? If your current plan design has three-year cliff performance goals that may result in multi-million dollar payouts, you may want to consider having annual performance goals that result in smaller, but more frequent payouts. If the old plan expected a $12Million payout at the end of three years, perhaps you should consider annual payments of $4Million each. Only $1Million of the old plan will be tax deductible in the third year, but $3Million will be deductible if you use annual installments.
• Perhaps you used a three-year cliff, because of expected tax deductibility, but a five-year annual schedule makes more sense given the new rules.
• Are you fully aware of how the accounting related to your plans may change if you change key design elements?

Now may also be the time to educate or remind your shareholders that one of the key driving elements of your past plan design was adherence to the old version of 162(m). Getting them on board early may allow for a much easier approval process during proxy season.

For those companies who tightly manage their pay to maximize tax deductions, this change creates major headaches and potential opportunities for improvements. For companies who have built pay programs that provide outsized equity award values for executives, this may be an opportunity to reevaluate whether the cost of those payments still justifies avoiding cash LTI plans. Without the tax deduction, many companies may find themselves in a better position using simple time-vested cash or RSU plans, with lower values and lower risks. Of course, shareholders will also need to get on board, while they are still getting used to the increased use of performance-based equity programs.

Note: The new rule explicitly adds the CFO to the list of “Covered Employees,” regardless of pay. It also changes the definition of “publicly-traded company” to include companies that are required to file with the SEC due to public debt.

I’d love to hear how this may impact your company or clients. Are your pay changes already in the works, or are you waiting until the last possible minute to make your decisions?

Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and considered a leading expert on equity compensation issues. Dan has written several industry resources including an issue brief on 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 @Performensation.