Compensation Cafe

Lights, Camera, Pay-Action!

All too often, we find ourselves stuck at the table “strategizing;” a trending buzzword which simply put is the act of planning.  However, the overemphasis and meticulous planning of a total rewards strategy, or anything for that matter, is nothing without taking the blueprint into action. 

Granted scheming a well-conceived plan of action is integral, especially when dealing with pay.  Pay is already a sensitive topic; it runs deep with emotions and impacts people's livelihoods.  It’s for this very reason that organizations and their “strategic leaders” mustn’t’ sit too long at the table formulating or re-working their pay approach.  A time will come when the rubber must hit the road.

Sit idle for too long and you lose the ability to attract and retain key talent.  Action takes an air of confident assertiveness to press the “go live” button swiftly yet decisively.  Assuming a master plan is now in place, the following are a few key "action" ingredients, igniting life into the strategy:  

1. A proactive team – the individuals spearheading the initiative ideally are diverse in their backgrounds or job functions. Having this depth of representation creates advocacy, buy-in, and commitment from the entire organization. Most importantly, the “ego” must be left at the door.  Team members concede that the matter at hand is not about one's self-interest but rather achieving a common goal. For instance, the collective goal is to ensure the workforce has the right pay program or incentive mechanisms to drive the right behaviors, allowing all business lines to reward in a way that is favorable to the business achieving its goals.

2. Calculated risk is a reality of life, such that we cannot predict the outcomes in every situation. Although we can play out scenarios and stress test the good, bad and ugly, eventually we have to be Ok to let go and allow the plan to run its course. Risk aversion can be an Achilles heel; if we say our employees are our greatest asset we must then invest accordingly.  Fearing or prolonging a pay equity review could instead create increased disparity or, worse, deepen your liability and exposure.  Ignoring employee feedback and turnover statistics, or failing to do a market review because of the time, effort and costs involved, could not only hinder your market competitiveness, but could result in a much more costly market catch up to resolve. 

3. Timelines – when the due date is set then there must be enforced expectation and accountability of the participants to comply. Action feeds into a schedule of events, these pre-set dates function as markers or key milestones. Once in motion, we are continually assessing, evaluating, and pivoting as we hit these dates.  The timeframe is our forward-thinking roadmap, we only turn back to learn and improve from the past.

I am certain you as readers can “strategize” many more key points of action! Think also of our employees: they too do not have the time to wait around for what will be.  How can we as leaders expect action from them if we cannot deliver upon it ourselves?

Reena Paul (CCP, GRP) is a Senior Consultant with LifeWorks Compensation Consulting Team.  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 on LinkedIn, or contact her directly at [email protected].  

Image source: Unsplash image with credit to GR Stocks 

Bob's Your Uncle

I once lived and worked in England for five years as an expatriate, and during that time my HR team took great pleasure in confusing me with English words that held little meaning for an American.  Often, I could even repeat the phrase back to them, yet still didn't understand what the words meant.

As the Brits often told me, we speak the same language, but we don't.  My colleagues loved to "take the mick out of me" (poke innocent fun).

One example that has stuck with me the years is "Bob's your uncle."  Imagine the first time I heard that phrase.   What again?

Within the UK it's a common phrase that means "And there you go" or "Everything's fine now."  But the words just didn't make sense to me.  But like so many colloquialisms out there, finding the root cause going back decades or more proved a challenge.  It took me almost two years to find someone who could explain where the term originated (we didn't have Google back then).

Easy Peasy

Two hundred or so years ago there was a high-ranking Member of the English Parliament (Robert, Lord Salisbury) who held great sway (political influence) across the British Empire.  This was a powerful man, and one who believed in nepotism and political cronyism, so it was not unusual for even his distant relations to find themselves gifted with important government positions.

Such favored office holders with familial connections held positions of power, influence, and easy living.  Over time the phrase was born, that everything would be easy peasy (fine and dandy) if "Bob's your uncle."

And That Applies How?

Which got me to thinking about a message I had received a few weeks back from a recent graduate, one who wanted to make a career in HR, and specifically Compensation.  This inexperienced fellow posed a basic query, one often asked by those just beginning their careers.  "How can I achieve success in my chosen profession (Compensation)?"   He wondered whether there was a blueprint, a map, or a guide of sorts to keep him on the straight and narrow.  He had hoped to find a "Compensation for Dummies" book from Amazon.

Of course, there are no rules, no instruction manuals or pointed arrows on the road, each guaranteed to take you by the hand and show the way to career success.  Instead, the experiences of those who went before you are varied and distinct in so many ways, usually a compilation of diverse career choices, working for supervisors who influenced for good or ill, differing type and operating style of employers, and of course the series of unanticipated head knocks (lessons learned from mistakes) that one gains over the length of a career.

What happened to me may not happen to you, I thought.   There is no, "Read this and you'll be fine."

So, I condensed my experiences, career preferences, personal work philosophy, and gut instincts into a set of generic principles that could (or should) provide a solid platform of suggestions for anyone interested in career success, whatever the chosen profession.

Below is the essence of my response to that recent graduate, reflecting my thoughts for how a compensation practitioner can become a success.  It's not a complete list, the specific applications can sway in the wind along with the reality of personal circumstances, but the concepts are broad enough for individual interpretation.

• Understand your organization:  You need to know at least the basics of the business operations where you work.  What are your products/services and what advantages do they offer a customer or community?   What is the company's reputation, and why? Don't remain stuck in your office/cubicle but get out there and learn about what makes the business tick.
• Understand the compelling facts:  What is the business environment that your organization operates in, and how competitive is your reward program?  What story do the compensation metrics of your organization tell you?   What issues do you face with payroll, turnover, morale, engagement, etc?  Sadly though, all too many practitioners start and stop here.
• Understand your management: Who are these people who run the business and what are their management biases?  Learn the perspectives that each of them brings toward making HR and compensation decisions.  Know these leaders and take every opportunity to ensure that they know you.
• Understand your goals: If you don't know where you're going, or which pathway you're on, then any road will do. So, learn what defines success at your organization and strive to support efforts in that direction.  Make sure that your own objectives are integrated into the larger picture of overall success.
• Mix, stir and bake at 350 degrees until done!  Take all of the knowledge gained from the above, combine it with your own skill sets and experience, a little political deftness and then work diligently at making a difference, every day.

And there you are!  Follow these suggestions in pursuing your chosen career and everything will be fine. 

Bob's your uncle.

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 "Falling down cat," by Celine Q

Cafe Classic: Pay Transparency and the SCARF Hypothesis

Editor's Note:  Some of my favorite Cafe posts over the years have been those tying science - particularly brain science - to the field of rewards.  A great example is this Classic from Stephanie Thomas, where she brings the lessons of neuroscience to the topic of pay transparency.

Everything we do, every thought we've ever had, is produced by the human brain. But exactly how it operates remains one of the biggest unsolved mysteries, and it seems the more we probe its secrets, the more surprises we find.

-Neil deGrasse Tyson 

I'm continually amazed by the things neuroscience is uncovering about our brains. These discoveries are interesting in and of themselves, but many of them have practical implications for the workplace.  I revisited an article about neuroscience and performance management by David Rock, Josh Davis and Elizabeth Jones, and I started thinking about how these insights into brain function might relate to pay transparency. 

Within neuroscience, two dominant themes are emerging: (1) the majority of our social behaviors are driven by our efforts to minimize threats and maximize rewards, (2) our brains treat our social needs much the same way they treat our needs for food and water. Many of our social needs manifest themselves in the workplace, and our behaviors to satisfy these needs, maximize rewards, and minimize threats, are directly observable within organizational life.

David Rock has codified a framework - the SCARF Hypothesis - that argues five aspects of organizational life have a marked impact on we respond. The five aspects of organizational life are:

• Status - the perception of being considered better or worse than others;
• Certainty - the predictability of future events;
• Autonomy - the perceived level of control over one's life;
• Relatedness - the experience of sharing goals with others;
• Fairness - the sense of being treated equitably, especially compared to how others are treated.

I would argue that each of these five aspects is not merely an "extra" or "added bonus" that we would enjoy experiencing in the workplace, but is - consciously or unconsciously - a real need, just like our needs for food and water. 

All of our interactions in the workplace act to either satisfy or deny these five needs. Having a transparent pay process (communicating to employees how compensation decisions are made and providing them with enough information to really understand those decisions) can contribute to satisfying each of these needs:

• Status: In terms of compensation, status can be tricky. A well-designed compensation system should differentiate between employees, providing different rewards for different levels of achievement. In reality, some employees will be better performers than others when objectively measured. Pay process transparency can help to keep the focus on these objective measures, rather than on amorphous or ambiguous rankings based on (in)correct perceptions. If employees understand what objective measures your pay program rewards, then status, as a need, can be re-focused on status relative to objectively measured individual performance toward satisfying performance expectations, rather than on a subjective perception that I received a smaller merit increase than my co-worker because I am subjectively valued by the organization less than my co-worker.  
• Certainty: A transparent pay process helps to manage employee expectations and provides predictability. Having a transparent pay process means that employees understand what is expected of them in order to earn bonuses, merit increases, etc. A little bit of uncertainty can be a good thing. Mild uncertainty triggers a mild threat response and generates just the right amount of dopamine and adrenaline to pique curiosity and motivate individuals to solve problems. Too much uncertainty, however, can generate panic and lead individuals to make bad decisions. Ideally, your employees will experience mild uncertainty about how to achieve what's expected of them, not about what is expected of them or what the pay consequences are of satisfying or not satisfying those expectations. 
• Autonomy: Autonomy and certainty are intertwined; greater autonomy leads to a greater sense of certainty about the future. If your employees do not understand the linkages between performance and compensation, they may feel as though they have no control over what happens to them in terms of their compensation. Without some sense of control over what happens to them, your employees can easily slip into a "flight" response, fleeing your organization in search of opportunities that do provide them with a sense of autonomy. Being transparent about pay can help your employees to see that pay is an output directly related to the inputs of effort and performance they contribute.
• Relatedness: Ideally, all employees should be working toward the overall strategic goals and objectives of the organization. While individual goals may differ, they should all be aligned with organizational strategy to keep everyone moving toward the same things. Being transparent about your pay processes can help employees understand how they each contribute to these strategic objectives, and how those contributions will be rewarded.
• Fairness: If your employees understand how compensation decisions are made, they still may disagree with those decisions, but they are less likely to view them as unfair. Perceptions of fairness are critical; as noted by Rock, "the perception that an event has been unfair generates a strong response in the brain, stirring hostility and undermining trust." If your employees don't perceive that they are treated fairly with respect to compensation decisions, it almost doesn't matter whether you're satisfying your employees' needs for status, certainty, autonomy, and relatedness. The "flight or fight" response will be triggered, and your organization will suffer the consequences of this response in terms of retention and engagement.

Note that all of the above is predicated on the assumption that your compensation decisions are non-arbitrary and based on an articulated set of objective criteria. If your compensation decisions are arbitrary, or you can't articulate the set of objective criteria used in those decisions, you need to address this issue before beginning to think about pay process transparency. 

Taking the time to make sure your employees' SCARFs are organized and addressed with respect to compensation can go a long way in boosting - and maintaining - productivity, engagement and willingness to show organizational commitment.

Stephanie Thomas, Ph.D., is a Lecturer in the Department of Economics at Cornell University. She teaches undergraduate and graduate courses on economic theory and labor economics in the College of Arts and Sciences and in 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 media outlets such as The New York Times, CBC, and NPR, and has published papers in a variety of journals. 

 

Hashtag Social Media and Rewards

As the war for talent rages on, employers have to leverage all sorts of techniques to reframe their employee value proposition and entice candidates to sign with them.  Likewise standing out as a candidate is not so easy either and herein lies an opportunity…

Used by many daily, for many they have amassed quite the following or number of “likes", while for others it has become their life’s work: I am referring to a small thing called social media. You might have heard about it! In all seriousness, social media’s interactive ability to share information, ideas, career insights, and other expressions via virtual community outlets and networks creates a new medium of talent and organization attraction.

There is value both as a prospective employee and as a recruiting organization to evolve our tactics, from the traditional CV submission and review process to instead tap into the likes of Tik Tok, Instagram, or LinkedIn.  Granted not all industries are cut out (yet) for this level of exposure; the reality is, however, that some are and many more will.

Remote work forced us to reassess our total rewards approach and, as our profession evolves, so shall we reassess our techniques towards talent management.  This is especially true knowing that the workforce will be predominantly millennials in a few short years with generations thereafter rising to employment level quickly.  Gen Z’ers have not seen anything other than interactive-based technologies. 

Knowing what lies ahead and the predictable reality of technologies' influence on work-life, employers should consider the following benefits of social media and how to integrate it into the hiring strategy:

1. For starters, be receptive and open-minded. Accepting different modes of “resumes”, whether a video or a personal website, creates a personable and interactive experience. As an employer it gives you a direct line of sight to the candidate's ability to be creative, their ability to market, be innovative, and to some extent their risk tolerance – it is not easy to put yourself out there.  How a candidate “submits themselves” is an indication of the key characteristics a traditional paper CV will not be able to profile.

2. Candidates are not the only ones interviewing.  Who we are as employers and our appetite to do things differently and evolve with the marketplace is in the spotlight.  Investing in our online presence creates opportunities and increases our breadth to attract from a diverse talent pool.

3. Breaking down the biases.  Systemic biases often exist in our HR practices and processes towards hiring, developing, and promoting talent.  Often our recruitment approaches are institutionally deep routed and unconsciously we may overlook a potential candidate.  Integrating social media presents an opportuning to re-write the playbook and reset the standards and guidelines of how it will impact our recruitment strategies, giving employers a fresh perspective in addressing issues around diversity, equity, and inclusion.

Only time will tell as to whether social media will become a feasible recruitment option, but knowing the trajectory of technology and its influence, I can only imagine that soon enough there will be "an app" for that!

Reena Paul (CCP, GRP) is 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 and contact Reena directly on LinkedIn

Photo by Alexander Shatov by Unsplash

6 Reasons Equity Isn’t Like Cash

Equity compensation is a truly unique element in the total rewards toolbox. I do a lot of work with these plans. The consultants in this space are such a small group that most of us have known each other for years or, in some cases, decades (I am old). The one thing we all agree on is that equity is not as effective as it could be, because so few HR and compensation professionals truly understand it. This article boils down to some of the most important things you need to know about equity compensation if you want your programs to work better.

1. Equity is commonly the least equitable form of compensation
   At many companies’ equity compensation values depend mostly on when you started working at the company. If you start early and the company has an established plan and process, your grant may be worth multiple times that of a person who starts just a few weeks later. Negotiations that result in small award sizes differences can magnify into indefensible differences in the future.
2. Specificity is the enemy of accuracy.
   This is a saying I have been using for years. Most of the market data for equity compensation is sketchy. The models you use to determine grant sizes and future values are supported by a series of mild to wild guesses. Broader ranges and less specific award sizes are some of the best ways to avoid inequity. Trying to create base-pay style differences compared to the 50^th percentile, is certain to result in unfortunate results.
3. Equity is a finite resource with near-infinite value. Cash is an infinite resource with a very finite value.
   You only have 100% of the company to work with. The majority of that will go to shareholders. A chuck will go to founders. You may get as much as 30% of the company to work with, but plan on 15-20% in your equity plan. While your pool is limited, the potential future value can magnify beyond credulity. With cash the opposite is true. A great company can always generate more cash. In this sense, cash is ultimately limitless, but it’s never worth more than the currency being delivered.
4. The risk of granting bigger grants early is low, as long as you…
   …are willing to manage your staff. The great thing about equity is that your company gets it back if people leave before vesting. The tough thing is that means you need to vigilantly manage poor performers out or up to ensure your equity pool goes to good use.
5. It is a poor retention tool unless…
   …you spend the time and money to ensure people understand their awards and can perceive the potential value. The biggest users of equity are tech firms. Tech is also an industry with one of the highest turnover rates. People do not value what they do not understand. Equity compensation is not a magic spell. You need to work at helping people see the value in staying.
6. When you make a mistake is may be unfixable.
   Equity compensation can be unforgiving. If you make a mistake on someone’s base pay you can correct it and make it up even months later. If you mess up an equity grant or forget to get someone’s shares approved, the stock price movement over just a couple of days can result in unrecoverable losses. If you miss a vesting event or calculate a performance metric wrong, it may not be possible to fix the issue since it may impact taxes, SEC reports, shareholder communications and so much more.

When used properly equity is an incredibly powerful tool with unmatchable benefits to shareholders, employees, and the company. Treating equity like an extension of your cash compensation is a recipe for failure. Granting equity without an understanding of its short-term and long-term impact is a recipe for disaster. Equity compensation is an unfamiliar resource, but any compensation professional can learn enough to ensure this element of pay is a competitive advantage. Start with the guidelines above to get a head start.

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.

Redefining our Approach to Survey Data

Having access to timely salary data is critical to organizations' ability to make informed decisions when it comes to securing talent and maintaining their competitive position. The insights we extract from purchased results are an essential ingredient in being able to defend the why and how in our pay approach.  Herein also lies the question of whether market data is holding up to the demands of supplying organizations with timely, accurate, and reliable insights that will inform pay decisions internally and equip organizations to compete in the talent war.

While I will continue to be an advocate for data, it's worth noting that our dependence on it is demanding a better return on investment.  The environment, our organizations, and its people are moving at an alarming pace. The ability to tap into data that is reflective of your immediate location, of a comparable role match, and (most importantly) is current. is hard to come by.  The inability to benchmark affects our ability to manage and retain talent and subsequently disrupts the integrity of maintaining pay fairness and equity in pay design and administration.  Case in point: bringing in a new hire at a rate that is above the pay grade and that of an existing seasoned professional internally.

For us to regain trust in our survey data, we need to also think of the factors that are causing ambiguity and what measures we will take in response.  Below are just a few examples to open this conversation:

1. Technology – survey platforms need to move at the same pace as many of our compensation management tools (i.e. real time). The data collection process needs to be seamless, effortless, and one that adopts integrative techniques that validate, job match, and facilitate the ability to regularly data update or refresh. Imagine regular data feeds from participant HRIS systems.

2. Time – time is not only a question of survey providers releasing information but also in having the dedicated resources internally to participate in what can be a labor-intensive process. Lack of time, leads to a lack of participation reducing the number of available data points and the size of your sample set, inadvertently affecting the statistical outputs.  For some, this means a lack of data visibility and/or having to resort to a larger peer group.  

3. Job matching – the rate of job creation is faster than what education and employers can keep up with. Hence, the roles you are survey matching to may not be equivalent.  Interpretation of how you benchmark, and in turn use this data is key as to whether you will need to mark up or down the results.  Furthermore, through technology integration and creating an enhanced survey experience, we can facilitate a more continual scan and output of the unique job titles observed.  Additionally, consolidating online job postings could give us a more real-time perspective of the emerging roles of our competitors and the posted pay ranges.   

4. Flexibility – perhaps we need to rethink our longstanding cyclic process of survey participation.  For years it has been the same scheduling of events; this timing is no longer conducive to today’s immediate needs. 

Alternatively, we may need to evolve our pay structures altogether and become more broad-based (if not already) to accommodate for market variability.  Consider also that select cross-functional jobs may not move at the same pace as hot skill or IT positions.  Due to this, there is a degree of data interpretation required when assessing the larger overarching market perspective relative to your organization.

Overall, the need for data will be a persistent one, as is the need to attract, retain, and motivate our talent.  Similar to how we have, in the past couple of years, adopted new strategies to cope with redefined work, we are may not be far behind in how we begin to re-envision our approach in participating in and handling data from surveys.

Reena Paul (CCP, GRP) is a Senior Consultant with LifeWorks Compensation Consulting Team.  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 on LinkedIn, or contact her directly at [email protected].  

Image source: istockphoto with credit to Ivelin Radkov

Cafe Classic: FABulous Pay Improves Talent Acquisition

Editor's Note:  What can great salespeople teach us about communicating rewards?  Quite a bit, actually, as Dan Walter points out in this Classic post.  All that and a bonus pizza topping metaphor coming right up!

How are great salespeople able to seamlessly turn every one of your concerns into a demonstration of the prowess of their product? Are they really just that convincing or is there some type of method to their success? The best salespeople personalize every discussion. The trick is years of practicing a simple process until it has become part of how to explain everything. Your recruiters, staffing professionals and talent acquisition stars can do the same with your compensation plans (and you can easily help them).

The key in the absolutely fabulous method is the F.A.B.

F = Features

A = Advantages

B = Benefits

Features are the basic facts about your pay elements and their unique components. They are simply factual descriptions. Examples include:

1) “Our pay philosophy is to offer moderate base pay with an industry-leading potential for incentive pay.”

2) “We offer non-qualified stock options for every new hire and also have an annual grant program.”

Advantages are the unique aspects of each feature. Every feature will have anywhere from one to many advantages (the list will grow over time.) Advantages are facts that add color(s) to each feature.

1.A.) “Our pay philosophy allows us to ensure our best employees are paid for excellent performance.”

1.B.) “Our pay philosophy aligns with our high-performance company culture.”

2.A.) “Non-qualified stock options provide significant upside if the stock price goes up.”

2.B.) “Non-qualified stock options provide a low risk method for becoming an XYZ company stock owner.”

Benefits are the real winning element of this approach. Every advantage will have anywhere from one to endless benefits. Benefits are the things that allow a personal link from the individual’s needs and/or desires to your company’s pay plans. These are often referred as the WIIFM (What’s In It For Me). When you can demonstrate what you are offering was designed specifically to meet their needs, you lower barriers and raise both curiosity and understanding. More importantly, you increase the perceived value of that component of pay.

1.A.A.) “Juanita, we are recruiting you because you have proven to be a high performer. Our pay philosophy was designed to ensure your pay will always reflect your exceptional skill and talent.”

1.A.B.) “Darryl, we have structured our pay to focus bigger payouts on hard workers like yourself. Our bonus program can set you up to be paid far more here than at Company X, who doesn't provide this kind of leverage to its very best talent.”

1.B.A) “Pam, you mentioned that you don’t feel challenged in your current job. Our whole company is designed to challenge you and allow you to challenge yourself. Even better, our pay philosophy is designed to make sure our most curious and successful employees get paid top dollar. 

The key to the example above is making people understand how and why your pizza is specifically made to their tastes and preferences. Performing this explanation skillfully builds a trust between your talent professional and the individual. It shows that your people are listening, that the company cares about the individual and that your pay programs were designed specifically for them. The result is personal, efficient and powerful.

Every component of your total rewards can be addressed in this manner. Your sales team will probably even help coach you through some of these until you get the feel for it. Don’t create great pay tools and then leave your staffing people without a handbook on how to show their value. Take a moment and put together a pay element FAB in the comments section below. I guarantee that someone will add another advantage or benefit to anything you list. The power is in the personalization.

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.

Equity Compensation is Worthless

Before you send an angry email telling me that I am stupid, please read on. For more than three decades equity compensation has been considered a necessary and ubiquitous element of pay at start-ups and high-growth publicly traded companies. There are two big questions that must be addressed.

1. Why do so many companies use a tool that they seemingly do not want people to understand?
2. Why do so many employees want something that they so abjectly misunderstand?

Large studies have shown again and again that most (85%) equity compensation recipients do not understand their awards. They do not understand how and why they create value. They do not understand tax consequences. They do not understand how to compare these awards against those of other companies. It should also be noted that companies usually do not understand how to properly determine grant sizes or know how to use this pay element in any intentional manner.

On the other hand, employees want this magical instrument. Most really aren’t sure why they want it (will it make them a millionaire?) but they KNOW that more of it is good. Few employees see it as a truly long-term ownership or value creation tool. How do I know this? Turnover in tech companies is higher than that of nearly any other industry. Equity is much like that new toy my kid wants when he sees it at a store. It’s exciting when you get it, but the luster fades rather quickly.

Equity compensation was once seen as the great equalizer. It was the magic ingredient that allowed cash-strapped, scrappy start-ups to compete against behemoths with piles of money and security. In those glorious yesteryears, companies did one thing far differently than most do today. They made education about equity a centerpiece of their total rewards program.

People seldom appreciate the real value of things they do not understand. Consider the little silicon chips that make handheld computing devices possible. They have far greater value than most people understand. We don’t discuss them much anymore because we kind of assume people know about them. Similarly, employees don’t perceive the value of their equity compensation properly and compensation professionals do not take the time and effort required to fix the issue.

Are 83 RSUs a better value than 10,000 stock options? It all depends on the context. There are so many other aspects to consider! Most companies email a link to a quick presentation and a basic Q&A and hope that their employees figure it out.  

Equity awards are worthless without a thorough understanding of their details and how the company will accomplish the lofty value goals projected by a recruiter or optimistic set of slides. Imagine a company worth $3Billion. With a respectable overhang of 15%. The equity compensation value may be close to $450Million. A typical company may spend 2 days a year and $20,000 communicating this program. If 85% of the people do not understand their equity, the company is wasting $382Mllion on misunderstood equity.

Imagine if they spent even one-tenth of 1% of the equity value. The communication budget would jump to $450,000. Now imagine that understanding moves from 15% to 50% of participants. The $450,000 investment would return $225Million! Perhaps equity compensation wouldn’t be so worthless if we started treating it like we want our employees to perceive it.

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.

Cafe Classic: Are Your Pay Plans Just New Hire “Click Bait”?

Editor's Note:  We've all encountered the disappointment of clicking on a promising headline, only to find out we've been fooled into taking the bait.  Not good.  So  - asks Dan Walter in his Classic post - are your pay plans all that you advertise to your job candidates... and employees?

“You won't believe what this star from the ‘80’s look like now!” “The best banana bread EVER!” “This great trend is your next haircut!”

It happens to everyone. We see the headline and click through to see the interesting pictures or stories. When the new page opens up (and we get past the explosion of ads) we find nothing surprising, new or even interesting. In fact, we are disappointed and annoyed that we were fooled again. Before you stop reading, you should know that this is exactly what many of our compensation programs are doing during the recruitment process.

Attract, Motivate, Retain (and hopefully Engage). This is the mantra of compensation and total rewards. Let’s just focus on the first topic for this post. Think about what attracts you. It may be good or bad, but it is almost certainly different. No one stops on the street to look at a generic white sedan. No one jumps at the chance to read a news story about a kid who did something normal in a totally predictable way. Enter the professional “click bait” headline writer.

These are people who will spend ten times longer writing the perfect headline as they spend on their weak and typo-filled article beneath it. Their goal is to drive clicks. The article generally has nothing different or new. And, there is no reason to stick around. This probably isn't who you want to be.

We all know that attracting the right talent is difficult. We spend a lot of time crafting easy to access “reasons” why our company and its associated compensation philosophy and plans are better than the competition. But, these blurbs often lead to programs that are set at the 50^th percentile, based on industry “best practices” and provide nothing different or interesting. Is it any surprise that it can be hard to keep people around beyond afterglow of their hire date?

If you are one of those people who truly do things differently, you can probably stop reading now. If you are someone who stays in the middle of almost every path, you may want to take another few moments to read on.

Most survey data is heavily weighted to middle. This is largely because most external consultants, presenters and authors would rather follow the path of least resistance (for them.) Their goal isn’t always to provide you with the best solution, it is to provide you with the solution that they are best prepared to provide and you are best prepared to accept. Sadly, that means programs that look the same at nearly every company.

You, the overworked, internal HR or compensation professional, are left to find a way to make the resulting vanilla programs sound interesting and different without stretching the truth. This cripples both the attraction and retention process before you even get started. The alternative is to explore compensation philosophies and programs that are truly aligned with your corporate culture and strategy.

Creating a bespoke approach to compensation requires more initial effort. It may also require more support or administrative effort in the future. But, the payoff is in having pay programs that actually do the things that we all claim are our goals.

Think about how happy you are when that engaging headline takes you to an honestly heartwarming or fascinating story or photo. Imagine how happy your new hires will be when the job they apply for is supported by compensation that makes a difference. Imagine how happy your recruiters will be when you give them the opportunity to easily sell a job to the best possible candidate rather than struggling to convince the third or fourth person they talk to. The key is creating programs that reflect what makes your company great instead of what every other company claims makes them great.

Yep. It can be harder. Yep. It requires a new approach to getting management buy-in. But, it is what the most successful companies actual do. The difference is often just one of intent.

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.

Titles Are the First to Give

We are being tested as we try to survive the post-Covid staffing tsunami. (And who knows? Possibly another wild wave known as the Covid variant that's out on the horizon.) Will we play by the rules that kept things ticking along in the good times, or give in to today's pressure by slipping in some policy workarounds?

Titles are often the first to give. After all, if you can placate an employee with a souped up title, haven't you come out pretty clean? You might have to increase the salary, too, but the new title gives the employee immediate social acknowledgement. This psychological boost can go a long way to recementing a potential resignee's commitment to your company. (At least for the short term.)

The thing is, loosening up your titling guidelines has been repeatedly tried and repeatedly proven a real troublemaker. Even if things in staffing are desperate, you can run into immediate problems. One moment's weakness with just one employee's title can cause instantaneous issues with other employees in the same department, and then their friend's department, and so on.

In the medium term, playing loose with titles can cause salary structure alignment problems that can affect your data analyses, pay equity being just one example. In the long term, you'll find that you will have to recreate the salary structure and policies eventually. Just ask any consultant, who will have a long list of costly projects that ensued from clients' panicked titling practices.

You don't have to take my word for it, though. As ever, Compensation Cafe has resources that can help you think and work your way through the pressures you face when times are tough.

Ann Bares wrote, "Job Titles: Are They Really Free?" during the last recession, which was another time for panic. While she cites data illustrating that titles are a common negotiation item, Ann cautions, ". . . we'd better go into the practice with eyes wide open as to the eventual implications and costs of such a move."

And for a detailed exposé of what title juggling can do to your salary structure and administration practices, read Chuck Czimar's, "It's Only a Title, Right?"

Margaret O'Hanlon brings deep expertise to discussions on employee pay, performance management, career development and communications at the Café. Her firm is re:Think Consulting. Earlier, she was a Principal at Willis Towers Watson. A former Board member for the Bay Area Compensation Association (BACA), Margaret coauthored the popular eBook, Everything You Do (in Compensation) Is Communications, a toolkit that all practitioners can find at everythingiscommunication.com. She is a member of U.S. Masters Swimming.