Compensation Cafe

The Tom Sawyer Approach to Equity Compensation

Most of us have read Mark Twain’s classic “Tom Sawyer” at some point in our lives. At one point Tom is punished and told to whitewash the fence at his Aunt Polly’s place. It was hard and boring work, but Tom was an entrepreneur with a great knack for marketing.

When approached by a friend to go swimming, Tom explained that whitewashing the fence really isn’t work.

“Like it? Well, I don’t see why I oughtn’t like it. Does a boy get a chance to whitewash a fence every day?”

And with that, Tom convinced his first co-worker to trade an apple for the incredible chance to help whitewash the fence.

And at that moment Tom founded FencePaint.club the newest startup accepted by the best accelerator.

Later another kid walks by.

“Yes, she’s (Aunt Polly) is awful particular about this fence, it’s got to be done very careful. I reckon there ain’t one boy in a thousand, maybe two thousand, that can do it the way it’s got to be done.”

As FencePaint.club stated in its job postings: “We only hire the very best, the most talented, the most skilled, and the most passionate people to help us in our world-changing mission of improving the world with more beautiful and functional fences. Do you think you’re good enough?”

“Tom gave up the brush with reluctance in his face but alacrity in his heart.”

And with that, FencePaint.Club granted its first stock options and began the process that would turn them into the next trillion-dollar company.

“Tom said to himself that it was not such a hollow world after all.” He had discovered a great law of human action…Work consists of whatever a body is obliged to do, and Play consists of whatever a body is not obliged to do.”

And this, Founders, HR, and Compensation professionals is the secret to startup equity compensation. The most effective programs are structured and communicated to make the receiver of equity feel as though they have gotten a great opportunity to do something that others only wish they could do.

This is your challenge. Review your equity compensation program(s). Take a close look at your communications. Be honest about what your talent acquisition team and managers are telling prospects and employees about their awards. Are you Tom Sawyer getting people to whitewash a fence or just one more employer looking to put another cog in the machine?

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: Hey Startups! Tomorrow IS too late!

Editor's Note: Dan Walter shares his Classic advice about the perils of waiting too long (startups, we are looking at you) to get your compensation act together.

We’ve all heard the phrase “It’s never too late.” I am sorry to tell you that everyone has been wrong. As it turns out when it comes to compensation issues, today may not be too late, but tomorrow almost always is.

One of the most consistent and pervasive issues that I deal with is helping companies fix what they didn't do (or what they didn't do correctly.) This is especially true with small companies who often don't have a dedicated compensation professional. The problem may come to light when a key employee is lost, but it is often identified far earlier then lost in the shuffle of focusing on day-to-day business.

If you haven't gotten started on your compensation philosophy, structure and long-term incentives, please get started when you finish this article.

The repercussions of waiting can be expensive, time-consuming and distracting at the exact time your company is hitting its stride. First, every company should understand its approach to compensation, often referred to as a “compensation philosophy.” Your philosophy should define why and how you plan to pay people.

If your goal is to align your employees to investors through equity compensation, you need to act immediately. If you make promises or even suggestions regarding equity that are not formalized concurrently, you are likely to find yourself delivering compensation that meets no ones expectations. Even worse you may find expectations so high, that satisfaction borders on impossible.

It no longer surprises me to have a group of 8 or 10 key employees earnestly explain how each should receive 15% of their employer’s stock. It no longer surprises me when an owner or founder believes that they are doing something great by rolling out a new program only to find out their staff was imagining something far greater. I have seen companies lose great employees. I have seen companies pay huge mediated settlements to staff members whose understanding differed from their employer’s. I have seen companies deliver compensation programs so late that any chance of gains were lost before they got started.

Are you still reading? Have you made a note to get started on fixing your compensation today?

I know you have incredible employees that are passionate about the success of your company. I know they have bought into your vision of a successful future. What I also know is that they expect things to be formalized, finalized and actualized. Every day you wait, your employees’ passion and hard work will build value in their minds faster than your company can keep up. While it may “never” be too late to get started, I promise you that “never” refers only to today. Tomorrow IS too late.

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.

 

Cafe Classic: Trouble Getting Support for New Pay Plans?

EEditor's Note:  Maybe you’re asking the wrong questions.  Dan Walter explains in today's Classic.

I often hear statements like, “Our employees don’t value that. We asked them.” Overall, we have improved our efforts to engage our employees in the participation in new of pay programs, but perhaps we should be asking different questions.

Asking your employees if they want equity compensation or a new type of STI is kind of like asking a two-year old if they want a new kind of food.

The answer will almost always be no.

New food, like a new pay plan, is an unknown and therefore a risk. In a world with so many “knowns,” why risk it by trying something new? This is particularly the case when the new thing is different or hard to understand.

You need to explain the new thing before convincing them to try it.  Then you need to confirm that they like it.

Instead of asking people if they want to participate in a stock option plan, or telling them that they should want to be in the new annual incentive plan, think about starting the discussion with the conclusion or results.

Instead of, “Would you like to get stock options?”

Try, “Wouldn’t be great if you could be paid in a way that gives you more money as your hard work contributes to the company’s success?"

Or, “We’d like to find a way to have your pay more closely aligned with the growth of the CEO’s pay over the next few years. Let’s talk about some ways to do that.”

You just can’t expect people to inherently accept something new. You need to guide them into seeing potential solutions from new perspectives. You can start by demonstrating how the new solution is right before you ask them if they would like to try it. Every food my son has eaten (and he eats almost everything) was first consumed by an adult in front of him.

The same is true when discussing new pay with your executives or Board of Directors. You can’t just expect them to support a move from a legacy program to your new cool idea. Unlike you, they haven’t read the articles, taken the classes, and met with colleagues. They haven't been thinking about the solution and working out details in their heads for months. They may not have yet concluded that the current program isn't perfect, or that a new solution may be better.

Blindly asking if they will approve a switch from the current LTI metrics to something else won't work. Telling them that you "need" to change to RSUs from your current Stock Options is unlikely to get enthusiastic support. Try instead to show the goals or objectives the new plan is designed to achieve (go beyond the numbers and dig into the human capital goals). Then show where your legacy programs have strengths and weaknesses and how a new approach will provide better success.

Only then ask the question you need to have answered. "Can I get your support in completing a full recommendation for a new approach that may like this…?" That is when your real work begins, but that's fodder for another article. 

Of course, this doesn't work for every tool and every person (some kids are super picky), but you will find it will work for most. And, when it doesn’t, it provides new data on what you may want to consider before the next “ask.”

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.

Four Compensation Predictions for 2022

This is the thirteenth year I have written a post during the last week of the year. I seldom make predictions for an upcoming year because compensation generally evolves so slowly that any real changes take several years to come to fruition. As we head into 2022, I am going to break that tradition and make a few predictions. I think we have a unique opportunity in front of us and many compensation professionals will relish the challenge.

1. Base pay increases in many industries will be far higher than we have planned.
   if you have planned a 4% budget for 2022 and use a lag, or lead/lag, strategy, please expect to lag from very early in the year. The market is unlikely to cool. Executives are being held to high standards when it comes to growth. Investors have put a ton of money into the market. All of these will factor into increases that will continue to rapidly outpace what has become the 3% norm for the past decade and beyond.
2. Survey providers will be pressured, and perhaps forced, to address the inaccuracy of LTI data in surveys.
   This is especially true in private company data, but expect to see more demand for global granularity, award details like vesting and performance criteria, and better explanations of how values were determined. This is a weak point in the world of compensation and companies are rightfully impatient to see better data.
3. Survey providers will begin categorizing positions into “onsite”, “hybrid”, and “remote”. Survey data without this level of specificity is putting every competitive company at risk. Expect to see the first “pulse” or “spot” surveys on this topic before the end of Q3. Expect this to be a normal part of survey submissions before the end of 2022.
4. Expect to see more companies visibly break the Base/STI/LTI paradigm that has dominated compensation philosophies for 15 or 20 years. At some point, you cannot differentiate your offers with just a bit more base pay. Short-term incentives will likely become shorter to address that speed with which pay is changing. LTI programs are already changing. Leading-edge companies explored more new vesting schedules and LTI plan design elements in 2021 than in any year in recent memory. This information will become more well-known and inspire hordes of other companies to move away from the lock-step adherence to stock options with a 4-year vesting schedule or RSUs that are similarly designed. If the long-time programs worked as advertised our ability to attract people would be higher and our turnover would be lower. It’s time for a change.

I am sure we will see other changes, just like I am sure at least one of the above will prove to be completely wrong. 2022 is sure to be another interesting year. In 2020 we just did our best to react to a world that became almost instantly unfamiliar. In 2021 we weathered a push for hiring unlike any year in recent memory. In 2022, we will get our feet underneath us, gather up our balance and leap forward into a new approach to pay that may provide a foundation for the next 10 years. There is no reason to wait. The future is yours to create.

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.

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.

Professional Unions in 2031

It has been ten years since we finally escaped the ravages of the COVID-19 pandemic. We try not to talk about it much, not only because of the human losses but also because of how we allowed people to separate us into factions that were delineated by what each of us seemingly didn’t have. One of the most interesting things was how it changed the way we work and get paid. I sometimes wonder how it could have been today if different choices had been made, but there’s no turning back now.

As the pandemic raged, many of us moved out of cubicles and into our dining rooms and guest bedrooms. We learned of the benefits of working without commutes and someone constantly watching over our shoulders. We also learned that many of us thrived in the social community that our workplace offered us. Most importantly, we finally started to realize what our companies had been trying to tell us (but not show us) about work-life balance.

Many of us were able to pick our kids up from school without the guise of a doctor’s appointment. Some of us no longer missed Friday night football games that we were unable to attend because of our long drive home. Many of us came to embrace our newfound flexibility and, yes, freedom, even as we struggled to figure out how to keep them if our companies called us back into the office.

We adapted more quickly than we would have guessed. By the end of the second year, the 50 and 60 hour work weeks and hour-long commutes that were the hallmarks of success in the 1990s and 2000s seemed pretty dumb to many of us. We had grown up in a world with no middle ground. Either you worked a million hours, answered emails on the weekends, and made your job your “family” or you weren’t successful.

When the call came to return to the office our employers seemed more than happy to return to the old paradigm. We asked for better pay AND more reasonable hours. They sometimes offered the former, but their business and staffing models depended on us working 9 or 10 hours a day. We asked for more time and better equipment to work from home, but many companies would not move away from the “command and control” structure built over 80 years of post-WWII results.

When our requests were not answered some of us refused to work, others demanded change. When our demands accomplished nothing we, for the first time as skilled professionals, rose up and organized. We saw how pay for other “professional” fields like pilots and baseball players raised wages and protected time off. We realized the pact between companies and their professional staff had been broken. We were no longer upper-middle class. We no longer took relaxing, work-free vacations. We no longer worked “full-time” we worked “all the time.” So we organized.

It is funny to look back at how short-sighted and self-interested the leaders of those companies were. It would have been so easy for them to adjust their model to deliver more pay and balance to employees and slightly lower returns to the market and executives. They swore the changes we wanted could not be done. It turns out the success they wanted couldn’t happen with us. In the end, they lost that battle and lost even more in the long term.

Sadly, we also lost in the long term. The current world may provide more balance, but it no longer provides the leveraged upside that some of has had from equity compensation. It is now nearly impossible to start a new company without tons of money in advance. Yes, we have more in some areas, but we all have less in many. It would have been so easy for companies to have made the right moves in 2022 and 2023 to avoid all of this. But we are where we are and it’s time for me to head off to my kid’s baseball game.

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.

Startup Pay is like Guerilla Warfare

It has been proven time and time again that a persistent and committed band of fighters can hold off and even beat the largest and most powerful armies in the world. This is never accomplished by fighting with the same tactics. It works exactly because the tactics and passion for survival are far different than that of the larger and better-funded force.

Wikipedia puts it this way:

“Guerrilla warfare is a form of irregular warfare in which small groups of combatants, such as paramilitary personnel, armed civilians, or irregulars, use military tactics including ambushes, sabotage, raids, petty warfare, hit-and-run tactics, and mobility, to fight a larger and less-mobile traditional military."

Most human resources and compensation professionals are peaceful people, but we are all fighting in the war for talent. It often surprises me how many startups choose to fight that war using the same tools and techniques as their larger combatants. There are, of course, rules that generally must be followed, but they are few and fairly unrestrictive. When you are battling for the existence and success of the company that aligns with your passions and puts food on the table, perhaps you should consider not following the leaders.

More companies should look at the major trends and core market data as examples of what NOT to do. This is the history of startup success. This is the core of rewards elements like 401k, stock options, and great food at work. Each of these things was initially used to provide a competitive advantage for scrappy startups versus large established corporations.

In compensation, we tend to start with market pricing, but it may make more sense to start with establishing the ideal pay mix. Base pay at the 50^th percentile assumes that base pay should play the same role at every company. Short-term incentives that are scaled to match market data ensure that you will be competing against companies with larger budgets using the same tools as they use. That seems counterproductive, and kind of dumb. Granting equity compensation with a 4-year vesting period because it is a “best practice” is kind of like American Revolutionaries choosing to wear bright red costs because the British Army wore them first.

When we start with pay mix, we rearrange how we view our budgets and path to success. For more than 15 years companies have been locked into this idea that startups can only use 20% of fully diluted outstanding shares as their maximum equity pool. This isn’t a rule, it’s a guideline. Smart investors can be educated to understand that giving up a bit more capital now, to win later, makes more sense than hoarding shares and losing.

While cash is limited at startups, annual incentives can still exist and are compelling. I have helped many companies roll out annual programs where the delivery mechanism is something other than cash.

Food was a great differentiator when everyone worked together in a cool shared office location. In a remote, or work from home, environment, we need to imaginatively consider other options. Discounted delivery? Schwann’s truck deliveries? A StarTrek-like “replicator” in every home? Think about what the big companies wouldn’t do and then try and do it!

The goal of every startup is to eventually grow out of being a startup. You don’t need to be Amazon, Google, Apple, or Netflix today, you need to be who they were when they too fought using unexpected and often “unfair” tactics to support their growth. It is a war for talent and your ability to win starts with your ability to fight differently.

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: How to Explain Stock Options to a Dog

Editor's Note:  Albert Einstein once famously said “If you can't explain it to a six year old, you don't understand it yourself.”  (And no, "because I said so" does not qualify an explanation.) Dan Walter takes this challenge to a new and hilarious level in one of our favorite and most popular Cafe posts.

Stock options are one of the most used and least understood tools in the compensation toolbox. Recently, a new optionee  asked if I could explain stock options in a manner that even his dog could understand. I have included my answer below.

"Come here Rover, I have got something to explain to you. Stock Options ....STOP scratching yourself and listen....Stock Options are an offer from the company that allows you to buy company stock at a later date. The cool thing...STOP sniffing my pant leg....The cool thing is that the company will let you buy that stock at today's price. If the stock price goes up then you get a great deal. If it goes down, then you get nothing (or close to it). A couple of key details....COME back here and stop rubbing noses with that cute poodle...If you quit your job any options that haven't vested will probably go back to the company. In fact, ...GEEZ stop pulling at your leash!... the shares you do exercise may also be bought back by the company (I would have to read the plan and agreement to know for sure.)

...What did you ask boy? How do you value them?... A private company is required by IRC 409A to have a reasonable valuation performed on the company at, or near, the time of grant and again at least annually or whenever the value may have materially changed. A public company generally uses the day’s closing or average price. ....OK, just hang on and I will get you a treat....The 2000 options you received may have a starting value of a few dollars or a few thousand dollars. It depends on the number of shares outstanding and the total value of the company. The final value will depend on the success of the company, the change in stock price, and your ability to keep your options etc. ...I'm not sure what’s in the treats, probably beef and bones or something like that...They could be worth nothing or they could be worth millions! The key is working to raise the value of the company as a whole.

I hope this helped a little. Now roll-over and let me rub your tummy."

As I re-read my response I realized that although the dog may now understand the basic concept of a stock option, they would not be able to understand the true risks and benefits of such a complex tool. Stock options, like many forms of equity, have inherent upsides and downsides. We tend to focus on the positives when we choose to use them and emphasize the negatives when we use something else. We seldom provide a fully colored, 3-dimentional picture of how these instruments work in a world of volatile stock prices, complex income and tax ramifications and various financial planning strategies.

When we choose to use complex compensation instruments during a period of unpredictable markets, we must also provide far more training and resources to our employees. Similar examples can be made for many types of equity instruments and nearly every form of performance-based pay. We short-change our employees and our companies by not ensuring that our employees truly understand the what, why and how of every compensation program we offer.

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 Baby is Ugly – Compensation Edition

I love kids. My 7-year-old son claims I like talking to kids more than I like talking to parents (often he is correct.) I am one of those people who coo about the cuteness of every baby. Sometimes I may be stretching the truth. Compensation may be your baby, but sometimes you need to be a bit more honest. Sometimes your compensation baby is ugly.

This post was inspired by a Head of Total Rewards at a client of mine. The company is going through a bumpy patch and there aren’t any great solutions that will make everyone whole or happy. Most of their value has evaporated for the time being. Things they have planned for and communicated at the corporate level have fallen through. Their industry is going through a (temporary) downturn. She said on a recent call, “admit it, Dan, the baby is ugly”.

Admitting the truth about a difficult situation is often the first step to finding a resolution. It isn’t fun. It isn’t enjoyable. It isn’t everything we learn about work-life balance, attracting the best people, motivating them to perform, providing them with rewards to stay for a long time. Sometimes it's necessary to admit the facts so you can patch up the ship well enough to try again another day.

But there is always something redeeming in nearly every situation. Perhaps your expertise and efforts can make a hard landing softer. Maybe there is a way to save and reward the people who will be critical to correcting the course when the storm passes. Maybe your prior hard work of ensuring job titles were tight and pay levels were market competitive will help those who must be let go find a better position somewhere else.

So, what should you do when your baby is ugly? First, remember that this is your job, not your baby. Admitting the truth about the situation is critical to finding solutions. Next, approach your solutions from the perspective of you cannot fix everything in a truly terrible situation, but that doesn’t mean there aren’t any paths to success. Lastly, you need to communicate calmly and matter-of-factly to everyone impacted as soon as the opportunity arises.

Start with a triage assessment. Identify who and what can be saved, which things will survive without your help, and which things must be abandoned. An example can be found here. Abandon the unsavable quickly, but with respect for the people impacted. Explain to those who will absolutely survive that you will be getting back to them soon. Focus your efforts on the things where your efforts are required for future success.

With your priorities set, put your efforts into achievable solutions, not “great” solutions. Most of these won’t be found in your WorldatWork reference materials. Don’t hesitate to contact friends or even external experts. Most will provide ideas without complaint. Focus on quick execution, it probably won’t be pretty, but make sure it’s effective.

Then stand up in front of the crowd and tell them the truth. Be direct. Be clear. Be confident about the future (even when you may be unsure or scared.) In difficult times people need a leader who can shine a light on the facts while also pointing out that the darkness will pass. This is often the hardest part. Remember that you have a plan for tomorrow and that the plan depends on others being able to execute.

Sometimes the baby is ugly. When it’s your friend’s child, keep your thoughts to yourself and say nice things. When it’s your compensation programs, be honest, fix what you can, and focus on navigating the storm.

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.

Does Discretionary = Discriminatory?

ESG (Environmental, Social, and Governance) goals have become the rallying cry of investors and board advisors. DEI (Diversity, Equity, and Inclusion) goals remain a key issue for Human Resources professionals. At many companies, there is still a widespread allowance for discretion in setting pay levels, variable compensation incentives, and equity compensation awards. Discretion is a precarious thing. It allows companies to recognize great talent or performers, while at the same time allowing for potentially discriminatory practices. Getting your arms around this topic may save you from a load of hurt in the future.

Most leaders and talent acquisition professionals want the autonomy to negotiate with prospective employees. This gives them the ability to create the best value proposition for both the company and the individual. The majority of HR and compensation professionals seem fine with discretion and many do not have a formal review process to ensure the final offer rationally fits within the pay structures of the rest of the company. Unfortunately, I have seen base pay numbers that range from $60K to $200K for the same role! So much about total rewards depends on the foundation of Base Pay. When the foundation is so differentiated, it is nearly impossible to have other pay elements make sense.

It is still a common practice for companies to offer discretionary “bonus” programs. These programs often fail at their intended purpose. The lack of transparency means that differences in amounts can seem like they are based on favoritism (and they often are.) The programs also suffer from “recentism”. Work done in the most recent quarter is unconsciously weighted more heavily than worked performed earlier in the year. Like a kid who does all of their homework the last week of the school year, this allows people to work hard and campaign during “bonus season” and be rewarded like they did great all year. Combining something that may not seems fair with an ability to manipulate results seldom creates a satisfying result.

When you add equity compensation as a pay element the results skew even worse. People like round numbers, so grants under up being in round numbers. How much more can 2,500 shares deliver than the standard 2,000? Using Amazon as an example: In 2016 Amazon stock was around $1000/share. Today it is about $3,200/share. 500 additional shares would have created an additional $1.1M over the last five years! An extreme example, of course, but not that extreme when compared to the relative changes in values between an early-stage pre-IPO company and the same company after its IPO.

Here are some things you can do to get started.

1. Limit the level of negotiation and discretion for Base Pay. This is true for pay above and below your target amounts. Just because you can hire some for far less than the market, doesn’t mean you should. Unless paying below market is a common practice for your company, it is likely to result in an unfortunate dispute in the future.
2. Put more structure into your annual bonus programs. Educate your managers on how they can and should use their budget. Perform peer reviews or approvals to ensure that bonuses aren’t based on relationships or recent activities. Consider creating a real Short-Term Incentive plan with measurable goals and related payout levels.
3. Be far stricter about equity award sizes. Provide strong, understandable guidelines. Make sure everyone involved understands the potential impact of a differentiated grant. Scale standard award sizes to flatten differences in base pay for the same job level.

Without an underlying current of ESG and DEI concerns unchecked discretion has been a real problem for as long as people have been paid. With the overarching goals, audits, and visibility that come with better governance and concerns about discrimination and fairness, unchecked discretion is a time bomb waiting to ruin an upcoming year for you and your company. Getting ahead of it before the new year should be a goal for everyone in Human Resources and Compensation.

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.

3 Reasons Equity Compensation is Experiencing Climate Change

Equity Compensation has been slowly going through its own version of climate change. Much like our planet, the environment for equity compensation has been changing for decades and very few have adjusted or even noticed. Whether you agree with the causes of climate change it is hard to deny that weather is different than it was even 50 years ago. Regardless of the driving forces, it is impossible not to recognize that equity compensation is delivering different results than it was when it became the major currency of tech startups in the 1980s and 1990s. The question at hand is if or how companies will address the issue,

1. Monolithic plan design is no longer effective

When equity started out it was relatively easy. You granted stock options, probably Incentive Stock Options (ISOs). They vested annually over four or five years. Only your US employees received them. Big companies paid in cash and were not a challenge.

Over the past couple of decades, there have been changes to accounting rules, tax codes, dilution models, extended times to an exit, global workforces, and more. Through all these most companies have continued using stock options, vesting schedules have changed slightly (most are now three or four years and vest multiple times a year). Companies use RSUs more frequently, but generally only when forced. Nearly every company, in just about any industry, uses equity. Things have changed, but I don’t think we can argue they have kept up with the surrounding environment.

2. Long-term is increasingly short-term

It wasn’t uncommon to have grants with 25 year lives in the 1980s. The ISO rules restricted the tax benefits to a life of 10 years and companies followed the path of least resistance for all grants. Vesting was designed to get the company and the participant to a potential exit event.

Today it takes longer to reach and exit than in those heady early days. At the same time, executives and employees are increasingly less patient. Three years is considering by many to be a reasonable time to build value. In some cases, companies are exploring “long-term" awards designed to retain people for one year!

3. Funding rounds are bigger, but equity percentages haven’t changed

IPOs are a funding round. Companies looked to an IPO as the major funding round required to move them from a start-up to a competitive business. They were the ultimate value creator and liquidity event.

Today the average pre-IPO company seems to be a “unicorn.” Companies can be so well funded without tapping the public markets that IPOs are used as an escape hatch, not a necessity. With so much money pre-IPO, there are still very few companies that have made the effort to allow for employee liquidity prior to an IPO.

I can, and eventually will go on. This article was originally created with 5 reasons, which quickly morphed into eight and the makings of a whitepaper or e-book. Once have a foundation of the challenges we face we can begin to discuss why this is happening. We can discuss why investors, boards, and founders have done so little to address the challenge. We can discuss long-term, lasting solutions and what they will take to become real. But, for now, we need simply to first recognize the changes are taking place around us and will not fix themselves.

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.