November 20, 2014 Effective Incentive Planning. 22 Quick History of VisionLink Founded in 1996 6...
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Transcript of November 20, 2014 Effective Incentive Planning. 22 Quick History of VisionLink Founded in 1996 6...
November 20, 2014
Effective Incentive Planning
22
Quick History of VisionLink
Founded in 19966 consultants with over 140 years
experience450 Clients in over 40 states and
CanadaFocus: compensation management
that drives growth“VisionLink” = rewards alignment
between shareholders and employees
33
Four Most Desired Aspects of a Job
Compelling FuturePositive Work Environment
Opportunities for Personal and
Professional Growth
Meaningful Financial Rewards
44
Salary
PerformanceIncentives
SalesIncentives
GrowthIncentives
CoreHealth &
Welfare Plans
Executive Benefit Plans
Qualified Retirement
Plans
Nonqualified Retirement
Plans
Salaries Competitive with market standards? In compliance with FLSA guidelines? Managed within a flexible but effective structure?
Performance Incentives Tied to productivity gains? Clear, achievable and meaningful? Self-financing?
Sales Incentives Challenging yet achievable? Reinforcing the right behaviors? Differentiating your offering?
Growth Incentives Linked to a compelling future? Supporting an ownership mentality? Securing premier talent?Core Benefits Responsive to today’s employee marketplace? Allocating resources where most needed? Evaluated to eliminate unnecessary expense?
Executive Benefits Flexible enough to address varying circumstances? Communicating a unique relationship? Reducing employee tax expense?
Qualified Retirement Plans Giving employees an opportunity to optimize retirement values? Operated with comprehensive fiduciary accountability? Avoiding conflicts and minimizing expenses?
Nonqualified Retirement Plans Optimizing tax-deferral opportunities? Aligning long-term interests of employees with shareholders? Structured to receive best possible P&L impact?
An Aligned Compensation
Strategy
55
What returns are we looking for from our compensation investment?
Premier talent magnet Quality retention High productivity
66
Bonus Plan Types
Executive/management incentive plan
Gain sharing planTeam based planProject based bonusesRetention bonusesHiring bonuses
6
77
What’s the purpose of your bonus plan?
Motivate people? Change
Behavior?Share profits?
Keep up with market
standards?
Attraction and retention?
88
Imagine…you call me one year from now.
“Craig, that plan VisionLink helped us build is having a tremendous impact. Just wanted to thank you.
99
My follow up question
“What are you observing?”
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What I’d hope to hear
1. Sharper execution2. Unified vision3. Higher productivity (i.e., profits)
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Where do the first two come from?
1. Sharper execution2. Unified vision
Clarity Believability Meaning
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CEO Employee
These are the specific results that
create enough value to generate bonuses.
This is how your plan
works.
I understand
what results we’re
seeking. I see how I
can contribute.
I understand
how the plan works.
Clarity
1313
CEO Employee
Here are the results we’re
expecting. Here’s how we plan to get there.
Here’s why we’re
confident these
results are achievable.
I understand the results.
I understand what has to happen to achieve them. I
believe we can do it.
Believability
1414
CEO Employee
Here’s how much you
should expect to receive if we hit our minimum, expected
and superior
result levels.
Each of those
amounts is fair for the
results achieved.
I’m enthused
and grateful to be a part of this plan.
Meaning
1515
Where does the third one come from?
3. Higher productivity (i.e., profits)
Alignment between job duties and organizational goals
Individual involvement (faster, easier, cheaper, bigger)
Meaningful value
15
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Let’s discuss terms
Bonus
Incentive Plan
Short-term Incentive
Plan
Value Sharing Plan
1717
A Value Sharing Plan…
…doesn’t try to “change behavior” …doesn’t try to motivate
…makes a statement about: how the organization creates value how associates can contribute to that
creation how the organization shares the value
employees help create
1818
An effective value sharing plan…
Is tied to specific performance criteria
Is announced as early in the year as possible
Allows for some degree (15-25%) of subjectivity
1919
Two structural approaches to Value Sharing Plans
Both approaches seek alignment with critical profitability and growth goals Profit Based Allocation Target Award (“percent of salary plan”)
2020
ProfitBased
Allocation
(PBA)
TargetAward
(TA)
A percentage ofannual profits awarded
to employees
The award amountis divided among
employees based on apre-determined formula
Paid at year-end
Employees assigneda “targeted” incentivevalue – often based
on a percentage of salary
Achievement of award is tied tomultiple specific measurements
or “metrics.” Metricscan vary person to person.
Typically paid at year end,but may be quarterly.
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ProfitBased
Allocation
(PBA)
Focus
Value
Design
Essential
Solely annual profits
May be open-ended
Relatively simple
Strong PerformanceManagement System
2222
TargetAward
Focus
Value
Design
Essential
May include company, dept,team & individual metrics
Typically capped
Can run frombasic to complex
Selecting theright metrics
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VisionLink has developed a system of combining the best of both approaches
while eliminating most of the problems.
1. Allows the company to set a minimum financial threshold for the year.
2. This threshold must be met before the funding of any awards.
3. A percentage of profits in excess of the threshold will be credited to the pool
4. Values will be expressed to employees as a percentage of salary
23
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Three performance levels are selected at the beginning of the year (BOY) - Base, Target and Superior
1
Actual value at end-of-year will be a factor of (a) final profit result, (b) dept results, and (c) individual employee performance
6
The value is converted to a percentage of salary when expressed to employees (e.g., "at Target your award would be 10% of your salary" )
5
The Pool is allocated to employees by tier or individually (e.g., 40% to tier 1, 30% to tier 2, 30% to tier 3)
4
A percentage of profits above a minimum threshold is pre-determined to be set aside for employees - this is the Pool (e.g., 15% above $1,500,000)
3
Each level is determined based on a forecasted profit value (e.g., $1,500,000, $2,000,000, $2,500,000)
2
6 Step Process
2525
Pool Funding and Allocation
Thresholds as % of Pre-Bonus OP Threshold $
Incremental Increase ($) in
ThresholdCumulative ($)
Threshold
Incremental Credit (%) at
Threshold
Incremental Credit ($) at Threshold
Total Credit ($) at Threshold
0.0% - - - 0.0% - - 75.0% 1,500,000 1,500,000 1,500,000 12.5% 187,500 187,500
100.0% 2,000,000 500,000 2,000,000 22.5% 112,500 300,000 125.0% 2,500,000 500,000 2,500,000 27.5% 137,500 437,500 150.0% 3,000,000 500,000 3,000,000 25.0% 125,000 562,500
Tier Allocation $ Amt @ Test $ Amt @ Base$ Amt @
Target $ Amt @ Superior EE Allocation1 50.0% 191,250 62,500 150,000 218,750 PS2 30.0% 114,750 37,500 90,000 131,250 PS3 20.0% 76,500 25,000 60,000 87,500 PS
Pool Allocation
2626
Matrix Approach
Two (or more) performance measures are linked together
The measures may be competing Highest payout follows successful
maximization of both factors
2727
Indicators
What specific and measurable indicators will best reflect the improvements desired?
2828
Indicators
Identify the indicators that will be used tomeasure performance in each area
For example: Company—Revenue Growth and Net
Margin
292929
10.2% 100% 120% 140% 160% 200%
9.4% 75% 100% 120% 140% 160%
8.5% 60% 75% 100% 120% 140%
7.7% 45% 60% 75% 100% 120%
6.8% 30% 45% 60% 75% 100%
13.0% 15.0% 17.0% 19.0% 21.0%
Actual ResultsRevenue Growth 8.8%Net Income 17.1%Multiplier 100%
Revenue Growth
Company Performance Matrix
Net Margin
3030
An employee in this plan…
…will understand and respect the importance of profits
…will understand what contribution he or she can make to the generation of profits
…will understand what his value sharing potential is at various performance levels
…will receive communication at various times throughout the year about the results he and the firm are on track to achieve
…will understand why his final award is what it is
3131
Balancing Short-and Long-Term Value Sharing Programs
Owners think about both short-term and long-term goals
Why would you want your employees to only think about short-term goals?
Shouldn’t value-sharing programs reward for the achievement of both?
3232
SalariesSTIP
Benefits
LTIP
Present Compan
y
FutureCompany
3333
Why Long-Term Value Sharing Matters
#1 Value sharing attracts the best talent and magnifies results
Attracting the “right” people▪ Willing and able to compete▪ Assume stewardship role in
safeguarding shareholder interests
▪ Willing to share in risks and rewards of value creation
3434
Why Long-Term Value Sharing Matters
#2: Value sharing plans (effectively designed) reinforce the company’s business model
Nurture a culture invested in the business model
▪ Reinforce leverage points
▪ Reinforce roles and expectations
3535
Why Long-Term Value Sharing Matters
#3: Value sharing protects against bad profits and promotes good profits
Everyone has an interest in good profits if everyone’s wealth multiplier rises or falls on the ability of the company to sustain the right kind of profitability.▪ Pay people in a way that
communicates long-term profitability expectations
▪ Protect company’s interest in generating good profits
3636
Why Long-Term Value Sharing Matters
#4: Value sharing promotes an ownership mindset
Build a rewards system that communicate “what’s important.”▪ Keep performance engine
working while moving the company forward towards growth goals
▪ Define “what’s important” the same way ownership does—revenue/EBITDA growth, profit/margin improvement, cost management
3737
Why Long-Term Value Sharing Matters
#5: Value sharing builds trust and accelerates results
Turn key people into “partners” in building the future business▪ Value sharing
communicates a sense of fairness
▪ Create a unified financial vision for growing the company
3838
Why Long-Term Value Sharing Matters
1. Value sharing attracts the best talent and magnifies results
2. Value sharing plans (effectively designed) reinforce the company’s business model
3. Value sharing protects against bad profits and promotes good profits
4. Value sharing promotes an ownership mindset
5. Value sharing builds trust and accelerates results
39
How this happens
1. Paint a picture of the future
2. Monetize it3. Commit to sharing a
portion of it4. Present it to your key
employees5. Manage it right6. Consistently reinforce
it
4040
Grant Equity or Not Equity?
Full Value or Appreciation
Only?
Yes
Appreciation
Stock Option
Full Value
Performance Based?
Yes
Performance Shares
No
Restricted StockNo
Reward for Value Increase or Financial
Performance?
Value Increase
Full Value or Appreciation?
Appreciation
Phantom Stock Option
Full Value
Performance Based?
Yes
Performance Phantom Stock
No
Phantom Stock
Financial Performanc
e
Appreciation-Performance Based
or Employee Directed?
Performance Based Reward for
Profit/Cash Flow or Other Metrics?
ProfitsAllocation or
Objectives Based?
Allocation
Profit Pool
Objectives
Other Metrics
Performance Unit
Employee Directed
Strategic Deferred
Compensation
4141
How can incentive plans be more effective?
Payouts need to reflect performance“About 1/3rd of companies pay out awards even when they don’t achieve the minimum level of performance – a practice, not surprisingly, that’s associated with the least effective plans.”
A related tidbit: “Self-funded plans appear to be the most successful at improving business performance.”
4242
How can incentive plans be more effective?
Design and communication are “make or break” factors.
“Plans reported to improve results significantly had three outcomes in common, they:- improved individual performance,
- improved performance in target areas, and- engaged employees effectively.”
42
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“Almost any type plan can deliver – if it’s properly designed and if it’s supported by business literacy, consistent communication, performance management, and leadership involvement.”
How can incentive plans be more effective?
4444
Why do value sharing plans work?
Require management to clearly define strategy and establish priorities
Require communication of priorities and expected achievement levels
Engage employees in the determination of how they can contribute
Require ongoing communication of performance versus expectations
Reinforce importance by “putting money where the mouth is”
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VisionLink Philosophy
Variable compensation is an investment, not an expense Increase financial performance via “self
funding” programs▪ Production, profits, and/or share value
Recruit and retain quality employees Company performance is maximized
when owner and employee “visions” are linked Creates line of sight Win-win outcomes
45
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Q&A
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Craig Rutledge Partner(949) 265-5715crutledge@vladvisors.comwww.vladvisors.comwww.phantomstockonline.com
Thank you!