Compensation Cafe

Taking the Easy Road

2013-05-21T05:00:00-07:00

How many success stories do you figure start with the phrase, “I took the easy road”?

Most companies with global operations tend to pay their internationally-based top level executives in accordance with some form of global compensation structure – with the intent to level the playing field for those with multiple country responsibilities.

However, for the rest of their international population it’s not as straightforward.

The Challenge

Companies with local national employees face a challenge and a risk when it comes to their decision as to how to reward in each of their operating countries. Do they “do as the Romans do” and follow local practice, or do they seek to create a standardized global framework in an effort to standardize pay practices?

For those charged with developing tactics to effectively pay employees across the globe, the headache is in dealing with a diverse collection of economies, cultures and competitive pressures – some of which may be moving in different directions. However the approach of recognizing country-specific differences in pay methodology often comes up hard against the interests of corporate staff administrators, who traditionally look for the easy way, the simple way, the one-size-fits all way of dealing with far-flung employee groups.

The headquarters staff will ask, "what difference does it make"? Unless otherwise required by legislative action or representation, why can’t we be fair to all our employees in the same way? The metrics below illustrate what they would wish to standardize for each country:

Value (price) jobs irrespective of locale. Some prefer to use the US dollar as a global "common denominator."

The pay mix of base salary and incentives. This presumes that everyone views the opportunity for variable pay in the same fashion.

Universal date pay increases. Every employee should have their performance review at the same time.

Average pay increase percentages. The percentage should be fixed with a global percentage, not country-specific.

Why Not?

Why doesn’t one size fit all? Why can’t you treat all employees in the same fashion, no matter where they're working; they all belong to the same company. Perhaps you should consider these points before reaching for that cookie cutter.

· Economy: When dealing with country-specific inflation rates ranging from flat to 20%+, do you really want to offer the same percentage salary increase? What if one country's economy is struggling (US), while another remains relatively unscathed (Australia)?

· Culture: In some regions job and income security needs command greater interest over pay-at-risk, so in the pay mix the base salary dominates the variable portion. For example, while China has a very aggressive sales compensation environment, India shows more interest in base salary and the CTC (cost-to-company) package than variable compensation.

· Competition: Companies react to the cost of labor vs. the cost of living. If their marketplace rewards in a certain fashion (pay mix, commission vs. bonus, quarterly vs. annual rewards, etc.), companies who provide a different approach risk lower employee engagement and a talent drain.

· Representation: National unions and Works Council impact on pay actions could reverberate up the hierarchy as companies strive to maintain equitable treatment with their other employees.

To be fair, varying practices according to country-specific conditions could cause a degree of consternation with the back office or headquarters staff and their computerized systems. These are folks who like things neat and pretty, the path of least resistance. "Where's my easy button"? In their defense though, senior management often asks for standardized metrics that may be difficult develop and compare:

Tabulating global statistics when definitions or methods vary

Identifying global trends based on diverse conditions

Balancing the impact of cross border movement

If you force international operating units to convert their practices to an common format and methodology, the result could be more than just confusion and local administrative difficulties. It could also mean the likelihood of over payments in some quarters while under paying the market in others – all for the sake of sameness and common report generation. This would serve up a combination of hurting employees while also harming the business.

So think about it. The easy road of simplified administration is rarely an effective rationale when making proper business decisions.

Chuck Csizmar CCP is 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 brood of cats.

Creative Commons image courtesy of liberalmind1012

Executive P4P: What Came First, the Chicken or the Egg?

2013-05-20T05:49:33-07:00

It’s an age-old negotiation. Pay me more and I will perform. Perform better and I will pay you. So, what comes first, the payment or the performance?

Hay Group’s Annual CEO Compensation Survey was released last week. The results show the highest weighting ever (31%) for long-term performance plans. Was this a result of executive pay programs that have been re-geared with performance metrics since the advent of Say on Pay? Was this the result of CEOs performing better as more attention has been paid to their actions and behaviors? Or, was caused by something else?

Some have suggested that this is proof that if you perform better you get paid more. Others argue that this is evidence that executive compensation has been gamed to ensure amazing pay when things are great and pretty darned good pay as long as things are better than terrible. Hay Group’s recent article mentions that superior performance resulted in a cash-pay premium of only 9 percentage points over poor performance, even though the difference in net income was more than 70%.

Obviously the overleveraged hockey stock graph that is claimed by many to show cranked up pay of top executives doesn’t apply to cash compensation. The incredible (although inedible) stock market has driven equity compensation to impressive highs. (Those who express any surprise at this must either admit they do not understand the impact of steep drops in the market (2008 anyone?) or stop talking about executive compensation for ever more.)

Let’s face it, even less than stellar performers are lifted when the market rises. And, with the leveraging action of stock options mixed with rising stock prices, it is hard to create separation between the high and low performers of the corporate world.

Another spoiler alert for the upcoming future are performance unit programs using TSR as a metric. TSR is impacted when the market gets hot. As top performing companies begin to plateau, investors push the prices of mid-range performers more than some underlying fundamentals may support in the long run. From 2010 to 2011, net income for the group measured increased by 13.1% and TSR went up by a median of 3.1%. From 2011 to 2012, net income increased by a far less impressive 2.1%, while TSR went up by equity spiking 14.4%.

These results give rise to the ongoing question: Whose fault is it that executive pay continues to climb, seemingly in every market turn?

The argument regarding executive compensation continues. When pay is up, one side picks a set of metrics to explain why it should have gone up more. The other side picks a set of metrics that shows why it never should have been so high in the first place.

Does better pay drive better performance? Of course! Not always, not perfectly, but…of course.

Does better performance result in better pay? Yep. Sometimes more, sometimes less than desired, but it certainly does.

Which comes first, the performance or the pay? In today’s world of executive compensation pay must be great to get performance, but performance must be great to justify pay in the long run. I guess this is just a long way of asking: What do you think?

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

Pay for Supervisors

2013-05-17T03:25:00-07:00

The well-established principle that supervisors should praise in public but criticize in private can derail a compensation system. An article caught my eye recently on how slackers pull down the group because the crew rarely sees the corrective discipline privately applied. It illustrates that what keeps people productive is effective communication of the appropriate feedback that drives behavior. That made sense, but the recommended solution sucked.

Two thoughts came to mind: (1) just as compensation is communication, isn’t communication also compensation? and (2) why are supervisors paid if not to keep the entire staff productive? This article will focus on the second question, because the first deserves a complete post of its own.

If a boss follows the accepted rules and keeps corrective interventions private and confidential, that apparent silence bespeaks indifference to the workgroup who do not see any improvement steps, remedial actions, reprimands, punishments or open displays of negative consequences to the slacker. One consultant prescribes intervention by the peer workers with the offender. Rather than getting pissed off and demotivated yourself, he suggests, you should take ownership of the issue (because you are most affected by it and therefore more responsible than the boss!) and handle it yourself. If the boss doesn’t act, some claim the peer co-workers should step up and chivvy the culprit.

Whose responsibility is it, to maintain a productive workforce? Nowadays, it is true, bosses may supervise remotely, having little proximate physical contact with the team and therefore frequently unaware of slackers who goof off. Even if out of sight, however, bosses are paid and supposedly trained to handle exactly these issues. It is their monkey.

Should co-workers be expected to cover for the supervisor, taking up the slack created by ineffective management to “supervise from below”? I think not. While social pressure from peers can be wonderfully effective, most workgroups are not elite teams of highly self-actualized experts who require little guidance. An immediate supervisor is usually PAID to manage the performance of subordinates. The boss may be called lead person, crew chief, foreman or forewoman, supervisor, manager, director, VP… or any title under the sun, but this role of people-monitor is the sole reason they receive a supervisory title and get higher income. Leaders don’t neglect the well-being of their followers, because that is a repudiation of their pay grade.

Remember that supervisors frequently have a more difficult task than mere managers. Many people get the fancy title of manager (higher rank, pay, status, etc.) while remaining a sole individual performer, handling a project personally or administering a functional area. Supervisors oversee people. Managers may have no subordinates reporting directly to them, but all supervisors are responsible for the output of workers who report directly to them. Handling people is actually a far more complex challenge than dealing with materials, administering plans, generating ideas and doing things that do not require exercising authority over people. Instead of doing things yourself, the supervisor is supposed to delegate tasks and leverage the application of talent through others. That is often much harder than handling issues personally as an individual contributor.

Since supervisors are already rewarded for filling that role of monitor and guide, they should be charged with the duty of fulfilling that responsibility. It seems wrong, improper and unfair to expect underlings to enforce discipline and to maintain the productive work environment when a supervisor is neglecting their duty. Any boss incapable or unwilling to perform that authoritative human interaction role should be demoted to a coordinator position where they can deal with data and things and not face supervisory challenges.

Or am I wrong, again?

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), and will express his opinion on almost anything.

Image courtesy of cafepress.com

What the Oreo Cookie Can Teach Us about Employee Recognition & Rewards

2013-05-16T05:14:10-07:00

Is your company global? If not global, do you have multigenerational and multi-cultural workforce? If so, then you likely experience many of the same stressors of global organizations in catering to local employee needs for appropriate compensation, benefits, recognition and rewards.
The greatest challenge of all is first understanding local needs. It’s all too easy for HQ to think they know what employees want (in any capacity). Truly understanding and catering to real local desires, however, is an entirely different matter.

This story in Smart Business about Mondelez International (formerly Kraft Foods) is a terrific illustration of my point. For our American readers, what do you think of when you hear “Oreo cookie*?” Chances are it’s not a small cookie sandwich, with a green-tea flavored crème filing that’s not very sweet. Yet that’s exactly what “Oreo” means to Chinese consumers today.

Mondelez was ready to stop selling traditional, American-style Oreo cookies in China because they were losing money on sales. The cookies were too big, too sweet and not at all appealing to Chinese consumers. Yet, by first listening to what Chinese consumers actually wanted and changing the product to align with those tastes, Chinese Oreo sales now account for nearly half of the global Oreo business.

This is a powerful lesson for HR pros creating global employee recognition programs, too. Simply recreating your program as designed for the country where HQ is located will almost certainly guarantee failure on a global basis, especially when it comes to rewards (the horror stories are quite compelling). Local tastes and local needs dramatically vary. While I know why clocks are a terrible reward for Chinese employees, I was a bit surprised to learn the most popular reward item – as regularly selected by Chinese employees in their own neighborhoods from a vast selection of reward choice – is fancy baked goods.

My point – never assume your way is the best way for all employees everywhere (or from every generation). While you should always work hard to include all employees in your strategic, social recognition program, you must also work hard to ensure it’s a program that is rewarding to them.

How do you localize your global programs?

* Even writing “cookie” instead of “biscuit” was, for this native Irishman, a customization in honour of the home country of the Oreo. Simple localization of language and terminology can also be a powerful means of acknowledging the importance of local needs in global programs.

As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. His articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

The Stuff of Legends!

2013-05-15T03:00:00-07:00

I've been getting to know a few new clients recently. They've been introducing me to their culture and I've been helping them learn a bit from their demographics. In writing a report for one client yesterday, I was repeating back to them a factoid they gave me. It went something like, "70% to 80% of new employees make it through the first year and tend to stay." I stopped typing.

It is exciting, but is it true? Do they have the data for it?

Every company has legends. Stories that they use to define the company as a hero. You have them in your company. You have them in HR. The thing is that, like all legends, things have been polished up a bit to build in drama. Or they may have been true once but over time the story has become more reassuring than accurate.

Or one day a few people wished upon a star.

Some legends are powerfully tied to the company's sense of self and should be negotiated carefully. Odds are Marissa Mayer thought she was tackling a legend when she limited telecommuting at Yahoo! She still thinks it was the right thing for the business.

Let legends automatically guide our decisions and over time our decisions will become dusty. This can be bad for the business, our employees and, frankly, our careers.

If people at your place of business toss around legends, especially if they involve a belief that things are just so, it's a good idea to check them out. ("We target the 75%ile" is a good one, if your market index is hovering around .6. Another is, "We pay for performance" when most employees are surprised by their performance ratings or the size of their incentives.)

Anybody out there have favorite legends to share?

Margaret O'Hanlon is founder and Principal of re:Think Consulting. She'll join Ann Bares and Dan Walter of the Compensation Cafe to speak the unspoken -- Everything You Do (in Compensation) Is Communication -- in an upcoming book. Margaret brings deep expertise in compensation, career development and communications to the dialog at the Café. Before founding re:Think Consulting, she was a Principal with Towers Watson. Margaret is Deputy Director of the International Association of Business Communicators (IABC) Pacific Plains Region. She earned her M.S. and Ed.S. in Instructional Technology at Indiana University, Bloomington. Creative writing is one of her outside passions, along with Masters Swimming.

Stop Spreading the Peanut Butter and Start Feeding the Eagles

2013-05-14T03:33:53-07:00

"The difficulty lies not so much in developing new ideas as escaping from the old ones." ------ John Maynard Keynes

I wrote an article here six months ago on the need to differentiate among employee groups --- how companies should manage their workforce like a portfolio of investments. And how some employees, like investments, pay a much higher return than others.

This subject still bugs me. I don’t think I hit it hard enough. So I will try again using some head-whacking 2x4’s. Here’s a quote from Laurie Ruettimann --- the high priestess of “whacking”:

“Here’s what I’d love to know: At what point in time did it become common place for every freaking single person in business to believe that they had to treat all employees in their organization equally in every situation? Here’s the truth. That’s what was made up by lawyers and adopted by HR people as an easy rule of thumb to play it safe against the itty bitty possibility that you’d get your butt sued. Over the years it’s gone from a concept used to protect against gross discrimination of gender and race to a concept used to create policies for everything from bereavement leave to bathroom usage. It’s out of control.”

Laurie makes Richard Beatty --- HR thought leader ---look positively “genteel”. Here’s what he says:

"HR wants to treat most employees the same way, and they spend considerable time trying to defend or fix poor performers, taking on the St. Bernard role. Low turnover isn't necessarily a good thing. Think about where you might want to disinvest.”

HR is also behind what Beatty calls the "silly" idea that a company should try to be the "employer of choice."

“If you are the employer of choice, who's going to be applying for your jobs? Everybody and their dog's brother. You want people who are excited, enthused, and understand how to contribute to what you do, as opposed to those who simply want to find a good place to hide out."

WOW! Is your head ringing from the 2x4s yet?

Much of the above boils down to HR’s penchant for risk avoidance and the need/ease of treating everyone equally. HR needs to move away from risk avoidance to risk leverage. Just as top management finds it critical to balance the risk and reward of their strategic decisions, HR also needs to incorporate risk into their thinking. This new mindset will help them not only understand the full range of HR risks, but determine which risks are worth taking.

Mr. Jesuthasan of Towers Watson, in the Oxford Economics Global Talent 2021 survey, says:

“Being risk-averse is no longer a viable approach. Risk awareness is not just about identifying the risks you don’t want to take, but also the risks you do want to take.”

It’s all about risk management. Will doing X increase the likelihood of getting Y?   Is doing A too big a risk to take in order to get B? Every day it’s about weighing relative risks against relative opportunities.

Do we spread the peanut butter --- risk averse? Or do we feed the eagles --- risk leverage? There must be some HR programs that are "adequate" and that's OK.  There must be some HR programs which are "good enough" and that's really good enough. (I may hear about this one.)

HR needs to focus on equity instead of equality; on engaging the right employees, not necessarily all employees; on hiring choice employees, not becoming an employer of choice; and finally, on special rewards for certain groups of employees, not all employees. There’s not enough time, energy or money to do everything for everybody.

If top management sees HR as part of the team, someone who is working to grow the business and help them take smart risks, they’re going to be far likelier to run things by HR – and far likelier to listen when HR tells them “no”.

Do you have an "equality" mentality — spreading the peanut butter? Or do you have an “equity” mentality--- feeding the eagles?

Head whacking is over. I feel better now.

Jacque Vilet, President of Vilet International, has over 20 years’ experience in Global Human Resources with major multinationals such as Intel, National Semiconductor and Seagate Technology. She has managed both local/ in-country national and expatriate programs and has been an expat twice during her career.   Her true love is working with local national issues. Jacque has the following certifications: CCP, GPHR, HCS and SWP as well as a B.S. and M.S in Psychology and an MBA.    She belongs to SHRM, Human Capital Institute and World at Work.   Jacque been a speaker in the U.S., Asia and Europe, and is a regular contributor to various HR and talent management publications.

Ideal Organizations Diversify The Definition of Diversity

2013-05-13T04:56:32-07:00

What does the ideal organization look like?

Rob Goffee and Gareth Jones have been looking at this question for more than three years. Their research found six common principles that cut across circumstance, industry, and individual ambitions. In their article Creating the Best Workplace on Earth, they reveal these six principles:

individual differences are nurtured;

information is not suppressed or spun;

the company adds value to employees, rather than merely extracting it from them;

the organization stands for something meaningful;

the work itself is intrinsically rewarding;

there are no stupid rules.

On the surface, these are common-sense principles that seem intuitive. But if we stop and really think about what these things mean, there are surprising revelations. Take the first principle, for example.

When we think about individual differences, most of us jump immediately to the standard definitions of gender, race and ethnicity, age, etc. But Goffee and Jones found that it's really about more than traditional diversity categories. It's about cognitive diversity: differences in core assumptions, perspectives, and habits of mind. The ideal organization "is aware of dominant currents in its culture, work habits, dress code, traditions, and governing assumptions but... makes explicit efforts to transcend them."

We're all familiar with the classic examples of the "eccentric scientist" who keeps odd work hours and the "creatives" that can't seem to work in suits and ties. But yet again, it goes deeper than we initially think. It's about tapping into less-obvious talents in unexpected places. It's about blending cognitive differences and combining skill sets in new and unconventional ways. It's about creating a truly interdisciplinary environment.

Combining data analysts, professional dancers and product designers into a cohesive work team is no easy feat. Measuring performance is even more difficult. Traditionally defined career paths and competence models don't work. Quantitative measurement systems can't adequately capture the value of that one breakthrough idea, but they do penalize the likely (and necessary) dead ends leading up to that breakthrough.

Such an environment also creates a unique challenge with respect to compensation. A one-size-fits-all rewards package will be sub-optimal. The challenge is to develop a system that encompasses enough variety to be effective in rewarding the data analysts, dancers and designers, but still retains cohesiveness and maintains pay equity. It has to account for differences in individual preferences in risk tolerance (base versus incentive), cash/benefits tradeoffs, and tangibles versus intangibles.

Diversifying the definition of diversity is messy business. Creating the ideal organization is likely an impossibility. So is building the perfect performance measurement system and total rewards package for this ideal organization. But even if we never get there, measurable gains can be made while striving for the ideal. Are you brave enough to dip a toe into diversifying the definition of diversity and see what great things might happen?

Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. Since 1999, she's been working with businesses and government agencies providing expert quantitative analysis. Stephanie's articles on examining compensation systems for internal equity have appeared in professional journals and she has appeared on NPR to discuss the gender wage gap. Stephanie is the founder of Thomas Econometrics Inc., the host of The Proactive Employer radio show, and author of the upcoming book Compensating Your Employees Fairly: A Guide to Internal Pay Equity. Follow her on Twitter at @proactivemployr.

Nine Ways to Sabotage Your Incentive Plan

2013-05-10T08:18:18-07:00

I continue to be amazed at the many ways that companies manage to sabotage their own incentive plan efforts.  Just for fun, I thought I'd compile a list of some of my favorite fails. I'm sure you have your own to add!

1. The Borrowed Plan. Why bother with the hassle of creating an incentive plan designed to support your company's competitive challenges, business priorities, values and culture when you can simply slap in the one your old employer used or the one that the guy from your networking group emailed you. Easy, peasy. Problem solved.

2. The Last Minute Roll-Out. You just couldn't find the time to work on the incentive plan until your boss reminded you (again) that it's one of your KPIs for the year. Thus reminded, you put one together quickly and slide it in place quietly two-thirds of the way through the fiscal year. Maybe nobody will notice. Heck, it's not like you're trying to get people's attention or change their behavior.

3. Refuse to Say What You're Trying to Accomplish.  Defining plan purpose and objectives? Seriously? This is the real world where we don't have the time for such academic exercises. The Board has declared that there will be an incentive and so an incentive plan there will be. I already have a design in mind that I like, so that's what we'll go forward with.

4. Ignore the Real Problems. You and I both know that the reason for our drop in manufacturing productivity is the lack of organization and the poor communication surrounding all the recent product changes. Engineering and manufacturing management haven't been on speaking terms in months, and plant employee morale is at an all-time low. But senior management is insisting on an incentive plan to spur productivity, so let's give them what they want - no questions asked.

5. Ignore Funding and Cost Questions. What will it cost? What will it pay out under different scenarios? Return on investment? Seriously, who has time to sit and figure all that out? Plenty of time to worry about that at year end.

6. Documentation is for Sissies. Formal plan documents? You must be kidding! We explained the basics of the plan at the quarterly staff meeting. People basically get it - at least at a high level - and they're all excited about the possibility of a payout. It's all good. What could go wrong?

7. The Payout Fail. So now it's year end, incentive goals were not met, the plan isn't going to pay anything out, and people are ticked. Really ticked. Yes, you probably could have explained it better and set the plan threshold more thoughtfully. OK, it's a disaster. So let's just pay them out something - anything - just enough to take care of all the complaining and get this whole thing behind us. We'll start over with a fresh new plan next year, and this time we'll really mean it.

8. Squandering the Teaching Moment. Plan roll-out was completed and the plan announcement memo from HR went out on time. But now people are going to their managers with all these questions. How is net income calculated? What things can the company do to maximize earnings? What does their department do that helps the company be profitable? Are there things in their job that they could do differently to better their odds of earning an award? Our managers are already busy and overwhelmed - they are not prepared for these conversations and they don't really have the time for the distraction. What to do?

9. Balance? What Balance? Hey, management wanted us to use incentive to increase productivity, so we gave them a straightforward productivity-based incentive plan. How were we supposed to know that a relentless, single-minded focus on productivity could result in problems with quality and employee safety?

What incentive plan fails have you witnessed?

Ann Bares is the Founder and Editor of the Compensation Café, Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting to a wide range of client organizations. Ann was recently named President Elect of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and has joined the Advisory Board of the Compensation & Benefits Review, the leading journal for those who design, implement, evaluate and communicate total rewards. She earned her M.B.A. at Northwestern University’s Kellogg School, is a bookhound and aspiring cook in her spare time. Follow her on Twitter at @annbares.

Creative Commons image "Spy vs Sci 567" by Anonymous9000

The One Equity Compensation Trend to Rule Them All

2013-05-09T06:15:45-07:00

Performance equity has taken a long journey. Initially, its use was inhibited by accounting rules that made it far more advantageous to grant equity with time-based vesting. Those rules went away at the start of an incredibly volatile decade for the stock market. The path to this trend has been an adventure requiring a fellowship of disparate groups and events. Stock options lost their luster after the end of Equity Compensation’s Golden Decade™. Dodd-Frank joined the fray after the financial mess of 2008-2009. Even time-based restricted units slowed in growth as companies worked to rebound. Finally, the incredible recovery of the stock market over the past several years has all led to a major shift in how companies, investors, the media and politicians view equity compensation.

As I went through 2013 Equity Trends Report from Equilar, I found several interesting morsels of information. The report discusses some of the trends in stock options, restricted stock and performance-based equity. At more than 30 pages, I would be able to little more than summarize it here. But, there was one section where I called and requested more data.

The report shows most data in time-ranges from 2007 through 2012, the one exception was the chart on performance shares granted to the S&P 1500. This chart shows only 2010 through 2012. As you may know, Say on Pay became a reality in the US in 2010. Assuming that Say on Pay had a direct impact on plan design, I asked for the data empirically showing the change in performance equity use from 2008 through 2012.

While the data speaks for itself regarding the impact of Dodd-Frank and Say on Pay, I believe the story is far from over. Performance-based equity is entering the troublesome “tween” stage. Most of the companies with these plans believe they are almost ready to be left alone for a while, but many investors are just starting to see newly developing issues. At the recent WorldatWork conference, there were sessions trumpeting the success of Total Shareholder Return (TSR) as a metric for equity compensation. At the same time, there were sessions that explained that TSR was clearly flawed and did not reward performance consistently. I predict we will continue to see rapid evolution in the use of internal financial and operational metrics. We will even see growth in metrics more qualitatively measured, like customer service scores.

Like so many in the throws of adolescences, the full potential and fate of long-term performance awards is not yet known. What data does show is that this is the one equity compensation trend that currently rules them all.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

Numbers That Lie

2013-05-08T04:11:14-07:00

Hard numbers can turn out to be really soft and squishy upon closer examination. Perhaps that is why predictive foresight is rarely fully accurate, even when based on the Best Available Data. (Note the nifty acronym, proving that even an optimal decision is still doomed to be a BAD decision.)

Reliance on data¹ does increase the certainty people feel when making their mistakes. Numbers are therefore fondly embraced by most compensation people, because numeric data seem to confirm the accuracy of measurements. But those very numbers can cause us to stumble because they promise a degree of precision that can be quite misleading, if not downright false.

Last year, the initial Apple effect greatly skewed exec comp survey results (see The Apple Effect note at the bottom here). Some frowned at the $376,000,000 in stock options granted to the new Apple CEO Tim Cook (which temporarily ballooned in value to over $600 million shortly thereafter) but little attention was given to his subsequent 99% pay cut this year… perhaps because it’s all RELATIVE. Funny, how a relative increase gets headline attention but a relative decrease is ignored. Surveys that did not make allowances for massive swings in isolated observations like that would leave their followers spinning in confusion.

Maybe it all depends on whether you want to find what is normal (the median), discover the most popular (the mode) or simply compute the average. Those arcane terms are really important in compensation work, because each has a different precise meaning.

When Bill Gates enters a Starbucks, the average customer in the shop becomes a millionaire.   Averages are directly impacted by outliers, while medians are the middle figure no matter how high the high or how low the low observation. Conventional society tends to favor AVERAGES even though they are more problematic in statistical terms. There are all sorts of fancy tricks statisticians use to manipulate the figures they process into “hard numbers.” They include winsorizing, trimming, hot decking (where a missing value is replaced by a similar but different observation) and others . Excuse me, but some of those gimmicks strike me as flat-out falsehoods; yet they are enshrined in statistical lore and thus may be applied without your knowing.

Likewise, anyone who finesses you with a claim that pay falls in a bell-shaped curve is yanking your chain (or pulling your thumb) in a big way. Wages are never symmetrical nor do salaries have a normal distribution. That means some of the standard statistical techniques just don’t fit the world of total rewards where the observations are living, breathing human beings. Whenever the science of number-crunching is invoked, the art of judgment must be added to assure its proper application.

These are just a few of the common compensation conundrums of lying numbers. What are your favorites?

¹Mark Twain - There is something fascinating about science. One gets such wholesale returns of conjecture out of such a trifling investment of fact.

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), and will express his opinion on almost anything.

Creative Commons image "Bell Curve" by hardeep singh