Compensation Solutions For a Bad Economy

Compensation Solutions
For a Bad Economy

22
Today’s Presenter:
Ken Gibson
SeniorVice President
(949) 265-5703
kgibson@vladvisors.com
23201 Lake Center Drive, Suite 207 ⬧ Lake Forest, CA 92630 ⬧ 949-852-2288
www.VLadvisors.com ⬧ www.PhantomStock.com

44
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A: Yes, more info will be provided at the end

55
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Request a copy of our slides
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consultation.
We value your input.

66
Post Webinar Intro
5 Minutes:
 Who We Are
 What We Do
 How We Do It

77
23201 Lake Center Drive, Suite 207
Lake Forest, CA 92630
(888) 703 0080
www.vladvisors.com
www.phantomstock.com
www.bonusright.com
 Headquartered in Lake Forest, CA
 Founded in 1996
 Over 600 clients throughout North America

88
Questions
 What is the role of incentives in a bad
economy?
 How can you lower expenses but still reward
performance?
 What kind of pay strategy encourages value
creation?
 Should your compensation philosophy differ
now from when times were good?
 What kind of employee performance should
be rewarded and how?
 How do you make sure your pay approach is
agile but also stable?
 What is the least “expensive” way to
compensate your people in this
environment?

99
Overriding Aim
Survive to Thrive

1010
VisionLink’s Survey of Business Community
Profile
 March 31, 2020
 Clients & “Friends” of VisionLink
 100 respondents
 $10 million-$1 billion annual revenue
 10-1,500 employees
 Private companies

1111
Survey Highlights
 44% indicated the economic condition has “hurt us a
little,” while 46% have recognized a “significant negative
impact.”
 88% of participants feel their companies will emerge
intact from the economic crisis. Only 1% feels the crisis
threatens the survival of their businesses.
 72% of the companies surveyed have not yet laid off any
employees; 14% have laid off more than 20%, with the
remaining 14% in between.
 54% of respondents are retooling parts of their business
model while 32% are “doubling down” on their current
model. Only 4% feel they need to significantly alter their
strategy to “weather the current storm.”
 87% of company leaders are optimistic about the future
of their enterprises even though their businesses have
experienced some short-term loss.
 The primary reason given for optimism was an overall
faith in the U.S. economy and their company’s abilities to
survive (53%), followed by 27% attributing their
confidence to their ability to innovate.

1212
WSJ Editorial
The Economy Will Survive
the Coronavirus
Don’t despair. Even amid the doom and gloom there are many things to be
glad about.
By
Vernon L. Smith
April 5, 2020 12:16 pm ET
Once the pandemic passes and we go back to work, the country will
recover quickly. The economy will reach new levels of
prosperity…Don’t despair. This economic crisis will pass, and pass
quickly, once the clampdown is lifted; especially if the financial
shock is reduced by fiscal and monetary relief. (Mr. Smith is a professor at
Chapman University and the 2002 Nobel Laureate in Economics.)

1313
In the Meantime…
Let’s Talk about
a Survive
toThrive Pay
Strategy

1414
Compensation Solution “Tool Kit”
1. Define the “Job” of Compensation
2. Re-Examine Your Rewards Philosophy
3. Emphasize Value Creation
4. Assess & Adjust Current
Commitments
5. Think Outside the Box
6. Create Structured Flexibility

1515
1. DEFINE THE JOB OF
COMPENSATION
What are the outcomes compensation needs to help the company
produce right now?

1616
Identify Compensation’s Job
“When we buy a product, we essentially
‘hire’ something to get a job done. If it does
the job well, when we are confronted with
the same job, we hire that same product
again. And if the product does a crummy
job, we ‘fire’ it and look around for
something else we might hire to solve the
problem.”
(Clayton Christensen, Theory of Jobs to be Done, Harvard
Business School, Working Knowledge, Dina Gerdeman, October 3,
2016)

1717
Broader Application
What if we applied this
theory to all of the
processes and systems
we use in an
organization including
compensation?

1818
Ken Questions
1. What “job” does your
compensation plan need to
do for you right now?
2. What pay strategy is best
suited to that “job? ”

1919
Key Outcomes
Examples of outcomes your
compensation strategy should be
helping your achieve right now:
 Create a focus on value creation.
 Lessen fixed commitments.
 Tie earnings to results.
 Reinforce priorities.
 Accelerate and reward innovation.
 Create growth partners.
 Build cost consciousness.
 Create a unified financial vision for
surviving then thriving.

2020
Start with Your Performance Framework
Business
Framework
Talent
Framework
Compensation
Framework

2121
Business Framework
Phase One
 Define Growth Expectations
(Vision)
▪ Key outcomes that must be achieved
 Define Business Model and
Strategy
▪ Performance Engine
▪ How the company will compete
▪ Where are growth opportunities?
 Identify Roles and Expectations
▪ Establish Performance Criteria
▪ Define “Success”
Business
Framework

2222
Compensation Framework
Phase Two
 Establish a pay
philosophy
▪ Expansive vs. Selective—or
Hybrid
▪ Define what the company is
willing to pay for
 Engineer a pay strategy
▪ Structure
▪ Mindset
 Adopt a “Total Rewards”
Approach
Compensation
Framework

2323
Talent Framework
Phase Three
 Identify Key Producers
▪ Meeting “success”
standards
 Identify Talent “Gaps”
▪ Recruiting Strategy
 Communicate
Expectations
▪ Define success
 Communicate Rewards
▪ Philosophy
▪ Programs
▪ Value Statement
Talent
Framework

2424
2. RE-EXAMINE YOUR REWARDS
PHILOSOPHY
In the current environment, what should be rewarded and how? How
should your philosophy differ now than during prosperous times?

2525
Compensation Philosophy Statement
 How value creation is currently
defined.
 How value is currently shared—
and with whom.
 How market pay standards
currently apply.
 How guaranteed pay and value-
sharing will be currently
balanced.
 How short and long-term value-
sharing will be currently
balanced.
 How merit pay is currently
defined.

2626
Key Areas to Focus On
 Explore and refine
“emergency”
principles.
 Determine priorities
for cash and non-cash
compensation, as well
as benefits.

2727
Then What?
 Put it in writing.
 Refer to it frequently.
 Communicate it…soon!
 Emphasize what will be
rewarded.
 Create a sense of partnership.
 Market the future.

2828
3. EMPHASIZE VALUE CREATION
How will you define value creation for your business? How and with
whom will value be shared? What measures will determine value-
sharing?

3030
Core Changes Shift from “Incentives” to “Value
Sharing”
 Took away local measurements
driving management incentive
plans—all paid on same metrics
▪ “We live together and we die
together”
 Aligned everyone behind
company success
▪ “I call it ‘pay the company first.’ ”
30

3131
Pay the Company First
“Basically, up to the company’s
operating profit target, all of
the profits go to the company;
and only after that target is
met, do we start funding the
incentive pool.”
Example: If UL’s target is
$80 million--
 100% of first $80 in
profit goes to company
 The next $20 million
goes to the incentive
pool
 From there on, 50/50
between company &
incentive pool

3232
Pay the Company First
Once value creation is defined,
compensation can follow a formula
for sharing value in a way that aligns
key producers with the company’s
business plan and priorities.
32

3333
The Value of Profit
Wealth Multiplier
Profits
Secure
Business
Reward
Employee
Results
Protect
Shareholders

3434
A Sense of Partnership
Leads to a Growth
Multiple
The Value of Profit
Wealth Multiplier
Profits
Protect
Shareholders
Secure
Business
Reward
Employee
Results

3535
4. ASSESS & ADJUST CURRENT
COMMITMENTS
How will you handle incentive plans that are active but based on goals
that are no longer relevant?

3636
Option: Restart
 Revise goals
 Set new starting and
ending dates

3737
Option: Revise
 Be transparent
 Transition from fixed to
discretionary plan
 Wait and see approach

3838
Option: Substitute
 Pause all short-term
commitments
 Set new results expectations
 Emphasize long-term plans

3939
Option: Good Faith Expression
 Executives forgo payouts for
2020
 Strong message for lay-off
situations
 Combine with long-term plan
substitute

4040
5. THINK OUTSIDE THE BOX
What non-traditional strategies might help you “survive to thrive?”

4141
Criteria for “Outside the Box” Pay Strategies
 Must be flexible
 Must drive value creation (wealth
multiplier philosophy)
 Must minimize guarantees
▪ Share the risk
 Must provide “upside” potential
 Must promote and reinforce innovation

4242
Examples
 Performance Agreements
 Opt-In Plans
 Long-Term Value Sharing
Plans

4343
Performance Agreement
 Typically done for executive or high-level
management
 Participants excluded from company’s incentive
plans
 Annual “deal” negotiated with CEO or other
primary business leader
 Deal memorialized on a “deal sheet”
▪ Defines financial, operational & leadership expectations
▪ Defines value of the award that could be generated
 Quarterly self-evaluation against performance
expectations with primary business leader

4444
Performance Agreement
Outcomes:
 Threshold for compensable
performance is very high
▪ Small or even $0 payouts can occur
 High-risk, high-reward—high upside
 Self-evaluations create a mentoring
environment
 High performers think and feel like
owners in the company’s success

4545
Opt-In Plans
Most Ideal in Small Company or Start-
Up Environment
 Opt for:
▪ “Higher” salary plus modest incentives
▪ “Low” or no salary and high upside
through short and long-term value
sharing
 Opt-In payments tied to a revenue or
profit-sharing formula
 Volatility: payments lowered &/or
deferred
▪ Deferred payouts made when economics permit
 Opt-In periods may differ
▪ Quarterly, semi-annual, annual

4646
Opt-In Plans
Outcomes
 Owners can limit guaranteed
payouts
 Employees have options
 Highly flexible—can adjust to
rapidly & frequently changing
economics
 Provides a “shared” entrepreneurial
experience
 Promotes an ownership mindset
 “Self-identifies” key performers

4747
Long-Term Value-Sharing Plans
Broad Application
 Used in any size organization
 Can be used with any of the
previous approaches
 Creates “wealth multiplier”
mindset
 Ties employees to vision and
business plan of the company

4848
Long-Term Value-Sharing Plans
Outcomes
 No current cash flow impact
 Emphasizes sustained
performance
 Provides alternative to short-
term incentive plans (in weak
economy)
 Instills a sense of partnership

4949
9 Long-Term Value-Sharing Plans
Stock Option
Performance Shares
Restricted Stock
Phantom Stock
Option
Performance
Phantom Stock
Phantom Stock Profit Pool
Performance Unit
Strategic Deferred
Compensation

5050
Grant Equity or
Not Equity?
Full Value or
Appreciation Only?
Yes
Appreciation
Stock Option
Full Value
Performance Based?
Yes
Performance Shares
No
Restricted Stock
No
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
Performance
Appreciation-
Performance Based or
Employee Directed?
Performance
Based
Reward for Profit/Cash
Flow or Other Metrics?
Profits
Allocation or
Objectives Based?
Allocation
Profit Pool
ObjectivesOther Metrics
Performance Unit
Employee Directed
Strategic Deferred
Compensation

5151
Phantom Stock
 Company establishes a phantom share value
(formula or valuation)
 Employees given an award that has current value
essentially equivalent to company stock value
(subject to vesting schedule)
 No rights of ownership
 Rewards for past contributions and future growth
 Payments will be made in cash (or stock) at pre-
determined dates
 Full value awards create a direct link to ownership

5252
Phantom Stock Options
 Employees given a promise of cash payment at a
future date
 The value will be based on the appreciation in stock
price from the date of award to the date of redemption
(like stock appreciation rights)
 Like stock options but without the need to pay for
shares
 Rewards employees for contributing to the increase in
enterprise value
 Can be part of the employee’s annual pay package

5353
Performance Unit Plan
 Employees given award units (PUPs) with a current value
 Units redeemable in a future year (3 years most common)
 Payment is made in cash at the end of the period
 The value of the PUP at redemption will depend on
improvement in 2 (or 3) performance metrics
 New PUP cycle starts each year, thus ultimately resulting
in an annual payout

5454
6. CREATE STRUCTURED
FLEXIBILITY
How can you make sure your pay strategy is agile enough to address
current conditions but enduring enough to be relevant when the
economy rebounds?

5555
The Need for Pay Agility
Compensation Solution
Create a rewards strategy that
is flexible and combine it with
an operational structure that is
enduring.

5656
Flexible but Enduring
 Look at compensation
strategy as you would an
investment portfolio.
 Individual pay
components are your
“asset classes.”
 As things change, adjust
weighting of each asset
class.

5757
Develop a Balanced Approach
The role of each pay component in
relation to others within the
comprehensive compensation
strategy is coordinated and clear—
and reflects the company’s pay
philosophy.

5858
Eight Components of Pay
Benefits
 Core benefits
 Executive benefits
 Qualified retirement plans
 Supplemental retirement plans
Compensation
 Salary
 Performance incentives
 Sales incentives
 Growth incentives
Incentives should be in the form of value sharing.

5959
Salary
Performance
Incentives
Sales
Incentives
Growth
Incentives
Core Health
& Welfare
Plans
Executive
Benefit
Plans
Qualified
Retirement
Plans
Nonqualified
Retirement
Plans
Salaries
Competitive with market standards?
Tied to strong performance management process (merit)?
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

6060
Build a Total Compensation Structure
A total compensation
structure gives you a
comprehensive view of all
compensation and benefit
plans and ensures
operational integrity.

6161
The Total Compensation Structure
Min Mid Max
1 203,531 271,375 339,219 50.0% 100% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 15,000 20,000
2 150,078 200,103 250,129 35.0% 75% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 10,000 12,500
3 119,497 159,329 199,161 25.0% 50% 100% 0% 5% Yes 5% $11,141 25 5 5,000 8,000
4 102,632 136,843 171,054 20.0% 25% 100% 0% 5% $6,127 25 5 5,000
5 81,293 101,616 121,940 15.0% 5% $6,127 25 5 5,000
6 69,720 87,150 104,580 15.0% 5% $6,127 15 5
7 58,564 73,205 87,846 10.0% 5% $6,127 15 5
8 50,176 62,720 75,264 10.0% 5% $6,127 15 5
9 44,038 51,809 59,580 5.0% 5% $6,127 15 5
10 37,211 43,777 50,344 5.0% 5% $6,127 10 5
11 30,784 36,217 41,649 5.0% 5% $6,127 10 5
12 23,562 27,720 31,878 5.0% 5% $6,127 10 5
13 19,529 22,975 26,421 0.0% 5% $6,127 10 5
14 17,354 20,417 23,479 0.0% 5% $6,127 10 5
Annual Car
Allow
Grade/
Band Sick Days
Salary Range
Bonus
Target
LTIP
Target
Financial
Planning
Perk
Deferred
Comp
Elegible
Deferred
Comp Max
Match
401k
Match
Max %
Vacation
Days
% Phantom
Stock FV
% Phantom
Stock AO
Health,
Dental,
Life

6262
Finding the Right Balance
Total Compensation Structure
Name Title/Position Tier Salary
Short-term
Incentive
Target
Long-term
Incentive
Target
Total Direct
Comp
H&W
Annual
Value
QRP
Annual
Value
Security
Plans Annual
Value
Total
Indirect
Comp TRI
Jason Smith CEO 1 $ 300,000 $ 120,000 $ - $ 420,000 $ 18,200 $ 8,000 $ - $ 26,200 $ 446,200
Lucy Jones VP Marketing 2 $ 210,000 $ 45,000 $ - $ 255,000 $ 16,200 $ 7,000 $ - $ 23,200 $ 278,200
Rick Miller VP Sales 2 $ 160,000 $ 85,000 $ - $ 245,000 $ 9,200 $ 6,000 $ - $ 15,200 $ 260,200
Janice Johnson CFO 2 $ 195,000 $ 40,000 $ - $ 235,000 $ 10,200 $ 5,000 $ - $ 15,200 $ 250,200
Maria York Director 3 $ 160,000 $ 10,000 $ - $ 170,000 $ 12,200 $ 4,000 $ - $ 16,200 $ 186,200
Frank North Director 3 $ 150,000 $ 10,000 $ - $ 160,000 $ 11,200 $ 3,000 $ - $ 14,200 $ 174,200
Ricardo South Director 3 $ 140,000 $ 10,000 $ - $ 150,000 $ 7,700 $ 2,000 $ - $ 9,700 $ 59,700
Simon Lewis Director 3 $ 130,000 $ 10,000 $ - $ 140,000 $ 8,700 $ 2,500 $ - $ 11,200 $ 151,200
$ 1,445,000 $ 330,000 $ - $ 1,775,000 $ 93,600 $ 37,500 $ - $ 131,100 $ 1,906,100
Can we
afford to
make these
payouts?
Should we
shift to a
longer-term
plan?

6363
What is the Right Allocation?
Total Rewards Investment (TRI) Allocation
TRI looks at each component of pay as a percentage of the total
Name Tier Salary STI% LTI% H&W% QRP% SP% TRI
Jason Smith 1 67.2% 26.9% 0.0% 4.1% 1.8% 0.0% $ 446,200
Lucy Jones 2 75.5% 21.4% 0.0% 7.7% 3.3% 0.0% $ 278,200
Rick Miller 2 61.5% 53.1% 0.0% 5.8% 3.8% 0.0% $ 260,200
Janice Johnson 2 77.9% 20.5% 0.0% 5.2% 2.6% 0.0% $ 250,200
Maria York 3 85.9% 6.3% 0.0% 7.6% 2.5% 0.0% $ 186,200
Frank North 3 86.1% 6.7% 0.0% 7.5% 2.0% 0.0% $ 174,200
Ricardo South 3 87.7% 7.1% 0.0% 5.5% 1.4% 0.0% $ 159,700
Simon Lewis 3 86.0% 7.7% 0.0% 6.7% 1.9% 0.0% $ 151,200
Salary STI% LTI%
H&W% QRP% SI%

6464
Offering Options
Sample
Position
Salary Short-Term
Value Sharing
Long-Term
Value Sharing
Total
Option A $120,000 $0 $0 $120,000
Option B $100,000 $20,000 $30,000 $150,000
Option C $80,000 $40,000 $80,000 $200,000
Codified via a simple employment agreement

6565
Market a Future
Build a Sense of Partnership

6666
Focus on the Future
 Here’s the short-term
picture
 Here’s our vision for the
future.
 Here’s how we plan to
get there.
 Here’s the role we need
you to perform.
 Here are the resources
you will be able to use.
 Here’s our philosophy
about pay and rewards.
 Here are the specific pay
programs you’ll
participate in.
 Here’s how our pay
programs will work for
you if we achieve our
plan.

6767
Employee Value Statement
Year 1 2 3 4 5
Targeted
Results
100% 100% 100% 100% 100%
Salary $160,000 $166,400 $173,056 $179,878 $187,177
STVS $64,000 $66,560 $69,222 $71,991 74,871
LTVS
(EOY)
-- $74,000 $186,000 $311,000 $448,000
401(k)
@7%
$17,120 $36,123 $57,169 $80,428 $106,086
Total
Cash
$224,000 $232,960 $242,278 $251,970 $262,048
Wealth
Accrual
$17,120 $110,123 $243,169 $391,428 $554,086
Total
Value
$241,120 $567,083 $942,407 $1,342,636 $1,767,343

6868
Compensation Solution “Tool Kit”
1. Define the “Job” of Compensation
2. Re-Examine Your Rewards Philosophy
3. Emphasize Value Creation
4. Assess & Adjust Current
Commitments
5. Think Outside the Box
6. Create Structured Flexibility

6969
Post Webinar Intro
5 Minutes:
 Who We Are
 What We Do
 How We Do It

7070
Take advantage of a one-half hour
consulting call with a VisionLink
principal at no charge.
Indicate interest on final survey.
Request Consultation & Take Survey
Request a copy of our
slides, report,
complimentary consultation
and BonusRight demo.
We value your input.

7171
www.BonusRight.com
www.bonusright.com

7272
 New SaaS tool
 Build and manage
your bonus plan
online.
 Indicate on survey
if you would like
to schedule a
demo.

7373
www.phantomstock.com
www.vladvisors.com
Subscribe to our blog!

7474
Special Offer
How to Create an Incentive Plan that Pays for Itself
Request your copy on the final survey.

7676
Ken Gibson
(949) 265-5703
ThankYou!

7777
Post Webinar Intro
5 Minutes:
 Who We Are
 What We Do
 How We Do It

VisionLink’s Focus: Help Business Leaders Build and
Sustain a High Performance Culture
Accelerate performance through pay strategies that
transform employees into growth partners.

If you do that…
• Quality of talent will improve.
• Employee engagement will expand.
• Performance will be magnified.
• Business growth will be accelerated.
• Shareholder value will increase.

8282
Ken Gibson
(949) 265-5703
ThankYou!

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