How to build a pay strategy that performs the way you want it to.
Do you want to ensure your pay strategy will succeed—that it will do the job you’ve “hired” it to do?
If so, you must learn the process that compensation experts use. It includes four phases of planning. If followed, you will end up with a compensation offering capable of attracting premier talent and turning your employees into growth partners.
VisionLink has been building rewards strategies for over 20 years. Now we want to share our secrets with you. Join us to learn the four steps to effective pay design and why each is essential.
2. VisionLink’s Focus: Help Business Leaders Build and
Sustain a High Performance Culture
Accelerate performance through pay strategies that
transform employees into growth partners.
3. 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.
5. 55
Market a Future that’s Relevant
Here’s our future
Here’s how we’re going to
get there
Here’s the role we picture
for you
Here’s how we encourage
our people to grow and
contribute
Here’s our
philosophy about
pay and rewards
Here are our specific
pay programs
Here’s how our pay
programs could
work for you if we
achieve our plan
7. 77
Why Pay Design is an Issue
Competitive pressure for
recruiting talent
Alignment between
shareholders and employees
Philosophy about value sharing
Cost versus investment
approach
ROI for owners
ROI for employees
8. 88
Common Pay Design Problems
Lack of leadership
No strategic framework
No guiding compensation philosophy
Lack of balance between salaries and incentives
Lack of balance between short and long-term incentives
Ill conceived metrics
No continuity between pay and talent strategies
“Incomplete” pay offering
Old-school thinking
12. 1212
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)
13. 1313
Broader Application
What if we applied this
theory to all of the
processes and systems
we use in an
organization including
compensation?
15. 1515
Core Drivers
Examples of outcomes that should
define what “job” you want
compensation to do:
Improve short and long-term
profitability (increased revenue,
improved margins, lower costs).
Improve shareholder value.
Accelerate innovation.
Increase the company’s ability to attract
and retain premier talent.
Provide clarity about roles, expectations
and outcomes.
Encourage a sense of stewardship about
roles.
Enable an ownership mindset on the
part of key people.
Link employee rewards to performance.
Build a unified financial vision for
growing the business.
16. 1616
Start with Your Performance Framework
Business
Framework
Talent
Framework
Compensation
Framework
17. 1717
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
18. 1818
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
21. 2121
Set Your Budget
2016 2021
Present Company Future Company
Key Indicators
35,769,174$ Formula Value 77,576,775$
Added Value
41,807,601$
Sharing Target
12%
Value Shared
5,016,912$
Plan participants
6
Average Value
836,152$
Future Company Projection
22. 2222
Create a Clear Pay Philosophy
A written statement of what the
company is willing to “pay for.”
Tie it to value creation.
23. 2323
Compensation Philosophy Statement
How value creation is defined.
How value is shared—and with
whom.
Market pay standards.
How guaranteed pay and value-
sharing will be balanced.
How short and long-term value-
sharing will be balanced.
When or if equity will be shared.
How merit pay is defined.
What do you want pay to
communicate about what’s
important?
24. 2424
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.
30. 3030
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?
Building a
Complete
Compensation
Strategy
31. 3131
Form of Pay Purpose Standard Investment ROI
Salaries
Provide for the current cash needs
of our executives
40-50th percentile for
peer group
$500,000
Achieve ROA standard
of 0.75%
Short-term Incentives
Enhance current cash payments to
executives for achieving top and
bottom line annual goals
30-40% of base salary $168,000 (Target)
15% revenue growth
and 12% margin
Long-term Incentives
(Cash)
Retain execs; focus them on long-
term earnings growth; align with
shareholder interests; meet wealth
accumulation needs
15-20% of base salary $84,000 (Target)
Long-term growth in
earnings (double
earnings = share 13%
of new value)
Long-term Incentives
(Equity)
Retain execs; focus them on long-
term earnings growth; align with
shareholder interests; meet wealth
accumulation needs
15-20% of base salary $84,000 (Target)
Long-term growth in
earnings (double
earnings = share 13%
of new value)
Core Benefits
Meet basic security needs of the
executives
50th percentile for peer
group
$25,500 ROA of 0.75%
Executive Benefits
Enhance basic security needs and
meet market standards for
perquisites
50th percentile for peer
group
$24,000 ROA of 0.75%
Qualified Retirement
Provide wealth accumulation
opportunity for executives
40th percentile (3% of
salary)
$15,000 ROA of 0.75%
Supplemental
Retirement
Strengthen rewards value
proposition to help recruit and
retain executives; meet wealth
accumulation needs
30th percentile
compared to banks that
have plans
$135,000 ROA of 0.9%
33. 3333
Grant Equity or
Not Equity?
Full Value or
Appreciation Only?
Yes
Appreciation
Stock Option
Full Value
Performance Based?
Yes
Performance Shares
No
Restricted Stock
No
Reward for Value
Increase or Financial
Performance?
Value Increase
Full Value or
Appreciation?
Appreciation
Phantom Stock
Option
Full Value
Performance Based?
Yes
Performance
Phantom Stock
No
Phantom Stock
Financial
Performance
Appreciation-
Performance Based or
Employee Directed?
Performance
Based
Reward for Profit/Cash
Flow or Other Metrics?
Profits
Allocation or
Objectives Based?
Allocation
Profit Pool
ObjectivesOther Metrics
Performance Unit
Employee Directed
Strategic Deferred
Compensation
34. 3434
Create a Financial Model & Dashboard
Detailed operation
projection
Award guidelines by
participant
Vesting, redemption,
payment schedules
Performance standards
Over/under performance
assessment (Base, Target,
Superior)
Success measurements
Cost controls
Cash flow and earnings
assessment
Funding standards
35. 3535
Set Your Budget
2016 2021
Present Company Future Company
Key Indicators
35,769,174$ Formula Value 77,576,775$
Added Value
41,807,601$
Sharing Target
12%
Value Shared
5,016,912$
Plan participants
6
Average Value
836,152$
Future Company Projection
37. 3737
Select Potential Participants
ID First Name Last Name Position / Job Title Date of Hire Tier
Initial Annual
Salary
1 John Ferry CRO 7/1/2016 1 $ 325,000
2 Patrice Cornyn CFO 1/15/2010 2 $ 225,000
3 Angela Jimenez COO 5/8/2009 2 $ 220,000
4 Jordan Fisher SVP Marketing 2/15/2011 2 $ 215,000
5 Armand Higuera SVP Sales 6/15/2012 2 $ 210,000
6 George Arnold SVP International Ops 2/11/2013 2 $ 205,000
38. 3838
Project Values by Person
2016 2017 2018 2019 2020 2021 2022
Assumed Market Value 37,391,912$ 44,827,967$ 53,653,761$ 64,118,910$ 76,516,644$ 87,992,136$ 101,188,912$
Formula Value 24,927,941$ 29,885,311$ 35,769,174$ 42,745,940$ 51,011,096$ 58,661,424$ 67,459,274$
Increase in Formula Value From Inception 4,304,881 9,262,251 15,146,114 22,122,880 30,388,036 38,038,364 46,836,214
Total Phantom Shares 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
Weighted Share Value (EOY) 2.49$ 2.99$ 3.58$ 4.27$ 5.10$ 5.87$ 6.75$
TOTAL PLAN PROJECTION
Annual Grants (BOY) 580,704 494,834 424,449 365,133 315,314 271,918 243,336
Cumulative Grants 580,704 1,075,538 1,499,987 1,865,120 2,180,433 2,452,351 2,695,688
Dollar Basis of PSOs 398,750$ 410,713$ 423,034$ 435,725$ 448,797$ 462,261$ 476,128$
Plan Value (BOY) -$ 249,703$ 787,472$ 1,672,464$ 1,676,041$ 1,712,299$ 1,550,033$
Annual Distributions -$ -$ -$ 882,670$ 880,805$ 895,587$ 836,154$
Cumulative Distributions -$ -$ -$ 882,670$ 1,763,475$ 2,659,062$ 3,495,215$
Vested Value (EOY) -$ -$ 882,670$ 880,805$ 895,587$ 836,154$ 781,978$
Unvested Value (EOY) 249,703$ 787,472$ 789,794$ 795,236$ 816,712$ 713,879$ 662,801$
Plan Value (EOY) 249,703$ 787,472$ 1,672,464$ 1,676,041$ 1,712,299$ 1,550,033$ 1,444,779$
Cum Plan Value (Pd, Unpd, Vstd, Unvstd) 249,703$ 787,472$ 1,672,464$ 2,558,711$ 3,475,774$ 4,209,094$ 4,939,994$
CPV as % of Formula Value 1.0% 2.6% 4.7% 6.0% 6.8% 7.2% 7.3%
CPV as % of Increase in Formula Value 5.8% 8.5% 11.0% 11.6% 11.4% 11.1% 10.5%
John Ferry 2016 2017 2018 2019 2020 2021 2022
Annual Grants (BOY) 189,320$ 161,325 138,378 119,040 102,798 88,650 79,332
Annual Distributions -$ -$ -$ 287,767$ 287,159$ 291,978$ 272,602$
Cumulative Distributions -$ -$ -$ 287,767$ 574,926$ 866,904$ 1,139,506$
Vested Value (EOY) -$ -$ 287,767$ 287,159$ 291,978$ 272,602$ 254,940$
Unvested Value (EOY) 81,408$ 256,731$ 257,488$ 259,262$ 266,263$ 232,738$ 216,086$
Cumulative Plan Value 81,408$ 256,731$ 545,255$ 834,188$ 1,133,168$ 1,372,244$ 1,610,531$
Patrice Cornyn 2016 2017 2018 2019 2020 2021 2022
Annual Grants (BOY) 81,917 69,804 59,875 51,508 44,480 38,358 34,326
Annual Distributions -$ -$ -$ 124,515$ 124,252$ 126,337$ 117,953$
Cumulative Distributions -$ -$ -$ 124,515$ 248,766$ 375,103$ 493,055$
Vested Value (EOY) -$ -$ 124,515$ 124,252$ 126,337$ 117,953$ 110,310$
Unvested Value (EOY) 35,225$ 111,085$ 111,413$ 112,181$ 115,210$ 100,704$ 93,499$
Cumulative Plan Value 35,225$ 111,085$ 235,928$ 360,947$ 490,313$ 593,759$ 696,864$
PSO Projection (CO) - Target
39. 3939
Study Different Scenarios
2018 2022 2018 2022 2018 2022
Increase in FV since Inception $ 21,835,870 $ 44,250,010 $ 32,084,240 $ 72,437,820 $ 47,554,260 $ 117,625,420
CPV for all Participants $ 3,426,720 $ 7,395,060 $ 5,177,840 $ 12,321,560 $ 7,819,860 $ 20,222,250
Value Sharing Percentage 15.7% 16.7% 16.1% 17.0% 16.4% 17.2%
Totals $ 3,426,720 $ 7,395,060 $ 5,177,840 $ 12,321,560 $ 7,819,860 $ 20,222,250
Todd Warren $348,480 $752,040 $526,560 $1,253,040 $795,240 $2,056,500
John Anderson $232,320 $501,360 $351,040 $835,360 $530,160 $1,371,000
Carol Watson $232,320 $501,360 $351,040 $835,360 $530,160 $1,371,000
Wilson Harrendale $232,320 $501,360 $351,040 $835,360 $530,160 $1,371,000
Charlie Hills $232,320 $501,360 $351,040 $835,360 $530,160 $1,371,000
Virginia Johnson $232,320 $501,360 $351,040 $835,360 $530,160 $1,371,000
Barb Tanaka $232,320 $501,360 $351,040 $835,360 $530,160 $1,371,000
Dennis Aguirre $232,320 $501,360 $351,040 $835,360 $530,160 $1,371,000
Eve Allendale $232,320 $501,360 $351,040 $835,360 $530,160 $1,371,000
Cheryl Flink $174,240 $376,020 $263,280 $626,520 $397,620 $1,028,250
Tessa Gray $174,240 $376,020 $263,280 $626,520 $397,620 $1,028,250
Emily Jordan $174,240 $376,020 $263,280 $626,520 $397,620 $1,028,250
David Bartholomew $174,240 $376,020 $263,280 $626,520 $397,620 $1,028,250
Jordan Kyle $174,240 $376,020 $263,280 $626,520 $397,620 $1,028,250
Shannon Lightwood $174,240 $376,020 $263,280 $626,520 $397,620 $1,028,250
Steven Barnes $174,240 $376,020 $263,280 $626,520 $397,620 $1,028,250
Base Target Superior
40. 4040
Consider Payout Events
Transaction Value
Total Employee Payments
Made Prior to CIC
Total Value to Employees at
CIC
Total Plan Employee Value
$ 121,782,700 $ 5,227,990 $ 4,419,926 $ 9,647,916
Employee CIC Value as
Percent of Total CIC Value
Total Employee Value as
Percent of Total CIC Value
3.63% 7.92%
Increase in MV from Plan
Inception
Total Employee Payments
Made Prior to CIC
Employee CIC Value as
Percent of Increase in MV
from Plan Inception
Total Employee Value as
Percent of Increase in MV
from Plan Inception
$ 70,280,090 $ 5,227,990 6.29% 13.73%
Employee
Payments Received Prior to
CIC
Value Due at CIC Total Value
Todd Warren $ 531,660 $ 449,484 $ 981,144
John Anderson $ 354,440 $ 299,656 $ 654,096
Carol Watson $ 354,440 $ 299,656 $ 654,096
Wilson Harrendale $ 354,440 $ 299,656 $ 654,096
Charlie Hills $ 354,440 $ 299,656 $ 654,096
Virginia Johnson $ 354,440 $ 299,656 $ 654,096
Barb Tanaka $ 354,440 $ 299,656 $ 654,096
Dennis Aguirre $ 354,440 $ 299,656 $ 654,096
Eve Allendale $ 354,440 $ 299,656 $ 654,096
Cheryl Flink $ 265,830 $ 224,742 $ 490,572
Tessa Gray $ 265,830 $ 224,742 $ 490,572
Emily Jordan $ 265,830 $ 224,742 $ 490,572
David Bartholomew $ 265,830 $ 224,742 $ 490,572
Jordan Kyle $ 265,830 $ 224,742 $ 490,572
Shannon Lightwood $ 265,830 $ 224,742 $ 490,572
Steven Barnes $ 265,830 $ 224,742 $ 490,572
Change in Control Report 2020--at Target
43. 4343
Build a Total Compensation Structure
A total compensation structure gives you a comprehensive view of all
compensation and benefit plans and ensures operational integrity.
45. 4545
Creating a 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
How are
these values
determined?
Why no LTI
to balance
the STI?
Should we be
addressing
these needs?
46. 4646
What Does It Tell You?
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%
47. 4747
Balanced Structure
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 $ 75,000 $ 75,000 $ 450,000 $ 18,200 $ 8,000 $ 15,000 $ 41,200 $ 491,200
Lucy Jones VP Marketing 2 $ 210,000 $ 36,750 $ 36,750 $ 283,500 $ 16,200 $ 7,000 $ 10,500 $ 33,700 $ 317,200
Rick Miller VP Sales 2 $ 160,000 $ 60,000 $ 40,000 $ 260,000 $ 9,200 $ 6,000 $ 8,000 $ 23,200 $ 83,200
Janice Johnson CFO 2 $ 95,000 $ 34,125 $ 34,125 $ 263,250 $ 10,200 $ 5,000 $ 9,750 $ 24,950 $ 288,200
Maria York Director 3 $ 160,000 $ 16,000 $ 16,000 $ 192,000 $ 12,200 $ 4,000 $ 8,000 $ 24,200 $ 216,200
Frank North Director 3 $ 50,000 $ 15,000 $ 15,000 $ 180,000 $ 1,200 $ 3,000 $ 7,500 $ 21,700 $ 201,700
Ricardo South Director 3 $ 140,000 $ 14,000 $ 14,000 $ 168,000 $ 7,700 $ 2,000 $ 7,000 $ 16,700 $ 184,700
Simon Lewis Director 3 $ 30,000 $ 13,000 $ 13,000 $ 156,000 $ 8,700 $ 2,500 $ 6,500 $ 17,700 $ 173,700
$ 1,445,000 $ 263,875 $ 243,875 $ 1,952,750 $ 93,600 $ 37,500 $ 72,250 $ 203,350 $ 2,156,100
We’ve
reduced the
STI targets.
But we’ve
balanced with a
LTIP (wealth
creation).
This can
strengthen
partnership and
improve retention.
48. 4848
A balanced approach will typically appeal to premier
talent who hold a long-term view
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 61.1% 15.3% 15.3% 3.7% 1.6% 3.1% $ 491,200
Lucy Jones 2 66.2% 17.5% 17.5% 7.7% 3.3% 5.0% $ 317,200
Rick Miller 2 56.5% 37.5% 25.0% 5.8% 3.8% 5.0% $ 283,200
Janice Johnson 2 67.7% 17.5% 17.5% 5.2% 2.6% 5.0% $ 288,200
Maria York 3 74.0% 10.0% 10.0% 7.6% 2.5% 5.0% $ 216,200
Frank North 3 74.4% 10.0% 10.0% 7.5% 2.0% 5.0% $ 201,700
Ricardo South 3 75.8% 10.0% 10.0% 5.5% 1.4% 5.0% $ 184,700
Simon Lewis 3 74.8% 10.0% 10.0% 6.7% 1.9% 5.0% $ 173,700
Salary STI% LTI% H&W% QRP% SI%
52. 5252
Value Creation Example:
Item Amount
Capital Account $20,000,000
Cost of Capital 12%
Capital Charge $2,400,000
Operating Income $10,000,000
Productivity Profit $7,600,000
Total Rewards
Investment
$25,000,000
ROTRI™ 30.4%
(ROTRI™ = Productivity Profit/Total Rewards Investment)
53. 5353
ROTRI™ Example:
Item Figure
Capital Account $20,000,000
Cost of Capital 12%
Capital Charge $2,400,000
Operating Income $10,000,000
*Productivity Profit $7,600,000
Total Rewards
Investment
$25,000,000
ROTRI™
(Return onTotal Rewards Investment)
30.4%
(ROTRI™ = Productivity Profit/Total Rewards Investment)
*Variable Pay
Plans (Value
Sharing) are
financed from
Productivity
Profit