VisionLink provides compensation consulting services to help businesses build high-performance cultures through strategic pay programs. In the presentation, Ken Gibson discusses four keys to creating an effective performance-based pay strategy: 1) understanding the relationship between pay and motivation, 2) adopting a "wealth multiplier" philosophy that shares value with employees, 3) using value sharing programs instead of incentives to reward financial results, and 4) measuring productivity profit to calculate returns on total rewards investments. The presentation provides examples and case studies of how businesses have successfully implemented these strategies to improve employee engagement, performance, and business growth.
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Today’s Presenter:
Ken Gibson
SeniorVice President
(949) 265-5703
kgibson@vladvisors.com
7700 Irvine Center Drive, Suite 930 Irvine, CA 92618 949-852-2288
www.VLadvisors.com www.PhantomStockOnline.com
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7700 Irvine Center Dr., Ste. 930
Irvine, CA 92618
(888) 703 0080
www.vladvisors.com
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Headquartered in Irvine, CA
Founded in 1996
Over 450 Clients throughout North America
7. VisionLink’s Focus: Help Business Leaders Build and
Sustain a High Performance Culture
Accelerate performance through pay strategies that
transform employees into growth partners.
8. 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.
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CEO Conversation
“How would you describe the culture you will need to accomplish your
growth goals?”
Outstanding products
Compelling value proposition
Fully engaged employees
Premier talent
Consistent performance
Ownership of results
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Response
“ Sounds like what you want is a
high performance culture. Is
that a fair summary of what you
said?”
“Yes, that about sums it up.”
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What is a High Performance Culture?
Clear Roles
Strategic Focus
Consistent Execution
Sustained Success Pattern
Regular Wins
High Confidence
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Key Questions About Compensation
Does your pay strategy--
…help or hinder the company’s business
model?
…clarify or confuse roles and expectations?
…reward outcomes or behaviors?
…encourage stewardship or entitlement?
…reinforce or undermine a high performance
culture?
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Key Questions About Compensation
To what extent should compensation--
…be tied to employee, team and company
performance?
…be guaranteed as opposed to variable?
…be measured for ROI
…reward short-term vs long-term
performance?
…impact employee engagement?
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Therefore, What?
Pay needs to become an asset
instead of a liability in your pursuit of
a high performance culture.
So how do you accomplish that?
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4 Keys to Creating a Performance Pay Strategy
1. Respect the Relationship
Between Pay and Motivation
2. Commit to a Wealth Multiplier
Rewards Philosophy
3. Share Value instead of Paying
Incentives
4. Measure and Track
Productivity ProfitProfit
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Total Rewards Approach
Compelling Future
Purpose
PositiveWork
Environment
Autonomy
Opportunities for
Personal and
Professional Growth
Mastery & Purpose
Financial Rewards
Partnership
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With Pay, Start with the Employee View
Everything you do in your
organization gives your
employees clues about two
things:
1. What you value
2. Where they fit
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Clue Taken from Pay Strategy
“Does my employer
understand why I care
about my compensation?”
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Link Company & Employee Goals
Financial “Hierarchy of Needs”
Cash Flow & Living Standard
Risk Protection
Retirement Planning
Value Sharing
Wealth Accumulation
Qualified & Executive
Retirement Plans
Comprehensive, Flexible
Benefits Plan
Short & Long-Term Incentive
Plans
Salary & Bonus
Wealth Multiplier Philosophy
Clear Pay Philosophy
1
2
3
4
5
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6 Reasons Employees Care About Pay
Personal
1. Lifestyle & Wealth
Accumulation
2. Career Measurement
3. Contribution Ambitions
Business
4. Roles, Expectations &
Priorities
5. Partnership
6. Continuity & Fairness
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Wealth Multiplier
Let’s Secure Growth Partners
Philosophy
Share economic value. "If you create financial value, you will
participate in a generous portion of it."
Cost or Investment?
Compensation is allocated to produce the highest possible
return for both shareholders and contributing employees.
Salaries
We use data for benchmarking, but our pay philosophy drives
where we want to be vis a vis market pay.
Bonuses
Bonuses (value sharing plans) are tied to crucial metrics,
recognize personal contributions, and are not capped.
Long-term Incentives
(quasi-equity)
Viewed by top performers as the most meaningful part of their
rewards program.
Results
If you want to be able to attract and retain the best talent in
your industry and have them adopt a stewardship mindset
regarding shareholder goals, this is your system.
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Wealth Multipliers vs. Wealth Creators
Wealth Creators
Profitability focus
Recruit to skills and
experience
Pay is an expense to
be managed
Salaries and total pay
should be “at market”
“Pay-for-
performance”
Wealth Multipliers
Accelerate value
creation
Recruit premier talent
that fits performance
framework
Pay is an investment
that should produce a
growing return
Market pay for bench
marking but pay
philosophy drive
comp strategy
Sharing value with
value creators
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The Value of Profit
Wealth Multiplier
Profits
Future
Business
Employees Shareholders
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A Sense of Partnership
Translates to a Growth
Multiple
The Value of Profit
Wealth Multiplier
Profits
ShareholdersFuture
Business
Employees
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Keith Williams Assumed leadership of
UL in 2005
Company carrying
considerable debt
Losing market share
Low employee morale
UL had become
bureaucratic and “siloed”
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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.’ ”
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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
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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.
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Concept of Value Sharing
“We are part of a team. If we all
work together we will generate
greater success. That success will be
shared with everyone if the
company succeeds.”
When structured appropriately,
value sharing programs are
perceived as a partnership.
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Results, not Methods
"You cannot hold people
responsible for results if you
supervise their methods.“
(Stephen R. Covey)
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The Right Premise
Reward employees for
achieving the
shareholders’ most
important financial
results and treat them
as growth partners.
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Central Metric (for value sharing)
Focus on One of These:
Profit
Increase in Profits (% or $)
(Sometimes: Revenue Growth)
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Balanced Value Sharing
"Peter Drucker once wrote that the
manager’s job is to keep his nose to the
grindstone while lifting his eyes to the hills.
He meant that every business has to
operate in two modes at the same time:
producing results today and preparing for
tomorrow.” (Ken Navarro, Strategy +
Business)
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1 Philosophy, 2 Rewards Periods
1. Short-Term Performance (12
months or less)
2. Long-Term Performance
(over 12 months)
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Basic Construct
All employees are told they will share in the creation
of company value
Every employee has a defined incentive opportunity
aligned to forecasted company results
Base – Minimum performance
Target - Forecast
Superior - Overachievement
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Value Sharing Calculation
Actual incentive can be tied to actual company
performance.
If company results are halfway between Base and Target.
Incentives will be calculated halfway between Base and
Target
Actual Results = $47,500,000
Calculated Incentive = $5,625
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Plan Weighting/Allocation
Pool allocation to plan participants contingent
on:
Company Performance – Employees
should have all or a majority portion of their
bonus based on company performance
Org Unit Performance – A portion of an
employee’s bonus can be allocated based
on department, location, division,
or business unit
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Plan Weighting/Allocation
Make overall company performance the primary objective (e.g.
~60 - 100%)
Organizational unit success should be secondary objective (e.g.
~10-40%)
Weight the overall incentive:
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Individual Performance
Trend is to de-emphasize
personal performance
Performance Management
Managers more likely to be
honest about performance if
incentives are not directly
correlated to performance
rating
If performance is deemed
“unacceptable” discretion
can be exercised to eliminate
incentive payment
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Select the Right Plan Type
Stock Option
Performance Shares
Restricted Stock
Phantom Stock
Option
Performance
Phantom Stock
Phantom Stock Profit Pool
Performance Unit
Strategic Deferred
Compensation
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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
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Rules of Thumb
Senior Executives
• Short-term--50%
• Long-term--50%
Management
• Short-term--60%
• Long-term--40%
Rank and File
Employees
• Short-term--75-90%
• Long-term--10-25%
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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)
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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
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4 Keys to Creating a Performance Pay Strategy
1. Respect the Relationship
Between Pay and Motivation
2. Commit to a Wealth Multiplier
Rewards Philosophy
3. Share Value instead of Paying
Incentives
4. Measure and Track
Productivity ProfitProfit
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Take advantage of one-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.