Performance Equity is No Longer the Future (it is the NOW)

Performance is the new normal. Are you normal?

Dan Walter - Performensation

Dan Walter, CEP, is the founder of Performensation Consulting. Dan has more than 18 years of experience in with equity compensation programs. He has designed and administrated both management and broad-based programs, for both public and private companies.  Dan has worked extensively with companies in U.S. and abroad. His experience with young entrepreneurial companies and established Fortune 100 companies provides his clients with a unique perspective on compensation issues. He creates effective, and when needed, innovative company-specific solutions. His clients appreciate the post-consultation support he provides to help ensure programs are working as designed. Dan’s expertise includes equity compensation, executive programs and talent management issues. He has experience with all aspects of these programs including: diagnosis, design, communication, administration and reporting. His equity compensation expertise includes stock options, restricted share and units, stock purchase and performance-based programs. Executive compensation experience includes benchmarking, short and long-term incentive program design, proxy disclosure reporting and total-reward evaluations. Dan also has significant experience in administrative and technological best practices for these programs.  Dan is co-author of two publications: “Equity Alternatives” and “The Decision Makers Guide to Equity Compensation”, available at www.nceo.org. He is also a featured writer at the www.CompensationCafe.com blog.

He accepts LinkedIn invitations from all compensation professionals at www.linkedin.com/in/danwalter.

Performance is the

New Normal

The Flow of Performance

Determine Needs Define Metrics Set Goals Track Progress Communicate Achievement Reward Accomplishment (or not) Start over….quickly

The Performance Process

The What Needs: Why you are measuring? Metrics: What is being measured? Goals: Achievement Levels and Timing Done correctly it is continuous and

ubiquitous We sometimes forget its happening

What’s Missing?The How What are the actions that must be taken?

Say on Pay Changed Everything

(And Nothing) Pay for Performance has become a

textable abbreviation: P4P Take that Brangelina!

Performance-based equity is most companies solution to the age old compliant: “Why do you pay those guys so

much!”

Say on Pay, an early look at 2012

Through April 23, 2012 286 Companies 5 “true” failures (ATU, IGT, KBH, C,

FMER) Those who passed averaged better

than 89% yes votes Failures have been very decisive

Say on Pay, new impact abroad?

UK Shareholders have had SOP for a decade Pay level growth was not materially

impacted Main change was a move from time

based equity and cash compensation to TSR focused equity compensation

Recent push to include more financial and operational metrics after a combination of plan design stagnation and misalignment between peer pay

Who Loves Performance Awards?

Shareholders Media Politicians Compensation Consultants Executives (when they pay out) Companies (when they get SOP

approval)

Only administrators don’t really love them And the providers who support

admin

5 Reasons to Embrace P4P

1. Links equity comp to business strategy

2. Provides a easy argument for better communication (and a budget)

3. Done right it can be leveraged like Stock Options and safe like RSUs

4. More interesting than time-based awards

5. Like or not, it is the future of equity compensation

Equity Compensation Values

2008 CEO

2008 CFO

2009 CEO

2009 CFO

2010 CEO

2010 CFO

44% 41% 39% 39% 34% 31%

16% 22% 17% 20%

17% 20%

40% 37% 43% 41% 49% 48%

Stock Options Restricted Performance

The Golden Decade is GONE

1988-1999 proved to be an anomaly. This period became basis for future equity compensation expectations.

Since 2000, the market has been more volatile and is reflective of periods prior to 1988. Higher volatility may lead to higher values for time-base stock options, but it also leads to higher corporate compensation expense and greater risk of delivering no value to participants

So Why is Performance Better?

Relative Goals can reduce the impact of market volatility Relative TSR

Absolute Goals can increase the focus on key achievements

In a volatile Market Stock Options are too unpredictable

In almost any market Restricted Stock Units provide limited motivation

Proper Design - Positives

Properly designed, performance equity can offer MORE STABILITY than time-based equity Not completely dependent upon stock price Can factor in influence of the market volatility

on peers and self Can provide upside leverage and downside

protection Time to achievement based on corporate

success cycles rather than the orbit of the earth around the sun

Proper Design - Negatives

Even if properly designed, performance equity can offer MORE RISK than time-based equity Improper goal setting can occur when source

data or future projections are incorrect Payout based on excellent past performance,

but delivered during poor current performance Grants at historically low prices it can result in

tremendous value delivery Goals always seem ambitious until, and unless,

they are achieved too soon

Communication

Long-term Performance Compensation is Like a Marathon You run slowest in the dark A bit faster when there are occasional lights Even faster when there are mile markers Faster still when you know where the

competition is A bit faster when you are in a strong group Fastest when you have all of the above AND a

cheering section motivating you along the way

Communication

Performance goals are in themselves a form of communication They must be talked about, consistently

in patterns than mean something to participants

Progress must be available when it is wanted, not only when its convenient

Messages must include both the good and the bad, or the patterns will be inconsistent and unbelievable

The 4 risks of Pay for Performance

1. Incorrect Metrics Metrics are the “things” that are being

measured. These are the foundation of your plan and must represent the measurements of success

Common issue: Misunderstanding of business strategy Vs employee engagement/alignment

Common issue: Motivating one action without balance of counter-action

The 4 risks of Pay for Performance

2. Poorly Set Goals Goals are the levels that define the success

of each metric These are the drivers of your plan and must

represent your destination Common issue: Insufficient modeling of Best

Case, Worst Case and Expected Case scenarios

Common issue: Goal achievement becomes obviously impossible (or far too possible) very early in the life of the program

The 4 risks of Pay for Performance

3. Underwhelming Communication Performance compensation is often confusing Clean, clear, frequent, communications are

essential to engaging and motivating your staff Common issue: No time or money to

communicate after initial roll out of program Common issue: Disconnect between what

HR/Comp believe is the purpose of the plan versus managements actual purpose

Common issue: Communication, Who has time for communication?

The 4 risks of Pay for Performance

4. Human Nature Human nature is the one thing that you cannot

build into your compensation programs, yet it is the single biggest risk to pay for performance

The problem isn’t that P4P programs don’t work well enough, it’s that they work TOO well

For programs that demand high-performance, you must also provide strong management and oversight

Many companies assume their compensation plans will manage people (only people manage people)

Questions and Contact Info

Dan Walter, CEP, PresidentPerformensation

514 Precita Ave, Suite 100San Francisco, CA 94110

877-803-9255 (toll free) ext. 700415-625-3406 (office)

917-734-4649 (mobile)dwalter@performensation.com

www.performensation.com

Twitter: www.twitter.com/performensationLinkedIn: www.linkedin.com/in/danwalter

Blog: www.compensationcafe.com

Other Places to Find Performensation

www.equitycompensationexperts.groupsite.com

Free Networking Group with 1300+ membersCross Functional Evolution for Equity Compensation

www.compensationcafe.com

Serving up straight talk, original thinking and caffeinated discussion on everything

compensationwww.slideshare.net/#!/performensation

23

Next generation Online portal. Use Sponsor Pass code “GEMS” to waive $595

registrationhttp://bit.ly/sharecomp2011

Free presentations, documents and more…