the over-compensation trap

The Over-Compensation Trap

Dave Swinford Dan LynchPearl Meyer & Partners Pulte Homes, Inc.New York, NY Bloomfield Hills, MI212-644-2300 248-593-5775

http://www.pulte.com/default.asp

2


How We Fall Into The Trap

How To Avoid The Trap

If You’re In It, How You Get Out

3


Assuming pay equals or will cause performance

Peer group bias Percentiling Piece-mealing Incrementalizing Special arrangements Not validating degree of difficulty

How We Fall Into The Trap (or, Worst Practices in Executive Compensation

4


Truncating risk, or forgiving failure to perform

Ignoring retirement benefits

Minimizing value of non-monetary rewards

How We Fall Into The Trap

5


75th percentile target position

75th percentile total compensation does not equal 75th salary + 75th bonus + 75 LTI

Percentiling

6


“One piece at a time,” “gradually”

Looking at the trees, ignoring the forest

De-emphasizing one year; “fixing it” the next

Piece-mealing

7


Improving specific compensation elements a bit at a time

Raising target bonuses to increase pay for performance

Incrementalizing

8


Guarantees

“One-time” incentives for “extraordinary” results• Take care to validate goals

Special Arrangements

9


Truncating Risk

X

Pay XX

X

X X

X

XX

X X

X

X

Performance

"Ideal" RelationshipMedian Performance

X

Median Pay

10


Truncating Risk

X

Pay XX

X

X X

X

XX

X X

X

X

Median Pay

Performance

"Ideal" Relationship

X

Median Performance

Zone of forgiveness; pay for effort

11


Truncating Risk

X

Pay XX

X

X X

X

XX

X X

X

X

Performance

"Ideal" Relationship

Median Pay

Median Performance

X

Zone of inadequate pay for performance

12


Focus on total value of package• Test all changes for impact on value and risk

profile• Never piece-meal

Need to think about timing as well as value Measure relative performance Performance-justify departures from median

philosophies

How to Avoid the Trap

13


Follow the performance “contract”

Keep executive careers in perspective

Don’t dis-respect non-monetary rewards

How to Avoid the Trap

14


Focus on Total Value of Package

Total Compensation Value

Salary

STI

LTI

Benefits

Perqs

15


Aggregate cost of management compared to income (net or operating)

• Our company, over time

• Compared to peers (Top 5 only)

» Beware of funny numbers (FAS123R; DB accruals)

Measure Relative Performance

16


Other measures that may be useful to compare

• Revenue growth

• Gross margin

• Returns (ROE, ROIC)

• TSR (over longer term only)


17



Simple Rankings vs. Peers Net Income Revenue

CEO Growth Growth TSR Total Comp. (1 year) (1 Year) 1 Year 2 Year 5 Year

H H G G D H US D F D H US G A D A A D D B US H US A Median E G A B G G C US C US B C A E H F C B F F B E E F B C E C F E

18



$0

Net Income

Net Income Growth

Top 5 Comp. vs. Net Income

0%

US

Peer Company Circle Size Represents Top 5 Total Comp.C

AF

G

E

H

D

B

19


Don’t Disrespect Non-monetary Rewards

Company’s reputation and stability

Development track record

Culture and climate

20


Rigorously define nature and extent of problem• Must get all parties to acknowledge the problem

Identify areas of acceptable program modification• Some cows are more sacred than others

Develop desired outcome

Develop and implement transition plan

Communicate, communicate, communicate

How to Get Out of the Trap

the over-compensation trap

Documents