4 Secrets to Overcoming Employee Entitlement
Today’s Presenter: Ken Gibson Senior Vice 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 2
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Post Webinar Intro 5 Minutes: Who We Are What We Do How We Do It 5
Headquartered in Lake Forest, CA Founded in 1996 Over 600 clients throughout North America 23201 Lake Center Drive, Suite 207 Lake Forest, CA 92630 (888) 703 0080 www.vladvisors.com www.phantomstock.com www.bonusright.com 6
Setting the Stage Conversation between CEO and his CFO Neighbor CFO: “What would you be looking for if you were hiring a CFO?” CEO: “I’d be looking for a business partner.” “The CEO is concerned about how the organization can create value for the long-term. So the question on my mind (with anyone I hire) is: How can we create value together?” 7
Mindset I have this kind of education I have this kind of experience I am filling this kind of position I meet these qualifications I have been here for “x” years Therefore, I deserve… to be hired to be promoted to get equity to be paid more 8
Entitled — Word Association Expected Presumed Deserved Anticipated Assumed Demanded Implicit 9
Signs of Entitlement “Why is my bonus less than it was last year?” “I think I’m underpaid for my position.” “I’m doing my job. Why am I not getting promoted?” “Why can’t I have equity in the business?” “I’ve been here 7 years. Why doesn’t my compensation reflect my longevity?” 10 10
Roots of Entitled Employee Mindset Employee lacks understanding of Employer lacks a coherent pay value-creation. philosophy. 11 11
What is the Antidote for Entitlement? Stewardship A willingness to assume responsibility for certain outcomes and not expect to be paid well unless you fulfill them. 12 12
Stewardship — Word Association Ownership Accountability Engagement Leadership Responsibility Purposeful Proactive 13 13
Signs of Stewardship Employees: Assume an ownership mindset in decision making Take a strategic approach to their roles Focus on outcomes and results Protect shareholder interests Expect to create additional value before receiving additional compensation Make sacrifices to help the company succeed 14 14
4 Secrets to Overcoming Entitlement Define Value Creation 1. Articulate a Clear 2. Compensation Philosophy Replace Incentives with Value 3. Sharing Communicate a Partnership 4. 15 15
As a Reward for Attending A Bonus Secret For those who stay till the end. 16 16
1. Define Value Creation Value attributable to the productivity and performance of human capital. 17 17
Build Accountability into Your Pay Design Accountable Pay 18 18
Calculating Value Creation Focus on Productivity Profit 19 19
Calculating Productivity Profit: 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 $25,000,000 Investment ROTRI™ 30.4% 20 20 ( ROTRI™ = Productivity Profit/Total Rewards Investment)
ROTRI ™ Example: Item Figure Capital Account $20,000,000 *Variable Pay Plans (Value Sharing) are Cost of Capital 12% financed from Productivity Capital Charge $2,400,000 Profit Operating Income $10,000,000 *Productivity Profit $7,600,000 Total Rewards $25,000,000 Investment ROTRI™ 30.4% (Return on Total Rewards Investment) 21 21 ( ROTRI™ = Productivity Profit/Total Rewards Investment)
2. Articulate a Clear Pay Philosophy A written statement of what the company is willing to “pay for.” Earnings should be linked to value creation. 22 22
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 roles, priorities and what shareholders most value? 23 23
Pay Philosophy Evolution Wealth Multiplier Wealth Creation Defensive Old School 24 24 24
Reflect a Wealth Multiplier Philosophy 25 25
Wealth Multipliers vs. Wealth Creators Wealth Multipliers Wealth Creators Accelerate value Profitability focus creation Recruit to skills and Recruit premier talent experience that fits performance Pay is an expense to framework be managed Pay is an investment Salaries and total pay that should produce a should be “at market” growing return “Pay -for- Market pay for bench performance” marking but pay philosophy drive comp strategy Sharing value with value creators. 26 26
The Value of Profit Wealth Multiplier Profits Future Shareholders Employees Business 27 27
The Value of Profit Wealth Multiplier Profits Future Shareholders Employees Business A Sense of Partnership Translates to a Growth Multiple 28 28
Case Study 29 29
Assumed leadership of Keith Williams UL in 2005 Company carrying considerable debt Losing market share Low employee morale UL had become bureaucratic and “ siloed ” 30 30
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.’ ” 31 31
Pay the Company First Example: If UL’s target is “Basically, up to the $80 million-- company’s operating 100% of first $80 in profit target, all of the profit goes to company profits go to the The next $20 million company; and only after goes to the incentive that target is met, do we pool start funding the From there on, 50/50 incentive pool.” between company & incentive pool 32 32
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. 33 33
3.Replace Incentives with Value-Sharing 34 34
Why? “…when financial incentives are applied to increase…motivation, intrinsic motivation diminishes. A meta-analysis of 128 independent studies conclusively confirmed this effect.” (“Stop Paying Executives for Performance,” HBR, February 23, 2016) 35 35 35
Results, not Methods "You cannot hold people responsible for results if you supervise their methods.“ (Stephen R. Covey) "You cannot hold people responsible for results if you pay them for their methods.“ 36 36 36
Value-Sharing Breeds Partnership Value-Sharing Concept “We are part of a team. If we all work together we will generate greater success. That success will be shared with everyone that helps the company succeed.” When structured appropriately, value- sharing programs create a sense of partnership. 37 37
Transitioning from Incentives to Value Sharing The premise should be to promote value-creation and value-sharing: ▪ “When you help us create value you participate in that value” ▪ Define value creation around the shareholders’ most important goals 38 38
Shareholder’s Most Important Result Sustainable and growing profitability 39 39 39
Dual Focus 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 Favaro, Strategy+Business) 40 40
1 Philosophy, 2 Rewards Periods Short-Term Performance (12 1. months or less) Short-Term focuses on rewarding profit Long-Term Performance 2. (over 12 months) Long-Term focuses on rewarding business value increase 41 41
Start With Pay Strategy Alignment The role of each pay component in relation to others within the comprehensive compensation strategy is coordinated and clear. 42 42
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