August 25, 2015

The 3 “Habits” of Highly Effective Pay Plans

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Today’s Presenter:

Ken Gibson Senior Vice 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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Founded in 1996 Over 450 Clients in North America Focus: Compensation design and

management that drives growth

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We’re happy to provide a copy of today’s slides. Information will be provided at the close

of the presentation.

To open or close the control panel: Click the red arrow

For questions during

today’s presentation: Use the question area on your control panel

Webinar

Q: Are the slides available?

A: Yes, more info will be provided at the end

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One hour consulting call with a VisionLink principal at no

charge Indicate interest on final

survey

Special Offer

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Key Question

Which compensation program or strategy should get most of your attention right now?

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Answer

“It depends….”

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Is there one right solution for all three companies?

Company A Company B Company C

10 Year-Old Technology Company 18 Year-Old Transportation Company

20 Year-Old Manufacturing Company

Grown from $50 to $75 million in revenue over past three years

$45 million in annual revenue, unstable growth (averaged 3% over past 5 years)

$150 million in annual revenue—up from $75 million three years ago

Wants to grow to $125 million over next three years

Wants to grow to $75 in the next five years

Plans to grow to $200 million in the next three years

Salary & Discretionary Bonus Salary & Discretionary Bonus Salary and Profit Sharing Bonus Plan

High Attrition Low Attrition Modest Attrition

Privately Owned Family Owned: Two sons working in the business

Privately Owned: New CEO hired by owner three years ago

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Is there one pay plan that is more important than others?

There is no single, “silver bullet” solution for every company.

There are, however, “silver bullet” habits that can guide priority setting.

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Effectiveness

Two Dimensions: Getting the desired

result Preserving and

enhancing the assets which drive the results

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Effectiveness in Compensation

1. Attract Premier Talent Offer compelling value proposition

2. Drive Sustained Success Reward results

3. Instill a Culture of Confidence Build a competitive advantage

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Why “Habits?”

The Power of Habit Charles Duhigg

Image Source: James Clear jamesclear.com

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The 3 Habits of Highly Effective Pay Plans

1. Define a Philosophy (Reminder)

2. Build a Structure (Routine)

3. Share Value (Reward)

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Habit #1: Define (and live by) a Pay Philosophy

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Habit #1: Define (and live by) a Pay Philosophy

A written statement about what the company believes its people should be “paid for.”

A Compensation Constitution

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Pay Philosophy

1. It must clearly articulate how the business defines value creation.

We believe shareholders must receive a return of “X” on invested capital and revenue growth of X% per year over the next five years to achieve its value creation goals.

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Pay Philosophy

2. It must communicate the company’s performance expectations and how they impact value sharing.

The first $X million of net operating profit goes back to the company. The next $X million is committed to employee value sharing. Beyond that, 50/50 is shared between employees and the workforce.

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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.” (Keith Williams, CEO)

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 Philosophy

3. It must define where the company wants to be relative to market pay for both salaries and total compensation.

We believe in establishing salaries at a level that falls between the 45th and 55th percentile of market pay but in providing significant (and in some cases, unlimited) upside potential through value sharing.

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Pay Philosophy

4. It must articulate the balance the company wishes to achieve between guaranteed and incentive pay.

We believe that every employee should participate in some level of value sharing between 10 and 25 percent of their salary. For key producers, 100 percent of their salary (or more) should be available through value sharing.

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Pay Philosophy

5. It must define the balance the organization deems appropriate between short and long-term incentives (value-sharing).

We believe for most employees, between 60 and 75 percent of their value sharing participation should be tied to short-term results (12 months or less) and 25 to 40 percent for long-term (12 months or longer). For executive level employees and other key producers, that ratio should be 50/50.

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Habit #2: Build and Maintain a Total Compensation Structure

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Compensation Philosophy

Our values and beliefs about

pay (that will help us fulfill our business model)

• Why do we pay our employees? • What do we pay for (desired

outcomes)? • How much do we pay (relative to

peers)? • How do we pay (to spur

productivity)? • How do our pay programs

differentiate us from our competitors?

Total Compensation Structure

Our system for operating pay

programs (per our comp philosophy)

• How do I benchmark my positions ? • How do we treat positions for

which there is no market data? • How do we value rewards

programs for which there is no benchmark data?

• How do we organize our positions within grades to simplify pay management?

• How do we assign relative values for each rewards program by grade?

Company Business Model

Our plan for generating

revenue and profits

• How does the company make money?

• How do we create and maintain our competitive advantage?

General Benefits

• How do we make

decision about altering or adding benefits?

• How do we control escalating insurance costs?

• When should employees become eligible for benefit program enrollment?

Executive Benefits

• What supplemental

life, disability and health plans?

• What performance or years of service criteria should be

• What additional benefits (car allowance, cell phone, etc.) should be adopted?

Long-term Incentives

• How are awards

determined? • How frequently are

they granted? • What vesting

schedule will we use?

• What events will trigger payments?

• How will awards be valued?

Bonuses

• What elements are

included? • What metrics do we

use? • How frequently do

we pay? • How do we adjust

for not-targeted performance?

• How do we account for individual performance?

• How do we set minimum performance thresholds?

Salaries

• How do we manage

merit and/or cost of living adjustments?

• How do we adjust for promotions or grade advancements?

• How do I set an appropriate salary budget?

• How should salary adjustments reflect our pay philosophy?

Financial Stewadship Partnership Reinforcement

Company Business Model Compensation Philosophy Total Compensation Structure

Rewards Plan Operation

Operational Integrity Financial Stewardship

Our plan for maximizing the return on our compensation

investment

• What is my total compensation investment?

• How are our plans forecasting against budget?

• What are the right metrics for measuring my compensation ROI?

Operational Integrity

Our plan for assuring

consistent, fair and wise decision making

• How do we validate the

effectiveness of our pay programs?

• How do we ensure we are paying consistent with our compensation philosophy?

• What programs should we consider expanding or eliminating

Partnership Reinforcement

Our plan for insuring our

employees understand and value our rewards proposition

• How do we communicate the

true value of our rewards proposition?

• How do we assess employee understanding and appreciation?

• What is the right way to communicate significant compensation events to our employees?

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Market Pay Assessment

Benchmark your roles against salary surveys

Major House Surveys

Industry Surveys

Internet Surveys

Government Statistics

25th 50th 75thTowers Watson Accountant 1 15% 47.0 52.5 58.0 Mercer Accountant - Entry 10% 10% 50.1 52.5 55.3 Radford Accountant 1 5% 55.4 59.1 63.8 Salary.com Accountant -5% 15% 40.7 44.3 46.5 ERI Accounting - Junior 10% 50.2 54.6 61.3 Kenexa Accounting Associate 10% 53.7 58.9 62.4 BDG Accountant I 5% 5% 44.2 50.1 54.3 Pay Scale Junior Accountant 15% 42.7 46.8 49.0 Robert Half Accounting Level 1 10% 51.3 56.0 59.5 DOL Accountant 5% 47.3 51.8 55.4

Aggregate Benchmark 100% 48.3 52.7 56.6

Position

Junior Accountant 51.4

Market DataEmployee AverageWeighting

Premium/DiscountMatchSurvey

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Building Salary Ranges

Align salaries to your Compensation Philosophy and the Market Data

Four Approaches Pure Market Pricing

Traditional Grade Structure

Broadband Structure

Hybrid Structure

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Building Out Your Structure

Now that Salary Ranges have been established we can see what other rewards can be tied to the structure

Use your Compensation Philosophy Common to have all rewards tied to the ranges

Incentive Eligibility (Short & Long Term)

Incentive Targets

Executive Perquisites

Vacation (PTO/FTO Programs)

Supplemental Insurance Programs

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The Final Structure

Salary

SalesIncentives

PerformanceIncentives

GrowthIncentives

Core Health& Welfare

Plans

Executive Benef it Plans

Qualif ied Retirement

Plans

Nonqualif ied Retirement

Plans

Min Mid Max1 203,531 271,375 339,219 50.0% 100% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 15,000 20,000 2 150,078 200,103 250,129 35.0% 75% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 10,000 12,500 3 119,497 159,329 199,161 25.0% 50% 100% 0% 5% Yes 5% $11,141 25 5 5,000 8,000 4 102,632 136,843 171,054 20.0% 25% 100% 0% 5% $6,127 25 5 5,0005 81,293 101,616 121,940 15.0% 5% $6,127 25 5 5,0006 69,720 87,150 104,580 15.0% 5% $6,127 15 5 7 58,564 73,205 87,846 10.0% 5% $6,127 15 5 8 50,176 62,720 75,264 10.0% 5% $6,127 15 5 9 44,038 51,809 59,580 5.0% 5% $6,127 15 5

10 37,211 43,777 50,344 5.0% 5% $6,127 10 5 11 30,784 36,217 41,649 5.0% 5% $6,127 10 5 12 23,562 27,720 31,878 5.0% 5% $6,127 10 5 13 19,529 22,975 26,421 0.0% 5% $6,127 10 5 14 17,354 20,417 23,479 0.0% 5% $6,127 10 5

Annual Car Allow

Grade/Band Sick Days

Salary RangeBonus Target

LTIP Target

Financial Planning

Perk

Deferred Comp

Elegible

Deferred Comp Max

Match

401k Match Max %

Vacation Days

% Phantom Stock FV

% Phantom Stock AO

Health, Dental,

Life

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The Financial Dashboard

1 275,000 137,500 137,500 17,500 13,750 11,141 Unlimited 15,000 20,000 627,391 627,391 2 606,900 212,415 159,311 52,500 30,345 33,423 Unlimited 30,000 37,500 1,162,394 387,465 3 516,214 129,054 64,527 52,500 25,811 33,423 49,636 15,000 24,000 920,091 306,697 4 748,942 149,788 187,236 93,000 - 36,762 72,014 30,000 - 1,332,144 222,024 5 887,638 133,146 - 135,000 - 61,270 85,350 50,000 - 1,369,473 136,947 6 149,488 22,423 - 22,400 - 12,254 8,624 - - 218,064 109,032 7 1,241,521 124,152 - 156,400 - 104,159 71,626 - - 1,721,734 101,278 8 826,026 82,603 - 86,800 - 85,778 47,655 - - 1,144,747 81,768 9 423,320 21,166 - 28,720 - 49,016 24,422 - - 554,785 69,348

10 501,331 25,067 - 25,080 - 73,524 19,282 - - 653,924 54,494 11 123,000 6,150 - 3,270 - 18,381 4,731 - - 157,897 52,632 12 210,800 10,540 - 8,720 - 49,016 8,108 - - 291,238 36,405 13 257,000 - - 10,450 - 67,397 9,885 - - 349,674 31,789 14 452,770 - - 19,950 - 128,667 17,414 - - 627,508 29,881

Total 7,219,950 1,054,003 548,574 712,290 69,906 764,211 418,747 140,000 81,500 11,131,066

Total Cost Car Allow Cost per EE Financial Planning

Grade/Band STIP Target LTIP Target

Health, Dental, &

Life Total Salary

Cost 401k Match Contribution

Deferred Comp Match

Vacation Days

The Total Compensation Structure in conjunction with your Compensation Philosophy helps determine how to make efficient and strategic changes to your rewards programs

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Habit #3: Share Value

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Why Long-Term Value Sharing Matters

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Why Long-Term Value Sharing Matters

1. Value sharing attracts the best talent and magnifies results

2. Value sharing plans (effectively designed) reinforce the company’s business model

3. Value sharing protects against bad profits and promotes good profits

4. Value sharing promotes an ownership mindset

5. Value sharing builds trust and accelerates results

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What shareholders want

Align pay with shareholder interests Tie pay results to value creation Large incentives are fine if shareholders receive a

fair return first Encourage top talent to join and stay

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What top producers want

Align pay with shareholder interests Share in value creation Large variable upside once shareholders receive a

fair return first A place to make a long-term difference

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Align Interests

Share Value Creation

Large Incentives/Fair to Shareholders

Long-term Partnership

Well, look at that…

Align pay with shareholder interests

Tie pay results to value creation

Large incentives are fine if shareholders receive a fair return first

Encourage top talent to join and stay

Align pay with shareholder interests

Share in value creation Large variable upside once

shareholders receive a fair return first

A place to make a long-term difference

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Salaries STIP

Benefits

LTIP

Present Company

Future Company

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$ New Value $

Margin Improvement

Sales Growth

Product Improvements

Cost Improvements

Customer Satisfaction

Productivity Improvements

Quality Employee Retention My Job

Responsibilities

Incentive Plan

Line of Sight

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Long-term Value Sharing Plan

The most important incentive plan to attract, retain and focus catalysts

The most under-utilized incentive plan in privately held companies

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Why under-utilized?

Not as common as short-term plans (others don’t do it; why should we?)

Appear more complicated (what don’t we know about the future?)

Lack of familiarity (where would we begin?) Fear of diluting equity (do we have to share stock?) Concern for disclosure (do we have to open the

books?)

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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

Objectives Other Metrics

Performance Unit

Employee Directed

Strategic Deferred Compensation

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Effectiveness

Two Dimensions: Getting the desired

result Preserving and

enhancing the assets which drive the results

43 43

Effectiveness in Compensation

1. Attract Premier Talent Offer compelling value proposition

2. Drive Sustained Success Reward results

3. Instill a Culture of Confidence Build a competitive advantage

44 44

One hour consulting call with a VisionLink principal at no

charge Indicate interest on final

survey

Special Offer

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Please complete our brief survey immediately following our presentation.

We value your input.

Request a copy of our slides, white paper and a complimentary consultation.

46 46 7700 Irvine Center Drive, Suite 930 Irvine, CA 92618 949-852-2288

www.VLadvisors.com www.PhantomStockOnline.com

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Sept 22nd

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Oct 27th

How to Build and Manage a Total Compensation Structure (HR Audience)

Nov 11th

Performance-Based Pay that Actually Performs How to Engineer Rewards that Drive the Outcomes You Want

Dec 8th

Upcoming VisionLink Online Seminars:

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NEW VISIONLINK REPORT AVAILABLE!

Compensation and Transformative Results How Growth-Oriented Companies Should Think About and Design their Pay Plans

Express interest on the final survey

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VisionLink Website www.VLAdvisors.com

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Q&A

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Thank You

Ken Gibson Senior Vice President (949) 265-5703 kgibson@vladvisors.com