Executive Incentive Compensation in the Private, Small ... · Executive Incentive Compensation in...

The world leader in serving science Proprietary & Confidential

Martin Van Walsum, CPA, MBA, CCP

Vice President, Executive Compensation

Executive Incentive Compensation in the Private, Small, and Midsized Marketplace

CBIA 2016 Compensation & Benefits Conference June 22, 2016

2 Proprietary & Confidential

• Revenues of $17 billion and 50,000+ employees in 50 countries

• We help our customers accelerate life sciences research, solve complex

analytical challenges, improve patient diagnostics and increase laboratory

productivity

• Formed by the 2006 merger of Thermo Electron (f. 1956) and Fisher Scientific

(f. 1902)

About Thermo Fisher Scientific


Our Mission


About Thermo Fisher Scientific (NYSE: TMO)

• High performing culture built around “making our numbers”

• Have closed 120+ deals in the past 10 years totaling $50+ B, including: Year Company Revenue Purchase Price

2011 Dionex $500 M $2.2 B

2011 Phadia $600 M $3.5 B

2012 One Lambda $200 M $0.9 B

2014 Life Technologies $4.0 B $16 B

2016 Affymetrix $350 M $1.3 B

2017P FEI Corporation $1.0 B $4.3 B

• Rewarded by investors with quadrupled stock price from January 1, 2009 to

December 31, 2016, and 97% favorable vote in 2016 “Say on Pay” referendum


About Barnes Group (NYSE: B)

• Founded in 1857 in Bristol, Connecticut making springs for clocks and hoop skirts

• Today, $1.2 B global manufacturer of industrial and aerospace components with

approximately 4,700 employees at more than 60 locations on four continents

• Stock price quadrupled from January 1, 2000 to December 31, 2007


Similarities

• B2B companies large and small suffer from “identity crises”

• Thermo Fisher Scientific – #267 on Forbes’ 2016 list of The

World’s Biggest Public Companies, # 97 in U.S.

• Forbes Inc. – Private Company, $400 M in revenue, 750 employees

• “Cash is King” – remains the most important element

of pay, even among executives making > $1M

• Employees seek differentiated recognition for their

contributions

• Affordability of driving incentives deep in organizations

• Scarcity of resources, especially good people

Differences

• Top talent is easier to accumulate in large caps

(challenge, not a barrier)

• Change isn’t easy, but it’s easier in smaller companies and in

private companies

Small / Private Companies vs. Large Caps


• Salary

• Merit and Market Adjustments

• Promotional Salary Increases

• Short-Term Incentives

• Quarterly or Semi-Annual in

specific circumstances

• Stock Options

• Non-Qualified

• Incentive Stock Options (ISOs)

• Stock Appreciation Rights (SARs)

• Restricted Stock / Units

• Performance Shares

• Performance Units

• Phantom Stock/ Faux Equity Plans

• Book Value Plans

Incentive Choices for Executives


Do Don’t

DO differentiate in at least three of the

components of Total Compensation

• Merit Increases, Salary Adjustments,

S/T Incentives, L/T Incentives

DON’T over-reward the same organization

level

• S/T incentives: the business

• L/T incentives: the company

DO use stock, to the extent available.

• The accounting for stock is still better than

cash (value fixed on grant date vs. variable

accounting)

• Options still tend to be less expensive

• If you are successful in creating stock price

appreciation, the linkage can become very

powerful for retention, motivation and

attraction – great story to tell

• Be mindful of overhang and burn rate

DON’T over-interpret “trend data”

• Example: “While the trend of giving bonuses

has steadily increased since 2013 (69%) for

all companies, top performers were more

likely to give bonuses in 2015. The 2016

CBPR found that 74% of average companies

gave bonuses in 2015, while 81% of top

performers gave bonuses in 2015.” 1

DO use metrics for any cash component

that incorporate the drivers of stock price

(or enterprise value for private companies)

DON’T let the finance and legal teams

over-influence incentive design

• Find a way that satisfies all needs

Do’s and Don’t of Incentives for Executives

1 PayScale Human Capital, 2016 Compensation Best Practices Report


• Any company, regardless of size, can utilize pay as an incentive to reinforce a

performance culture

• Pay cannot create behaviors

• The behaviors have to be innate in the assembled workforce

• Hire to the culture you want to create

• Pay for performance can reinforce those behaviors that already exist

• Focus attention on desired behaviors

• Promote acceptable risk taking

• Opportunities are more powerful than pay

• “The true reward for superior performance is increased responsibility. The money will

follow in the natural course”

• Some behaviors can be expected and don’t need to be reinforced through added

incentives

• Example: procurement executive negotiating steel prices

• Significant barrier to creating an effective linkage between pay and performance

is to be too slow to exit poor performers - especially executives

Creating a High Performing Culture


• Long-standing commitment by senior leadership to differentiate pay based on

company, business and individual performance

• Prior to 2009, belief was that “Pay for Performance” was already deeply ingrained in

the organization

• Misconception fueled by a lack of consistent analytics

• Actual differentiation was far less than was perceived

• Significant multi-year shift in two areas, beginning in 2009

• Repositioned annual Total Compensation cycle (salary, annual incentive payouts, long-

term incentive awards) from an HR process to a Role Model Leadership process

• Supported by messaging from CEO, through senior leadership, to all 5,000

people managers

• Defined specific metrics and issued guidelines to managers

• Differentiation requires a strong linkage to performance management process

Reinforcing a High Performing Culture at Thermo Fisher


Key Communication Messages to Managers

• Differentiate in reward decisions across all four pay decisions

• Merit increase, salary adjustments, annual incentives, stock grants

• Insulate your strongest performers from competitive “poaching” by fully

recognizing and rewarding their contributions first

• The market for top talent is strong in any economy

• No guarantees, but compensation decisions are one of the few controllable factors in

the employee engagement equation

• Stay within pools, without compromising rewards to our strongest performers

• Past behavior was to scale back rewards for high performing employees to stay within

budget

• Focus on career / skill development for all employees, provide opportunities to

“make the grade”

• Perform at a high level and make a decided difference on key business initiatives

• Managers should be able to articulate what “Clear Strength performance” is


• Expectation: 10% to 15% of employees will receive a Clear Strength (CS) rating

Metric: Performance Distribution

CS

15.0%

AS

79.5%

RI

5.5%

2008 PMDs

CS

12.8%

AS

82.2%

2010 PMDs

RI

5.0%

CS

13.2%

AS

83.3%

2014 PMDs

RI

3.5% CS

11.2%

AS

84.9%

2012 PMDs

RI

3.9% CS

11.3%

AS

85.5%

2016 PMDs

RI

3.3%


• Expectation: 80% of CS performers will receive at least a 5% merit salary increase CS Employees Receiving Differentiated Increase

(within country-specific CS guideline range)

Percent of

CS Performers

Receiving a

Differentiated

Increase by

Business

Goal 80%

Metric: Differentiated Merit Salary Increases


0% 5% 10% 15% 20% 25% 30%

CPD

LCD

APAC

MBD

CCG

CDD

HMD

LED

EPD

RSD

SDG

CNO

AIG

CMD

CAD

BSD

LPG

Corp

APD

BID

Goal 15% to 20%

• Expectation: 15% to 20% of employees will not receive a salary increase

Metric: Percent of Employees Not Receiving an Increase


• Goal: Average increase for CS performers of 3 times that of AS performers

CS Increases as a Multiple of AS Increases

Average Salary Increase By Performance Rating

Metric: Multiple of Average Merit Salary Increase


• Goal: Average increase for CS performers of 3 times that of AS performers

CS Increases as a Multiple of AS Increases

Average Salary Increase By Performance Rating

2.65x 1.84x

“If I’m a strong

performer I want to be

in other parts of the

company. If I’m an

average performer I

want to be in Newco.

That’s not the right

message.”

Metric: Multiple of Average Merit Salary Increase


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0% 0.1% to 1.4% 1.5% to 2.4% 2.5% to 4.9% 5% +

Goal: Trimodal Distribution of Merit Increases

Demonstrating Differentiated Pay for Performance


• “What gets measured, gets managed.”

~ Peter Drucker

• Take a business approach

• For Thermo Fisher, salary + bonus + stock

is a $500 Million annual incremental investment

• As with any investment, we are looking to

achieve the highest ROI, which is achieved by

investing in higher performing employees

• Work the channels

• Managers are paid to manage

“We’re not saying it’s easy, but it’s not unreasonable

to expect managers to exhibit role model leadership

and make tough decisions.”

• Managers are employees, too

• Assess the effectiveness of the communications to serve both masters

• Assume managers are sharing information with other employees – utilize that leverage

• Keep the manager front and center to maintain accountability – no “HR wouldn’t let me”

• Acknowledge the “small sample” impact on the ability to achieve the metrics

• But remember, any small sample is generally part of a large group that can!

Lessons Learned

Executive Incentive Compensation in the Private, Small ... · Executive Incentive Compensation in...

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