June 10, 2014 How to Effectively Link C Compensation ti to t Results R lt Today’s Host: J.R. Samples Founder/CEO (312) 217‐2080 [email protected] 2 Experienced Sales/Business Advisors Background – J.R. Samples  Established in 20055  15 years in F500 firms – Sales Mgmt; Area President  15 years as business owner of two technology companies  150 person; 4 Sales Managers; 25+ reps  Drove 400% Organic Growth  Acquisition Experience and Operational Integration  Our experience allows us to see the “Big Picture” and downstream implications  E t bli h d Th B li C Established The Baseline Company in 2012 i  Three Self Assessment Products for Do‐It‐Yourself p Improvement  Organization, Individual Leadership and Sales/Marketing 33 Self‐Assessment tools: Organization‐wide  100+ areas affecting your Strategy, Execution and Culture  Sales and Marketing Deep Dive  100+ Areas in marketing, sales 00 Areas in marketing sales tools & process, compensation & staff performance that drive your sales results  Leadership Development  60+ areas to develop your key leaders in areas of:  Competence ▪ Execution & Leading Change  Character ▪ Building Teams & Judgment Decision‐Making  Sales and Marketing Engagements  Improving Sales Performance  Implementing Effective Sales Tools & Processes  Marketing Strategy & Measurement  Accurate Forecasting Professional Services Engagements  Pre‐Sales Positioning and Training  Pricing Models (Fixed/T&M)  Writing Effective Scopes‐of‐Work & Ch Change Control C t l  Staffing and Productivity Analysis Business Engagements  P&L Forecasting  Corporate expense allocations  Moving from cash basis to GAAP and accrual based F/S  Exit Planning 44 Today’s Presenter: Ken Gibson Senior Vice President ( (949) 265‐5703 ) 6 [email protected] 5 Key Question y Is “Pay for Performance” just a nice theory or does it translate into real results for actual businesses? 6 Setting Expectations g p If you implement a new compensation strategy—and it “works”—what does that d k h d h mean? What’s different or better in the company when rewards are “working”? h d k 7 If it is linked to results it should… 1. 2. 3. 4. 5. Solve a problem Remove a barrier Encourage a superior outcome Reinforce a pattern or cycle Focus efforts ff Unleash Growth 8 9 $200 million in annual revenue 400+ employees Primary Growth Barriers y Flat revenue growth g  Attracting good not great talent  No alignment between p y shareholder and employee goals  Low survey scores related to y “mindset” issues—employees y g g not fully engaged  11 Primary Compensation Issues y p Current compensation programs not synchronized with company short or long‐ term goals l  Bonus plan deemed an entitlement  No long‐term plan tied to growing l l d shareholder value  12 Barrier By‐Products y Compensation viewed as an expense to be Compensation ie ed as an e pense to be “contained” rather than an investment to be allocated  Innovation and creativity were not evident  Tension between shareholders and employees  13 Solution—Part One Compensation GamePlan p        Reviewed all elements of existing compensation programs Interviewed ownership and key employees Performed market pay assessments Established a compensation philosophy statement Provided key recommendations for changes in existing compensation structure including short‐term incentive plan Recommended establishment of a Stock Appreciation Rights ( (SAR) plan for key people )p yp p Created mechanism for initiating and reviewing compensation strategies 14 Solution—Part Two Stock Appreciation Rights Plan‐‐provided meaningful potential long‐term value for key employees   Established participation level at 25‐30 key employees Established targeted budget to share 8‐10% of the increase g g in share value from plan inception ▪ Each employee’s value expressed as a fixed number of units ▪ The higher the earnings value the greater the participation (payout commitment) g g g   Instituted internal valuation process so that changes in value could be communicated to employees Communication plan  Regular updates on key value indicators  Enable employees to estimate the value of their value today and in the future  Established executive benefit guidelines for all key executives 15 Intent       Create a guiding philosophy for making compensation g gp p y g p decisions Reduce the sense of entitlement Create a predictable and “budgetable” strategy for the Create a predictable and budgetable strategy for the compensation investment Create more “stability” in guaranteed and other short‐term compensation i Create alignment between shareholder and employee wealth accumulation goals p y g Create a higher sense of stewardship among employees 16 Real Life Results Over a Five‐Year Period d      Greatly reduced sense of entitlement among employees Stronger recruiting message and higher caliber employees attracted to the company G Greater focus (among employees) on key growth indicators f ( l ) k h i di Employee survey indicated a significant improvement in engagement and ownership mentality g g p y Company share value grew at a compounded rate of 75% 17 Select the Right Plan Type g yp Phantom Stock Option Restricted Stock P f Performance Sh Shares Phantom Stock Profit Pool Performance Phantom Stock Strategic Deferred Compensation p Stock Option Performance Unit 18 Yes Full Value Full Value or Appreciation Only? Grant Equity or Not Equity? Performance Based? Yes Appreciation No Reward for Value Increase or Financial Performance? Stock Option Performance Shares Value Increase Full Value or Appreciation? P f Performance B Based? d? AppreciationPerformance Based or Employee Directed? Employee Directed Strategic Deferred Compensation Performance Phantom Stock Reward for Profit/Cash Flow or Other Metrics? Other Metrics No Yes Phantom Stock Option Performance Based Restricted Stock Full Value Appreciation Financial Performance No Profits Objectives Performance Unit Phantom Stock Allocation or Objectives Based? Allocation Profit Pool 19 Establish a Performance Framework Business Framework Compensation Framework Talent Framework 20 Establish a Performance Framework Phase One—Business Framework  Define Growth Expectations (Vision) ▪ Key outcomes that must be achieved  D fi B i Define Business Model and Strategy M d l d S ▪ Performance Engine p y p ▪ How the company will compete ▪ Where are growth opportunities?  Identify Roles and Expectations ▪ Establish Performance Criteria ▪ Define “Success” 21 Establish a Performance Framework Phase Two—Compensation Framework  Establish a pay philosophy ▪ Expansive vs. Selective—or Hybrid ▪ Define what the company is willing to pay for  Engineer a pay strategy ▪ Structure ▪ Mindset  Adopt a “Total Rewards” Approach 22 Total Rewards Approach pp Compelling Future Positive Work Environment Opportunities for P Personal and l d Professional Growth Fi Financial Rewards i l R d 23 The Compensation Framework p Growth R lt Results Employees drive the right KPIs KPI Rewards dollars drive value for shareholders & employees Produce “above market” return on TRI St t Structure Focus: Mi d t Mindset Focus: • Strategy Cost •Cost •Productivity • Clarity • Partnership • Passion Total Rewards Philosophy & Gameplan Business Vision ● Model ● d l Strategy R lt Results Ownership Mentality Increased Engagement Improved E Execution ti Culture of Confidence 24 Establish a Performance Framework Phase Three—Talent Framework  Identify Key Producers ▪ Meeting “success” standards  Identify Talent “Gaps” ▪ Recruiting Strategy R iti St t  Communicate Expectations ▪ Define success  Communicate Rewards ▪ Philosophy ▪ Programs ▪ Value Statement 25 Key Differentiator y View of Business Growth: Wealth Multipliers vs. Wealth Creators 26 Slightly different mindsets g y Wealth Creators lh      Profitability focus Recruit to skills and experience Comp is an important expense to be managed Salaries and total pay should be “at market” “Pay‐for‐performance” Wealth Multipliers lh l i li      Growth focus Recruit premier talent that relates to the culture Comp is an investment that should produce a growing return Salary benchmarking can be helpful but pay should be tied to positional value “Share value with those who create it” 27 A Difference in Perspective p Wealth Multipliers fundamentally view the role of compensation differently than Wealth Creators… y Wealth Multipliers lh l i li understand that d d h multiplying the economic value for all stakeholders increases the likelihood their own wealth will increase 28 Wealth Multipliers and Profit p h h l l d l f What is the Value, Role and Application of Profit to a Wealth Multiplier? 29 The Value of Profit Wealth Multiplier Profits Future Business Employees Shareholders 30 The Value of Profit Wealth Multiplier Profits Future Business Employees A Sense of Partnership translates to a Growth Multiple Shareholders 31 Compensation Strategy p gy Systematic way of investing profits in f f employees in a way that multiplies productivity and growth. In the process, d d h h create a sense of partnership with those on f h f hd d whom our future growth depends. 32 Value Sharing Philosophy “Basically Basically, up to the up to the company’s operating profit target, all of p g , the profits go to the company; and only after that target is f h met, do we start funding the incentive pool.” (Keith Williams, CEO) Example: If UL’s target Example: If UL s target is $80 million‐‐ 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 33 Pay the Company First y p y ROTRI™ Return on Total Rewards Investment™ R t T t l R d I t t™ Measuring the return on your compensation i investment t t 34 How much is the Total Rewards I Investment? t t?  Salaries  Commissions  Bonuses  Deferred award accruals (LTIP)  Core benefits  Executive benefits  Retirement contributions  Payroll taxes 35 ROTRI™ Example: p Capital Account $ 20 20,000,000 000 000 Cost of Capital 12% C i l Ch Capital Charge $ Operating Income $ 10,000,000 Productivity Profit $ Total Rewards Investment $ 25,000,000 ROTRI™ 2 2,400,000 400 000 7,600,000 30.4% (ROTRI™ = Productivity Profit/Total Rewards Investment) 36 ROTRI™ Example: p Capital Account $ 20 20,000,000 000 000 Cost of Capital 12% C i l Ch Capital Charge $ Operating Income $ 10,000,000 Productivity Profit Total Rewards Investment ROTRI™ $ 2 2,400,000 400 000 7,600,000 $ 25,000,000 30.4% Variable Pay Plans (Value Sharing) are financed from Productivity Profit 37 Current Equity C t E it Value 25,000,000 EOY 10% GR % GR (Threshold) 11% GR 12% GR 13% GR 14% GR 15% GR 1 27,500,000 27,750,000 28,000,000 28,250,000 28,500,000 28,750,000 15 104,431,204 119,614,737 136,839,144 156,356,759 178,448,449 203,426,541 Incremental increase in value 15,183,533 17,224,407 19,517,615 22,091,690 24,978,091 Cum Value Increase Above Threshold 15,183,533 32,407,940 51,925,555 74,017,245 98,995,336 % Shared 10% 15% 20% 25% 30% $ Shared 1,518,353 4,861,191 10,385,111 18,504,311 29,698,601 Net Increase for SH 13,665,180 27,546,749 41,540,444 55,512,934 69,296,736 New SH Value 118,096,384 131,977,953 145,971,648 159,944,138 173,727,940 10 10.9% 9% 11 7% 11.7% 12 12.5% 5% 13 13.2% 2% 13 13.8% 8% IRR 38 Tallyy Sheet Year 1 5 10 V Value Created for l C t d f Shareholders $ 5,000,000 $ 35,000,000 $100,000,000 Cash Incentives Paid to Employees $ 350,000 $ 2,650,000 $ 9,750,000 LTIP Vested Value for Employees $ 0 $ 1,950,000 $ 5,680,000 Total Paid or Vested f E l for Employees $ 350,000 $ 4,600,000 6 $ 15,430,000 % of Value Created Paid or Vested 7% 13% 15% 39 Proper View of Compensation p p    Strategic Tool Not One Dimensional, it’s Multi‐Faceted Define: f  Role  Outcomes  Financial Partnership  Communicate:  What’s Important  Priorities 40 Eight components of pay g p p y Benefits  Core benefits  Executive benefits  Qualified retirement plans lf d l  Supplemental retirement plans p Compensation  Salary  Short‐term incentives  Long‐term incentives (cash) h  Long‐term incentives (equity) 41 Salaries Competitive with market standards? Tied to strong performance management process (merit)? M d i hi fl ibl b ff i ? Managed within a flexible but effective structure? Performance Incentives Tied to productivity gains? Clear, achievable and meaningful? Self‐financing? Nonqualified Retirement Plans Qualified Retirement R i Plans An Aligned Compensation Strategy Sales Incenti es Sales Incentives Salary Challenging yet achievable? Reinforcing the right behaviors? Differentiating your offering? Growth Incentives Performance P f Incentives Linked to a compelling future? Supporting an ownership mentality? Securing premier talent? Core Benefits Executive Benefit Plans Sales I Incentives ti Responsive to today’s employee marketplace? Allocating resources where most needed? Evaluated to eliminate unnecessary expense? Executive Benefits Core Health & Welfare Plans Growth Incentives Flexible enough to address varying circumstances? Communicating a unique relationship? g p y p Reducing employee tax expense? Qualified Retirement Plans Giving employees an opportunity to optimize retirement values? Operated with comprehensive fiduciary accountability? Avoiding conflicts and minimizing expenses? q Nonqualified Retirement Plans Optimizing tax‐deferral opportunities? Aligning long‐term interests of employees with shareholders? Structured to receive best possible P&L impact? 42 Form of Pay Purpose Standard Investment ROI Salaries Provide for the current cash needs of our executives 40‐ 40‐50th percentile for peer group $500,000 Achieve ROA standard of 0.75% Short Short‐‐term Incentives Enhance current cash payments to executives for achieving top and bottom line annual goals 30‐ 30‐40% of base salary $168,000 (Target) 15% revenue growth and 12% margin Long‐ Long‐term Incentives (Cash) Retain execs; focus them on long‐ Retain execs; focus them on long‐ term earnings growth; align with shareholder interests; meet wealth accumulation needs $84,000 (Target) Long‐ Long‐term growth in earnings (double earnings = share 13% of new value) Long‐ Long‐term Incentives (Equity) Retain execs; focus them on long‐ Retain execs; focus them on long‐ term earnings growth; align with shareholder interests; meet wealth accumulation needs 15‐ 15‐20% of base salary $84,000 (Target) Long‐ Long‐term growth in earnings (double earnings = share 13% of new value) Core Benefits Meet basic security needs of the executives 50th percentile for peer group $25,500 ROA of 0.75% Executive Benefits Enhance basic security needs and meet market standards for perquisites 50th percentile for peer group $24,000 $24 000 ROA of 0.75% ROA of 0 75% Qualified Retirement Provide wealth accumulation opportunity for executives 40th percentile (3% of salary) $15,000 ROA of 0.75% Supplemental Retirement Strengthen rewards value proposition to help recruit and retain executives; meet wealth accumulation needs 30th percentile compared to banks that have plans $135,000 ROA of 0.9% 15‐ 15‐20% of base salary 43 Fundamental Philosophy p y Fair salaries, strong benefits, great upside for short‐ and long‐term growth and profitability We share the economic profitability. We share the economic value our employees help create. 44 Employee Value Statement Year 1 5-Year Plan Achievement Level 2 100% 3 100% 4 100% 5 100% 100% C Current and Inflated f Salary $ 160,000 $ 166,400 $ 173,056 $ 179,978 $ 187,177 Cash Incentives Paid at Target $ 64,000 $ 66,560 $ 69,222 $ 71,991 $ 74,871 LTIP Vested Value at Year End $ $ 74,000 $ 186,000 $ $ 448,000 Retirement Plan Value ((at 7%) %) $ 17,120 , $ 36,123 , $ 57,169 , $ 80,428 , $ 106,086 , Total Cash Received $ 224,000 $ 232,960 $ 242,278 $ 251,970 $ 262,048 Total Wealth Accumulation $ 17,120 , $ 110,123 , $ 243,169 , $ 391,428 , $ 554,086 , Total Paid or Accumulated $ 241,120 $ 567,083 $ 942,407 $ 1,342,636 - 311,000 $ 1,767,343 4545 How do you know a Rewards System is properly focused? 46 46 Line of Sight g Rewards What’s in it for me? Roles and Expectations My Contribution? Model and Strategy How ? Vision Where? 47 Total Rewards Sustainable Cash Flow Security Salary y / STIP Benefits Confidence in Lifestyle Wealth Accumulation Retirement / LTIP Participation in Value Creation Ownership Mentality Line of Sight g Deferred Gratification Win Talent Wars Self--financing Self Abundance Mentality Sustainable Growth Culture is Competitive Advantage 48 Rewards to Results Results Execution (behavior) Focus R Rewards d 49 Type Your Questions 50 Special VisionLink p Offer One hour consulting call with a VisionLink principal at no charge Indicate interest on final survey 51 Thank you for attending Please complete our brief survey immediately following our presentation. We value your input. You may request a copy of our slides slides, white paper and more information about the complimentary consultation consultation. 52 Upcoming VisionLink Online Seminars: The Most Important Compensation Plan a Company Can Have June 24th What is a Total Compensation Structure…and How do I Build One? July 22nd VisionLink: How We Help Companies Build Results‐Oriented Pay Plans August 26th What is Phantom Stock & Why Do I Keep Hearing About It? September 23rd How to Pay High Performers October 28th How to Stop Reinventing Your Pay Strategy Every Year December 9th 7700 Irvine Center Drive, Suite 930  Irvine, CA 92618  949‐852‐2288 www.VLadvisors.com  www.PhantomStockOnline.com 53 www.VLadvisors.com You can also subscribe to our blog 54 www.PhantomStockOnline.com 55 NOW AVAILABLE! New White Paper Express interest on the final survey 56 Q&A 57 Thank you! Ken Gibson Senior Vice President The VisionLink Advisory Group ( (949) 265‐5703 ) 6 [email protected] J.R. Samples Founder/ CEO / Accountability Partners (312) 217‐2080 JR@A [email protected] t bilit P t [email protected] 58