Effective Performance Planning

by | Dec 3, 2018 | Board Dynamics, Executive Compensation, Governance, Leadership

All About Motivating the Right Behaviour

There’s been a lot of talk in the market place today about the value of performance plans. The naysayers claim that they are not driving performance in the way they were originally intended, and the supporters argue that all compensation should not be a guarantee. A point of intersection is the fact that everyone agrees that employees should be recognized for the contributions they make and the performance they deliver.

Open the Conversation

Organizations are notoriously bad at having “hard conversations” which are discussions on performance, behavior, or anything that can be interpreted as judgmental in any way. This is a problem because all organizations need to deal with negative activities when they arise and, more importantly, inspire the lion share of their employees to perform at their highest level. By doing so, they can maximize outcomes (sales, profits, etc.) and keep stakeholders happy. When it comes to compensation and governance, stakeholders are relatively quiet when organizations are successful and driving higher returns, but when things go south, board pressures increase because stakeholders tend to place more scrutiny on things such as compensation plans and demand changes to corporate governance.

Establish a Schedule

To properly drive performance, organizations need to first establish a schedule and stick to it! You’d be surprised how many boards get around to first discussing annual performance objectives half way through or at the end of the first quarter. This would be like betting on a horse race after the horses are out of the gates and sprinting toward the finish line. Two things happen here, staff feel that first quarter performance is not considered important and agreed targets are easier to hit. If you want employees to perform for the entire fiscal year, logically you need to agree on the performance objectives and targets before the fiscal year begins.

Implement SMARTER Objectives

A reasonable set of SMARTER objectives; Clarity and focus are other elements that help to set an organization up for success. Laundry lists of objectives do little to keep employees focus on essential outcomes and instead, have them struggle with prioritizing their time between multiple objectives that will have minimal impact on their overall incentive reward. Therefore, to help to keep employees focused and driven concise one-page scorecards are ideal and should clearly outline:

  1. Clear performance target expectations; and
  2. All rewards associated with each objective.

Once the performance cycle properly begins, hard discussions should be replaced with proactive coaching conversations focused around the scorecards where employees go into every meeting with absolute clarity on their performance and can engage in win-win conversations in overcoming barriers and/or achieving higher performance levels. Moving away from judgmental conversations and focusing discussions on performance improvement, helps engage employees on a higher level and affirms that everyone wants the same thing – higher performance.

Performance management plan naysayers most likely develop their opinion on experiences and aspects associated with poorly executed and unclear plans that do little to motivate employees. Implementing simple things such as a schedule, scorecards, and win-win coaching conversations go a long way and help ensure that performance remains a priority and that stakeholder expectations are being met.

Strategy Mapping & Succession Planning

by | Sep 10, 2018 | Executive Compensation, Governance, Leadership, Succession Planning

Fifty years. That’s how long it has been since Japanese manufacturers introduced the world to “just-in-time” production methods. Toyota is credited as the initial birthplace of this methodology, which is aimed primarily at reducing flow times within production systems as well as response times from suppliers and customers. A huge aspect of this process is understanding production schedules and timelines and making sure that inputs, resources and parts are supplied and readily available.

One of the many responsibilities for Boards of Directors is to hire and oversee the compensation and performance of the top executive within their organization. As well, Boards are responsible for establishing the organization’s long-term strategic direction. Embracing the “just-in-time” approach and applying it to human capital management will allow Boards to anticipate what executive skills and characteristics are needed, at each stage of their strategic plans.

Ideally, Boards should be mapping their executive succession planning activities to their strategic planning responsibilities to help ensure that they have the right leadership within their strategic evolution. Like just-in-time manufacturing, proper succession planning requires organizations to proactively understand what skills they will need and when they will be needed.

All succession planning should begin with a review of strategic plans to understand what leadership skills are required at each stage. Once Boards have clarity on what will be needed, they will then be able to properly establish an inventory of:

  • What skills they have,
  • What skills can be developed, and
  • What skills should be acquired.

After Boards successfully implement a just-in-time mindset and map their succession responsibilities to their strategic planning responsibilities, they will have positioned their organizations for future success.

Global Governance Advisors (GGA) works solely for the board, in collaboration with senior management. GGA successfully provides expert, state of the art compensation and governance advice without apparent or perceived conflicts of interest. Our Executive Compensation consulting practice implements comprehensive reviews to ensure pay-for-performance linkage, successful succession planning, fulfillment of disclosure requirements and the optimum alignment of compensation to corporate strategy. We provide rigorous competitive assessments of pay levels for Chairman, Committee Chair, Committee Member and Board Director positions. These assessments include key financial metrics relative to peer groups in terms of retainer, meeting fees and equity compensation. 

Determining Executive Compensation

by | Jul 9, 2018 | Executive Compensation, Governance, Leadership

Guidelines to Establishing Executive Compensation

This year’s FIFA World Cup highlights the importance of using defense to create a top-notch offense. The same can be said for Boards of Directors. The board’s best offense is a good defense, and good defense starts with a great fundamental base.  That base, in the world of compensation, is the Compensation Philosophy, and that philosophy needs to mirror the business strategy of the company.

Two critical roles of the board of directors are establishing CEO succession plans and establishing executive compensation plans that both attract and retain executive talent and deliver the outcomes that align with the goals set by the board. While the board may act in good faith, there are times when there is shareholder push back.  How can the leading boards of directors develop executive compensation plans that are shareholder friendly?  Let’s take a deeper look at how executive compensation should be established in order to better align executive pay with shareholder returns.

The data from CEO compensation research continues to illustrate that the top paid CEOs have many layers of executive compensation.  When a board’s Compensation Committee finally agrees on how executive compensation is determined, it must ensure that it is market defensible and will pass the seemingly infinite views on “appropriate compensation”.

Four Steps a Board Should Follow

There are four steps a board should follow when determining executive compensation:

  1. Establish the compensation philosophy and peer group;
  2. Review current executive compensation against market practice;
  3. Assess the business impact before making final approvals;
  4. Report the process and compensation results to the executives and shareholders via the annual Proxy.

Establish Compensation Philosophy and Peer Group

The compensation philosophy for the company is the foundation the board needs to ensure so that the outcome, at the end of the process, is highly defensible, if ever scrutinized.  The compensation philosophy must account for the business strategy, risk appetite and the principles and objectives of the total compensation program.  This philosophy can and will be unique to every business – even those competing within the same sector.  Take two of the Top 4 tech companies: Amazon and Facebook.  Amazon has stated that its business culture and strategy is built on experimentation, and as a result they do not believe in rewarding top executives with an annual bonus.  They have claimed, in the 2018 Proxy Circular (DEF 14A), that some of the examples of successful experimentation include the creation of Alexa.” Alexa…how do you define executive compensation?” …you might ask.  In contrast, Facebook says that it acknowledges the business still being in the early stages of its journey, and that it must hire and retain people who can continue to develop the strategy, quickly innovate and build new products, bolster the growth of the user base and user engagement and constantly enhance the business model.  To achieve this, Facebook believes in more equity compensation, so it has further stated that it intentionally positions the cash compensation (base salary and annual bonus) below market but provides more of a heavy focus on equity-based compensation.  Overall, Facebook has stated it wants its executives to be bold, move fast and communicate openly.  In contrast to Facebook let’s examine Amazon and its approach to motivating executives.

Amazon, in line with its compensation philosophy, expressed that an annual bonus paid to the top executive officers is counterproductive to supporting an experimental business, and that short-term objectives will only focus on the “known.”  Amazon says that without a bonus program, the executive team will be more willing to truncate projects when early failure is detected.  Amazon states, in the proxy, that by not having a bonus program, it allows the executive team to abandon “failed” experiments, to focus on the “winning” ones.  One example that Amazon states, in the proxy, is that the management team was able to exit its auction type business early and focus on other winners such as Amazon Web Services (AWS), which has become a dominant force in Amazon’s revenue growth.  In lieu of the use of an annual bonus, Amazon has focused on a reasonable base salary but a dominant equity-based compensation arrangement, that ultimately will link future realized income for executives tied to the future Amazon share price (positive or negative).

What each board has demonstrated is that while Amazon and Facebook both compete for exceptional executive talent, the compensation philosophy has been customized to reflect the unique business strategy each company is employing.

Your board, with the aid of  the Chief Human Resource Officer, CEO and a knowledgeable independent executive compensation advisor will work through the process of coming to an agreement on the compensation philosophy that best fits your organization.

My advice is to be bold, dive deeper, and ask the hard questions about the business strategy to eventually arrive at the strong foundation level that the executive compensation program will be based upon.

After the compensation philosophy is established the peer group will start to gain clarity on finding the best organizations a company needs to benchmark against.  It’s important to understand that the peer group itself can be used in a few ways.  First is the obvious, the peer group helps to identify market pay levels of similar executive roles within the industry.  Second is perhaps less obvious, and that is that the peer group helps to establish market precedence and pay structure trends.  This is one of the most valuable pieces of information for the board to understand when determining how its executives should be paid.  The peer group can help give clarity on the use of various bonus and incentive awards, such as the general structure of the annual cash bonus plan, the use of stock options, restricted or performance shares, the use of pension and benefits etc.

A deeper dive in the peer group data helps to appreciate where the market is today and where it is heading tomorrow.  The latter of course, is best interpreted from an independent advisor that has a pulse on market trends before they are made public.

Review Executive Compensation

Now that the foundation is laid, and the board and management are in agreement with the overarching compensation philosophy, it’s time to compare current pay levels and structure with the market.

As mentioned earlier, the peer group data is highly valuable in multiple ways.  The independent advisor plays a key role to guide the board through identifying gaps between the current executive compensation program with the compensation philosophy and business strategy.

Depending on the gaps identified, the advisor will need to prepare some stress tested recommendations that will bridge the gap between the current and future executive compensation program.  Here is where a board can get nervous, as it may be reluctant to wake the sleeping giant.  The giant being the mass of shareholders, of course.  However, in order to drive management behaviour and shareholder returns, the compensation program needs to reinforce those behaviours that drive success.  In Amazon’s case, it’s experimentation that leads to life changing technology ~ “Alexa, is the blog almost over?” “Yes, you’re almost done.” ~ and therefore counter to the market norm – rewarding executives using an annual cash bonus. Amazon boldly linked more of the compensation to long-term shareholder value creation by awarding more of the total executive compensation program in equity.

Assess the Business Impact Before Making Final Approvals

Now that the process has clarified the business strategy and its impact on the compensation philosophy and the peer group is examined, the board will face decisions to potentially modify pay levels, pay structure or both.  When the board considers modifications, it is important that the board weighs the impact of those recommendations.  As I reflect upon pay adjustments, I place these adjustments into two broad categories – “opportunity” and “actual”.  The recommendations we make today are nothing more than an opportunity for the executive to receive the compensation.  As we know, it is common that more than 80% of an executive’s pay is at risk, so “opportunity” is nothing more than that.  The “actual” is the real impact on the business financials, share price and dilution levels,  and to the executive.

The board must see a scenario analysis and stress test of the various impacts any compensation adjustments will have today and in the future under various scenarios of success or failure; and the potential financial impacts on the business and shares.

Lastly, the stress test should examine shareholder advisory firm guidelines to focus on potential areas of risk that the compensation arrangements may trigger.

Report the Process and Compensation Results to The Executives and Shareholders via The Annual Proxy

Now to the fun part – reporting.  The board has the duty to shareholders to disclose in “plain language” the executive compensation program.  The fundamentals of great shareholder communication fall into three key categories.  To ascertain if the company’s proxy has done an effective job at communicating and rationalizing the executive compensation to shareholders, the board (at the end of reading their Compensation Discussion & Analysis section of the Proxy) must have a comprehensive understanding of the answer to these three key questions:

  1. How did the executive get compensated?
  2. What is the rationale behind that executive compensation?
  3. How much did the executive receive?

A quick read of Facebook and Amazon’s proxy help to illustrate the rationalization of rewarding pay packages in the echelons of $20+ and $30+ Million (Facebook’s Sheryl Sandberg 2017 reported compensation of $25,196,221 and Amazon’s Andrew Jassy 2017 reported compensation of $35,609,644).  For reference, Facebook passed its last say on pay vote in 2016 with a 91% YES and Amazon passed the say on pay vote in 2018 with a 98% YES.

Remember to examine the performance metrics within the bonus plan, the types of equity used, and if performance conditions are attached to the vesting criteria. The board must understand that even when the future share price is higher or lower than the grant date, the board must be comfortable with the level of pay the executive may receive.

Final Words of Thought

At the end of the day, it is highly unusual for a board to be successfully sued for how much compensation they elected to award to executives. However, that does not mean they will not find themselves under shareholder pressure from time to time.  After all, the board’s best offense is a good defense, and good defense starts with a great fundamental base …  the four steps every Board of Directors should follow when determining executive compensation.

How to Build & Motivate High Performance Investment Teams

by | Jul 5, 2018 | Executive Compensation, Governance, Pension Funds

A Summary of Our Presentation at the NCPERS Conference

Global Governance Advisors recently presented at the annual NCPERS conference for public pension Chief Investment Officers (CIOs) on how to build and motivate high performance investment teams.

Two Aspects of Building High-Performance Teams

The presentation focused on two critical points:

  1. Ensure that the compensation plan’s offering is fair and/or competitive to attract and retain key personnel.
  2. Establish an “at-risk pay” plan that effectively acknowledges and rewards investment staff for performance and contribution toward achieving higher returns for their pension funds.

Public pensions throughout North America need investment professionals to help manage the trillions of collective dollars with which they are intrusted. Public Pensions are competing with a private sector financial community that historically pays their employees at highly competitive compensation levels. The success of working in this sector is easily reflected in the 2018 Forbes World’s Billionaires list where 14% made their fortunes in the finance and investments industry – the highest-ranking industry represented in this list. It’s important to understand what other public funds are doing in the way of competing in the private market of pension compensation.

Positively designed “at-risk” incentive plans are easy ways to be competitive, reward employees for their performance, and mitigate risk. In the compensation world, the total opportunity is what is most important. By providing a reasonable base salary public fund boards can supplement salary with an incentive that will only pay out if positive results/performance is achieved.

What is the value to the fund if the performance increases by 5%, 10%, 20% or more? And, is that increased performance worth additional compensation?

Working in both the public and private sectors, GGA recognizes that public perception and headline risk are real obstacles for public pensions. As a result, public pensions will struggle to be competitive if they do not arm themselves with the objective facts. A few years ago, one of our clients struggled with higher than normal attrition; as well as difficulties hiring new investment staff. They theorized that they were not competitive nationally and were especially not competitive in their local community where several large public funds competed for talent.

They too, were straddled with public pressures and publicly dictated pay bands but wanted to objectively investigate their overall competitiveness. On behalf of this client, GGA conducted a nation-wide custom compensation survey and determined that their investment team positions were below the national levels for similar positions within public pensions. More importantly, the study showed that not only were they below the national levels, they were substantially below the compensation levels offered within their own community. Now, armed with current objective data, they were able to argue the case that adjustments were required if they were to continue to managing billions of dollars on their members’ behalf. The resulting increase in performance changed the fortunes of the fund.

At no point do we claim that it is easy for public funds to raise their compensation levels or implement incentive plans. However, if boards of trustees and executive teams throw up their hands and claim defeat before they try to proactively manage their teams, then they will continue to lose staff or fail to attract and retain the skilled professionals they need to grow their fund’s assets and protect the financial well-being of their members. Building your arguments on current objective facts and calculating how at-risk incentives can drive performance and higher returns will only strengthen your case and get you what you need to be successful.

How to Adopt a Dynamic Approach to CEO Compensation

by | Jul 5, 2018 | Board Dynamics, Executive Compensation, Governance, Leadership

Mitigate Risk and Improve Compliance

CEO compensation governance is fast paced, and it can be seemingly impossible to stay ahead of the ever-changing industry trends. The industry tends to move so quickly that a seasoned executive may not even be aware that they are at risk for creating a Board that is non-compliant when creating dynamic incentive plans for the CEO and other key senior managers.

“Many classical models of CEO compensation consider only a single period, or multiple periods with a single terminal consumption. However, the optimal static contract may be ineffective in a dynamic world. In reality, securities given to incentivize the CEO may lose their power over time: if the firm value declines, options may fall out-of-the-money and bear little sensitivity to the stock price. The CEO may be able to engage in private saving, to achieve a higher future income than intended by the contract, in turn reducing his effort incentives. Single-period contracts can encourage the CEO to engage in short-termism/myopia, i.e., inflate the current stock price at the expense of long-run value. In addition to the above challenges, a dynamic setting provides opportunities to the firm, the firm can reward effort with future rather than current pay.” Alex Edmans, Xavier Gabaix, Tomasz Sadzik, and Yuliy Sannikov; Harvard University

Global Governance Advisors (GGA) provides a wide-ranging review and evaluation of board structure, director pay, governance policies and board performance. We also help to define and articulate each client’s organization compensation philosophy in terms of desired pay positioning, peer group, short and long-term compensation, performance management, succession, retention and recruiting strategies.

Global Governance Advisors works with its clients to address the challenge of creating and maintaining a compliant Board room, by helping Corporate Directors prioritize the following 4 Ps of Effective Corporate Governance:

1. Participation 

An impactful Corporate Director will foster an environment that encourages open dialogue between the Board and management and urges them to engage in human capital discussions. The dialogue and advancement of strong corporate governance is fundamental – not only to your bottom line for the next quarter, but to the long-term goals of your organization for many years to come. All in all, participation is needed to ensure that the Board and management are steadily collaborating to fulfil their compliance requirements.

2. Perception

It’s essential for a Corporate Director to understand his or her shareholders. To accomplish this, Corporate Directors need to work hand in hand with their IR and Corporate Secretary to efficiently monitor the institutional and retail shareholders along with advisory firm guideline changes.

3. Preparedness

Preparation breeds success. To maintain compliance, Corporate Directors must stay prepared and ahead of industry trends including shareholder perspectives, industry, capital markets and exchange rules.

4. Proactivity

Corporate Directors are responsible for completing an annual risk assessment, which includes the production of an annual work plan. Since compensation adjustments work in annual cycles, Corporate Directors need to carve out a sufficient amount of time to efficiently develop annual work plans, prior to the beginning of the new fiscal year. At a minimum, the work plan should reflect the compensation committees charter. To accomplish this, they need to appoint their compensation advisor early so that he or she has ample time to prepare preliminary drafts for the Chair’s review and schedule any pre-meetings. Compensation trends move relatively quickly, and an active advisor with access to deep resources can be invaluable to directors and help management get ahead of potential issues before they may arise.

Global Governance Advisors (GGA) is a top 5 North American Human Capital Management firm that services boards of directors and senior management by providing transformative Human Capital Management governance advisory services.

Five Critical Human Capital Management Questions

by | Jul 5, 2018 | Board Dynamics, Executive Compensation, Governance, Human Resources, Leadership

Questions Every Board Must Address

“Given the pace of business change today, companies increasingly need agile boards with the expertise to guide the company amid emerging threats and opportunities. And investors increasingly expect that boards will embrace rigorous practices to ensure they have the right expertise in the boardroom to respond to evolving market and competitive demands. The highest-performing boards will adopt a continuous improvement mindset, ensuring that their composition evolves in light of new strategic imperatives.” AESC.org

Global Governance Advisors (GGA) works with its clients to address the challenge of meeting these threats head on and taking advantage of the opportunities to gain a competitive edge by addressing five human capital management questions for boards of directors.

Five HCM Questions for Boards of Directors

How does your organization approach these five questions?

  • How can our board better impact the success of the organization?
  • Have we fostered an environment that encourages individual directors to think critically about their contributions and the relevance of their skills to the company strategy?
  • Are we using our annual board assessment and regular executive sessions to assess the culture and dynamics in the boardroom and identify ways to operate more effectively?
  • Does our board have a platform to analyze and scorecard senior management compensation plans?
  • Does our board have access to an oversight vehicle for shareholder engagement activity that makes valuable information readily available to the board – in real time?

GGA’s offers a unique approach of weaving together a blend of services that address board productivity, governance and develop Senior Management compensation (incentive) plans to deliver outcomes that align with company goals.