Executive White Paper
The Future of Compensation: Where
it’s Headed and Why
VisionLink’s focus is to enable growth‐oriented companies to create greater alignment between
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of companies throughout the continental United States create and sustain transformational
rewards strategies.
The Future of Compensation: Where it’s Headed and Why
By: Ken Gibson
May 2013
Trends in compensation are important for a number of reasons, not the least of which is pay programs represent the largest budget item most business leaders have to manage. Add to that factor the economic, business and cultural changes of recent years and you have American companies paying more attention to this issue than probably ever have before—and with greater urgency.Perhaps most of the current focus has grown out of the economic conditions the country in general, and businesses in particular, has been experiencing since the major meltdown of 2008. The financial turmoil following that collapse has forced business leaders, employees, prospective employees and the public (through the eyes of the media) to look at salaries, incentives and benefits differently—and with an extra measure of caution. Owners and CEOs are reluctant to lock key producers into high, guaranteed compensation but still need to attract and retain the best people. Premier talent that has been sitting on the sidelines is concerned about coming back into the labor force and getting locked into salaries that are below what it earned at its peak. While all this is being considered, the media looks on and concerns itself with what’s “fair.” Such conditions leave all these parties looking for answers and asking where all this is headed.
If we are going to adequately address that question and find effective pay solutions that match the evolving environment we’re in, we will need to construct a proper context for how the rewards approaches of tomorrow should differ from those of today. To do so, there are three fundamental questions that must be answered. They are sequential and build on each other.
Where are growth‐oriented businesses headed and how will they compete in the future? If we want to understand future trends in compensation we must first determine where successful, future‐centered companies are headed. Compensation should reinforce an organization’s vision, strategy and business model. It is outcome based. As a result, pay strategies must align with the priorities and focus of the business—and become a strategic tool that drives their fulfillment.
What kind of talent will those businesses need to compete and meet their growth goals? A business will never rise above the quality of its people. The collective abilities of the organization’s talent pool form the foundation of the value proposition the business brings to the market. A company that can’t or won’t get the right people “on the bus” (as described by Jim Collins in his book Good to Great) will not be helped by even the best compensation strategy.
What kind of value proposition will attract and retain that kind of talent? A business won’t be different or better tomorrow than it is today if it continues doing things the same way it did yesterday—or by simply mirroring what its competitors are doing. The same holds true for its approach to pay. It must engineer a value proposition for its people (especially key producers currently “on the bus” and those the business is trying to attract) that effectively markets a future to those individuals and makes the company a magnet for premier talent.
With those questions raised, let’s now consider each in turn.
Where Business is Headed
The key word that describes the future of today’s enterprises is innovation. The focus on building or expanding creative capabilities within organizations both large and small is greater than it has ever been–and that will only increase in the years to come. One would be hard pressed to find any current business publication or journal that doesn’t have multiple articles on this subject; how innovation happens, who is leading innovation, the impact of creative destruction, and so on. It’s become a ubiquitous topic at virtually every business conference as well. So, how is this increased focus being carried out and what kind of innovation are businesses trying to achieve? This emphasis reveals itself in two ways. The first is in the attempt by larger businesses to stem the tide of creative disruption. These organizations are seeking to thwart the efforts of smaller companies who are trying to “disrupt” parts of their businesses a piece at a time. Cycles of disruption have been around long enough now that established enterprises are becoming wise to them. The best organizations are paying attention to inroads smaller players can make into their “space.” They are focused on instituting processes that will both accelerate creative development and leverage their “scalability” to crush disrupters before they can fully take hold. (See “Surviving Disruption,” Harvard Business Journal, December 2012, Maxwell Wessel and Clayton Christensen, 56‐64.)
The second manifestation of the innovation focus is with those organizations that find a void within an industry then move quickly and effectively to fill it. Sometimes this still expresses itself in creative disruption with smaller, more nimble organizations going after slower‐moving, larger ones. Other times it results in the development of whole new industries.
However, the primary creative focus of most successful companies in recent years has been business model innovation. As you consider the most prominent innovators of the past 15 to 20 years, nearly all have had this emphasis. In a recent Harvard Business Review article, entitled “The New Corporate Garage,” Scott D. Anthony described the evolution of this trend in these terms:
Whereas the inventions that characterized the first three eras [of innovation development in American companies] were typically (but not always) technological breakthroughs, fourth‐era innovations are likely to involve business models. One analysis shows that from 1997 to 2007 more than half of the companies that made it onto the Fortune 500 before their 25th
birthdays—including Amazon, Starbucks, and AutoNation—were business model innovators. (“The New Corporate Garage”, Harvard Business Review, September 2012, Scott D. Anthony, 44‐ 53)
This development should give growing companies a clue about where to look, both in building the future of their organizations and in fending off would be disrupters. The business model represents the revenue engine of the company and should be driven by clearly identifiable virtuous cycles that have leverage points—some based on efficiencies, others on unique capabilities. Those leverage points rely on consistency of execution and increased productivity. Capital flows to productive efforts that are consistently executed. Such an emphasis fuels further success patterns that the market responds to and builds a dominant position for the business. When this occurs, a culture of confidence emerges both within the organization and between the company and its customer—the source of its revenue. So, innovation will be the focus of business in the future and the primary emphasis is or should be on the business model. Talent and Business Model Alignment Competing on the innovation playing field of the future will rely heavily (if not entirely) upon having the best “players.” This requires that a company have the capability to identify the roles and skills needed to fuel the business model innovation just discussed. That process needs to also compare those needs with the skills and roles already being filled in the business so leadership can identify talent gaps. Such an analysis reveals what’s missing and helps define who the “right” people are that need to be recruited to the organization. In an examination of future compensation trends and potential strategies, this step is critical because it gives context to the kind of value proposition that will attract the talent being sought. And, what’s becoming clear is that most skill gaps are or will be in the form of talent that can fuel the innovation engine we’ve been talking about. Scott Anthony addressed this issue in the same article quoted earlier:
It’s early days still, but the evidence is compelling that we are entering a new era of innovation, in which entrepreneurial individuals, or ‘catalysts,’ within big companies are using those companies’ resources, scale, and growing agility to develop solutions to global challenges in ways that few others can…These companies have pushed into territory that was once the province of entrepreneurs, NGOs, and governments—from delivering health care technology, clean water, and new agricultural capabilities in developing countries to managing energy, traffic, public transit, and crime in the world’s major cities. (“The New Corporate Garage”, Harvard Business Review, September 2012, Scott D. Anthony, 44‐53)
What Anthony seems to be saying is that in the future, existing companies will need to attract individuals who would otherwise be on a path to disrupt the very businesses that hire them. In the days ahead, those organizations will need the ability to bring talent inside the existing enterprise to help engineer what used to only occur by starting or acquiring a new company.
Such a direction is also causing businesses to more carefully assess the roles they have defined for each of their key people. Organizations are hard at work identifying the skill categories that will need to be filled going forward and what capability “gaps” exist. The competitive environment of the future will require that people in key positions in an organization work in roles that maximize their unique abilities and relieve them of responsibilities that impede their capacity to have a more meaningful and strategic impact. Duties and responsibilities that are not within the key skill set of these individuals will be outsourced or filled by another contributor whose distinct proficiencies match that need. In another recent HBR article, authors Martin Dewhurst, Bryan Hancock and Diana Ellsworth explained this new emphasis:
In today’s knowledge economy, competitive advantage is increasingly coming from the particular, hard‐to‐duplicate know‐how of a company’s most skilled people: talented (and highly paid) engineers, salespeople, scientists, and other professionals. The problem is that across the private, public, and social sectors there aren’t enough knowledge workers to go around. And the situation promises to get worse: Recent research by the McKinsey Global Institute suggests that by 2020 the worldwide shortage of highly skilled, college‐educated workers could reach 38 million to 40 million, or 13% of demand.
In response, some firms are taking steps to expand the talent pool—for example, by investing in apprenticeships and other training programs. But a number of companies are going further: they are redefining the jobs of their experts, transferring some of their tasks to lower‐skill people inside or outside their organizations, and outsourcing work that requires scarce skills but is not strategically important.
Such moves aren’t new, of course. Firms have long been carving off repeatable, transactional work—such as call center services, payroll, or IT support—and either shifting it to lower‐cost locations or outsourcing it. What is new is that companies are now doing this with knowledge‐ based jobs that are core to the business. (“Redesigning Knowledge Work,” HBR, January‐ February 2013, Martin Dewhurst, Bryan Hancock and Diana Ellsworth, 59‐64)
So what do we conclude from these talent trends? First, companies that wish to gain or maintain a competitive advantage will need to attract catalysts—individuals that can create within an organization that which creative disrupters will capture if they don’t. Second, those individuals will need to be able to spend their time on those things that they are “great at”—things that fall within their unique abilities—and transfer to others the tasks requiring scarce skills that don’t impact strategy. This is particularly important since these people will likely be more highly compensated and the company needs them to be at full throttle in their area of highest effect. Third, these two factors are leading to a scarcity of talent in the marketplace—a dearth of knowledge workers that can have a meaningful impact on the trajectory of a business. Fourth, that scarcity creates high competition within the talent pool. As a result, companies need a robust and unique approach to their value proposition to win the talent wars—and thereby continue to compete in the marketplace.
If you take a composite view of these elements, how and why compensation needs to support the ability of businesses to innovate and compete becomes clearer. Pay strategies need to attract people with entrepreneurial capabilities and reward them for leveraging the ability of the company to expand, magnify or otherwise accelerate the virtuous cycles of the company’s business model.
Intuition will tell you this need is not going to be addressed by simply paying competitive salaries or even generous bonuses. Catalysts are looking for a compensation structure that will reflect the contribution they are making to the business. They want a stake in the value they help create. The compensation of the future will not necessarily involve new pay “schemes” that have never been used before, although some such plans are emerging. Rather, it will be more a matter of companies paying better attention to the range of pay elements they combine to create a financial opportunity that matches what the innovators of the future seek. It will become a question not just of how much those individuals will need to be paid but how (in what form) that compensation will come to them.
The Compensation Landscape
Now that we have examined the business and talent trends that are shaping the future, we should consider what is happening on the compensation landscape. After taking a “40,000 feet” look at how pay is being approached, we’ll examine specific pay strategies and the core philosophies guiding them. One of the best descriptions I’ve seen of the current pay environment is in a 2012 Workspan article entitled “The War for Stars—How to Keep Your High‐Performance Talent.” In it, authors Myrna Hellerman and Jim Kochanski identify two fundamental approaches and philosophies being adopted by companies in an effort to retain employees in their organizations. One is referred to as the “expansive” approach and it advocates retaining all but the very worst employees in the organization. They call the other one the “selective” approach and it “focuses on retaining star performers—a small group of high performers whose sustained, evidenced contributions drive organizational success.” (“The War for Stars,” Workspan Magazine, May 2012, Myrna Hellerman and Jim Kochanski, 54‐59)
Hellerman and Kochanski explain that the theory behind the expansive approach goes something like this: “Everyone in the organization is needed or they wouldn’t be employed here.” It’s a “why upset the apple cart?” philosophy. In such an environment, there is a fairly egalitarian approach to rewards and performance messages. The authors make the point that although this approach is easier to administer (than the selective method), it doesn’t typically enable an organization to raise performance standards and results.
Conversely, companies that adopt the selective approach believe that high performers should be treated differently. “[The selective approach philosophy] identifies, nurtures and works to retain the high performers at all levels of the organization. It seeks to produce a cycle that, in the long term, will not only retain existing high performers but create and attract more high performers and generate ever‐ improving standards of performance and organizational results. Most selective approach organizations set very high performance standards, which typically appeal to high performers who relish the challenge and the recognition associated with achieving tough goals. They want to win, and when they do, the
organization wins through improved results and the continued retention of the high performers who make it succeed,” the authors argue.
So, given the present business environment and trends, which approach makes the most sense? Intuitively, most would say the selective approach. In truth, every organization has to determine the kind of culture it’s going to nurture and which approach will drive the outcomes it seeks. It may mean that some organizations adopt some elements of each philosophy. However, if companies wish to compete in the future—both in the marketplace and in the war for talent—they can’t ignore the fact that high performers will be needed and those employees will have expectations that don’t often fit in the framework of the expansive approach.
The Performance Framework
Before an organization can effectively determine the kind of approach to pay it wishes to adopt (expansive or selective), it must first think through and articulate the performance framework that will inform its compensation philosophy and strategy. This business architecture is made up of three separate but interdependent parts—a business framework, a compensation framework and a talent framework. For any of the pay plans of the future to make sense, they must be considered within this context. Business Framework In this first category, a company must attempt to envision the future business, define its performance engine and standards, then identify the roles needed to execute its strategy and business model. Specifically, it is recommended that the following be addressed:
Business
Framework
Talent
Framework
Compensation
Framework
1. Define the company’s growth expectations (vision). Here company leadership wants to clearly express key outcomes that need to be achieved in the future in quantifiable terms. A financial model that looks at a three to ten‐year horizon in terms of base, target (or budget) and superior levels of growth is recommended.
2. Define the business model and strategy. This step involves a clear articulation of two separate but related issues. The business model defines how the company drives revenue and makes money. Its strategy describes how it competes in the marketplace. With those two elements in mind, business leaders need to identify where the leverage points are and how each can be maximized. This should help determine the growth opportunities that will lead to fulfillment of the vision defined in step one.
3. Identify roles and expectations. With the first two elements established, the company should think about the specific skill sets that will be needed to drive the business model and strategy. Those skill sets inform the kinds of roles and expectations that will be associated with the outcomes the company must achieve if the “future company” is to be realized. Expectations should be articulated in the form of performance criteria. Finally, the company needs to also define what “success” means as it relates to the fulfillment of each role. Compensation Framework With the business framework in place, the compensation framework is more naturally constructed. The pay structure should help align roles and expectations with the business vision, model and strategy by framing the financial partnership that will exist between ownership and the workforce. It should include the following:
1. Identify a Pay Philosophy. This is a written statement that acts as a kind of compensation “constitution” for the business. It should define what the company is willing to “pay for”—and presupposes the organization has defined value creation so it can articulate its belief about what and how value should be shared. The pay philosophy is also where a company addresses whether it’s going to adopt an expansive or selective approach to structuring rewards for key producers.
2. Engineer Pay Strategies that Reflect the Philosophy. This means a company will pay attention to both salary structures and value sharing—and strive to achieve an effective balance between the two. Likewise, it will build both short‐term and long‐term incentive plans (value sharing arrangements) that properly manifest the organization’s belief about the kind of financial partnership it wants to have with its people. To do so, it must pay attention to both the structural and the mindset impact of their plans. Structure addresses who should be in the plan, what kind of plan it should be, how much it should pay out and so forth. Mindset has to do with whether or not a plan will build a greater sense of stewardship about ownership priorities and whether there will be a higher level of commitment and engagement associated with employee performance. 3. Adopt a Total Rewards Approach. This simply means that an organization recognizes that there must be more to its value proposition than financial rewards. First, there must be a clear and compelling future—one that invigorates key producers about where the business is headed.
They need to be able to see themselves in that future and believe that their unique abilities are necessary for its fulfillment. Second, employees seek a positive work environment. This suggests premier talent in particular is working within the sphere of its distinct abilities, it likes the nature of the work in which it is engaged and the team of people with which it associates. Third, there must be opportunities for personal and professional development. This doesn’t necessarily mean training—although that can be a component. Rather, it means people feel as though their abilities will be magnified as a result of their association with the organization and its resources. And finally, fourth, there must be financial rewards. And those financial rewards need to relate to the value a producer helps create in the business. Key people want to have an appropriate salary and bonus plan, but beyond that they want to know there is a mechanism for building wealth in a similar way ownership experiences. (This does not necessarily mean sharing stock, however. More on this later.) Talent Framework The final piece in our performance framework is talent. This level of planning has to do with identifying key producers and defining where potential talent gaps might exist. With both existing talent and that being recruited, it includes communicating expectations and the rewards associated with their fulfillment.
1. Identify Key Producers. These are individuals who are most responsible for helping the company consistently achieve the “success” standards it has identified. A business needs to be able to recognize the difference between this kind of contributor and the rest of its workforce. It should also be able to identify the skill sets of those in this category and how they compare with the expertise needed to achieve the growth goals the company has set.
2. Identify Talent “Gaps.” Step one should make it easier to identify where the company falls short in the skills needed to reach organizational performance standards and goals. That gap should then drive the recruiting strategy the business adopts for seeking new talent.
3. Communicate Expectations. Individuals that are capable of driving the performance of the company want there to be high expectations that are well defined. Expectations are—or at least should be—reinforced in the way people are paid. When there is clarity in the link between company vision, business model and strategy, roles and expectations and rewards, “line of sight” exists within the organization. This means each of those elements are working together to create a unified vision of what the target is, who is responsible for its completion and how he or she will be rewarded when expectations have been fulfilled.
4. Communicate Rewards. In the context just described, pay strategies form the capstone that defines the financial partnership with the company’s key people. As a result, compensation must be both effectively engineered and clearly communicated. That communication should include a statement of the company’s pay philosophy, an articulation of the specific program(s) being introduced and a projection of the total rewards value a producer can receive from the business over an extended period of time. When all of this occurs, it provides a magnified view
of the value proposition being offered individuals coming into the organization. The new employee is no longer being recruited to a $175,000 salaried position. She is being offered a financial “partnership” that is worth, for example, $2 million over the next five years (or whatever the numbers play out to be for a given company). Any company that is serious about developing compensation plans that will meet the demands of the future will want to build a performance framework involving the elements just described. That way, as plans such as those about to be discussed are considered, they will be evaluated in the proper context and will more likely bring about alignment between the outcomes desired and the pay strategies being implemented. Compensation Plans of the Future With all of that as a preface, let’s turn our attention to some of the specific types of pay plans that will receive more and more attention in the future—at least by companies who are in tune with the trends just discussed. Performance Agreements
Performance agreements attempt to hit the issue of linking value sharing to value creation in a very direct way. One prominent media company discussed in The Workspan article referenced earlier used this type of arrangement with its key high performers. Those employees were excluded from the company‐wde incentive plan (a kind of profit sharing arrangement). Instead, they individually negotiated a “deal” with the COO and CFO of the company that defined financial, operational and leadership expectations. It likewise defined the value of the award that would be generated if the results were achieved as agreed upon. The agreement was memorialized in a “deal sheet” that became the basis of a quarterly self‐evaluation the participant engaged in with the two company officers. Those involved indicated that one of the primary benefits achieved with this approach was the dialogue it created between senior officers and key performers. There were regular discussions and a clear track to follow in evaluating results.
This approach appeals to organizations wanting to achieve the following:
Set a very high threshold for compensable performance for its key producers—those who should be driving high level results for the organization. Protect shareholders interests by creating a plan where small or even zero payouts can occur if the desired performance isn’t achieved. Attract individuals that thrive in a high‐risk, high reward environment, particularly when there is significant upside earnings potential. Engender a mentoring environment between high‐level leadership and key producers. Have high performers adopt a more owner‐like stewardship of the company’s success.
Make it more unlikely high performers will leave given the uniqueness of the financial relationship
Opt‐In Plans
An approach that is becoming more popular with smaller companies and start‐ups (although not limited to them) is one that offers key employees a choice in their pay arrangement. They are given the option (opt‐in or opt‐out) of having either a “higher” salary and modest incentive or a “lower” salary with higher, even unlimited upside earnings potential (through short and long‐term value‐sharing plans). In some organizations, key producers’ entire compensation can be variable, receiving payouts solely based on a formula (percent of revenue, profits, etc.). VisionLink’s compensation plan for its principals follows this construct. Opt‐in duration may differ from organization to organization or even between employees. Some companies may have opt‐in periods for a quarter or half a year instead of 12 months so they can change the payout formulas based on the priorities the company has for that interval. Often, in this kind of arrangement the company will even suspend or differ payouts during periods of diminished cash flow—with earned income being accrued, then paid out when revenue normalcy returns or improves.
This approach can have appeal in larger organizations that are trying to effectively launch a new division or subsidiary company. They would employ an opt‐in plan if they need to create greater flexibility in managing cash flow while providing large incentives for innovative talent to perform—and to do so quickly. The opt‐in approach appeals to organizations that wish to achieve the following: Put employees more in control of their earnings potential while also sharing the risk associated with cash flow and revenue volatility. Put owners in the position of limiting guaranteed payouts to key producers—thereby lowering fixed commitments.
Allow the organization a higher degree of flexibility in its use of capital—so it can adjust to rapidly and frequently changing economic environments. Provide a “shared” entrepreneurial experience with key talent (particularly those charged with driving innovation). Promote an ownership mindset without sharing equity. “Self‐identify” key performers. Those who are confident about their ability to perform will likely “opt‐in” to the high variable pay arrangement. Internal Venture Capital
Internal venture capital is an approach that is used primarily in larger organizations. It is intended to support an entrepreneurial undertaking within an existing business. The concept is self‐descriptive. A venture capital account is established and criteria for its access are defined. The company publicizes to its key, innovative talent that it wants to “fund” great ideas that will bolster its business model and is willing to “finance” them through the organization’s venture capital account. When this approach is adopted, compensation will often be tied to either a performance agreement or opt‐in plan. Commonly,
value sharing will be aligned with the performance criteria that have been set for the venture capital account. The intent is to create a highly entrepreneurial experience within an existing business.
Certainly, this approach isn’t for everyone. However, businesses that recognize the trends discussed in this paper likely also realize that they are competing against disruptive, smaller companies that want to incrementally take over parts or all of their market. When this kind of a program is adopted, a company is essentially acknowledging that it must create the same kind of environment—and attract the same kind of talent—that smaller, highly ambitious organizations are able to produce. They hope to attract to their organizations individuals that would normally be inclined to pursue this methodology on their own. Internal venture capital programs help companies achieve the following: Attract highly entrepreneurial employees. Engender a “start‐up” environment within larger organization. Create a clear focus on innovation. Allow the organization to move quickly with new ideas. Enable “mini‐entrepreneurs” to leverage the resources and scale of larger organization. Long‐Term Value Sharing Plans For years, companies have been using various programs for sharing value with those who help create it. This is not a new concept. However, in the future, the ability of a company to clearly define value creation and then have a mechanism for sharing it with key producers (in a way that properly reflects the organization’s pay philosophy) will be more critical than ever. Why? Because in the “new” environment, companies are competing for innovation talent, and those individuals will be seeking a relationship with an organization that operates under a “wealth multiplier” philosophy. This simply means an organization understands that shareholders will experience a greater wealth multiple for themselves if they create a vested interest for others to participate in the company’s success.
Some leaders of private companies resist sharing value because they assume this means sharing stock— and they are reluctant to go down that road for a host of valid reasons. In reality, sharing equity is only one of about nine different ways employees can potentially participate in the value they help create. Two of the more common approaches used are discussed below. For a more complete overview of the various options for long‐term value sharing (and the rationale behind each approach), visit
http://phantomstockonline.com/tools/which‐plan‐is‐right‐for‐your‐company.aspx. (This link leads to a tool on a website VisionLink sponsors that is focused on phantom stock and other value‐sharing approaches.)
Any company that intends to grow but does not have a compensation strategy that reinforces that vision is, at a minimum, sending the wrong message to its key people. The foundation of this paper’s premise is that premier talent will expect to participate in the value it helps create. Otherwise, individuals with unique abilities (especially people with entrepreneurial capacity) will be inclined to start enterprises of their own where they can realize the full benefit of the growth they engineer.
With that in mind, there are two related plans that are and will be receiving more and more attention in today’s business environment. They are phantom stock and stock appreciation rights (SARs).
Phantom Stock
This approach has become the plan of choice for private companies wishing to tie long‐term value sharing to the growth of the company without giving away real equity. Phantom stock ties a future incentive payout to the value of the business. In this type of plan, the company creates a share value based on a formula that can be tracked and measured over time. It doesn’t have to be linked to an actual valuation of the enterprise nor does it represent real equity in the company. These shares are distributed to eligible employees (typically key people) and are redeemed at points certain in the future (typically five to 10 years) or upon a trigger event such as the sale of the business. The point here is not to make a detailed explanation of how these plans work and their nuances. (A comprehensive overview of phantom stock can be found at www.phantomstockonline.com.) Rather, the intent here is to describe where these plans fit in the trends discussed in this paper.
Phantom stock plans will become a part of future compensation strategies for many enterprises because they tie the wealth building component of remuneration to the growth of the company. There is a direct relationship between value creation and how employees participate in the productivity profit they generate. They represent a kind of innovation dividend in that respect. These plans accomplish this without diluting the equity of shareholders and without impacting the current cash flow of the business. Distributions are made out of value that has been created only if the value is there. It’s a self‐financing approach. SAR (Stock Appreciation Rights) A stock appreciations rights plan is a form of phantom stock in which only increased company value is shared with employees. In this arrangement, the same valuation process is followed as in a phantom stock plan and shares are distributed on a similar basis. However, the increase in share value is what is given to employees at the distribution point rather than the full value. SARs play a similar role as stock options do in a pubic environment. They are intended to reward people for building the future company. This is often given to a group of employees that are newer to the organization where leadership doesn’t feel they should participate in the value which has been created to that point. They do, however, want them to participate in the growth they help generate in the future and feel a sense of financial partnership to achieve that growth.
In the context of this paper’s central theme, SARs and phantom stock appeal to those individuals who want a wealth multiple to their pay plan that is tied to the value they help create. Each parallels what a company might otherwise try to achieve by sharing real stock, but without the risk and liability (on the part of employees) or the value dilution (on the part of shareholders) associated with equity participation.
For a more complete treatment of the importance of long‐term value‐sharing plans such as phantom stock, obtain a copy of VisionLink’s white paper entitled, “Why Long‐Term Value Sharing Matters.” It can
be accessed at: http://www.vladvisors.com/compensation‐information/long‐term‐value‐sharing‐white‐ paper‐article.aspx. Conclusions The future trends of compensation are tethered to the means businesses will use to fuel growth—and that focus is deeply rooted in innovation. As a result, organizations will need talent that can support and drive the pace at which innovation needs to occur. And they will need a value proposition that appeals to individuals who might otherwise find themselves on a more entrepreneurial track. The 21st century is characterized by an ever‐increasing pace of change. Businesses that intend to stay ahead of the curve will need to constantly evaluate their performance framework and determine how their rewards strategies can best support it. They must come to terms with the kind of philosophy that will drive the development of their pay practices; whether it will be rooted in an expansive or a selective approach.
As the speed of change increases, we will see the specific compensation approaches mentioned here evolve and develop. New ones will emerge and flexibility within the framework of guiding principles and a clear pay philosophy will be essential. Innovation in compensation will need to match that of all other aspects of the business. In the end, companies with an unrelenting drive for success will seek compensation solutions that offer them a competitive advantage in attracting and retaining the talent that will make and keep them great. About the Author Ken Gibson Senior Vice President, The VisionLink Advisory Group Ken has been consulting with middle‐market private and public companies on executive compensation and benefits issues for over 30 years. In addition, he has authored numerous articles and white papers addressing compensation and rewards topics that modern businesses face. Ken also conducts monthly webinars for business leaders and CPE training webinars for CPAs on compensation best practices. His client work centers on the development of overall compensation strategies designed to enhance and improve shareholder value and workplace productivity. He is one of VisionLink’s six principals.