I’m paying out $1 million in bonuses for my top five people – what’s in it for me?

October Benefits Installment by Jim Moniz:

When Jack Welsh left GE, he received – and by the way continues to enjoy – a retirement benefit valued at about $ million a year, plus perks. Lots of press attention and much controversy followed, but the reality is Welch’s package amounted to less than 3/100s of 1% of the shareholder value that was created while he was at GE. In fact, his total compensation during Welch’s entire time at the company was less than 2/10ths of 1% of the value created.

OK so what’s my point? The Welch example illustrates a fundamental premise in examining the value of compensation. If you juxtapose Welch’s compensation arrangement with GE’s results during his tenure there, it hardly seems exorbitant…that’s because his “rewards” are being evaluated in the context of the bottom line. While the numbers may not be as dramatic in your business, the same premise and principles still apply. Compensation should drive and be tied to results that are quantifiable and measurable.

Here’s the big question – what are you getting right now for what you’re paying out? You’re getting the current result, whatever that may be. But if the results you achieve this year are not measurably different than what you had last year, what are you going to do next year to drive a different performance level? And how will pay differ in regards to these changes? Growth implies different results and by extension the strategies you’ve used to get current results can’t be the same in the future if a different result is desired or expected. Because compensation is one of the strategic tools in a business’ arsenal to affect change, companies looking to develop different performance results can’t expect to achieve forward motion if their rewards programs don’t match up to their goals.

Let’s break it down a little. If your company sets its target on growing net income by 20% per year over the next three years, you need to ask yourself a few important questions. What part of our compensation and rewards plan communicates that goal to employees? If we achieve or exceed that number how much are we willing to share? Who will get their fair share and then some if we meet our financial targets? To what extent will key employees’ participation fuel this desired growth? In other words, what comes first – growth or employees that are motivated by incentives to create growth?

For growth to occur sustained performance must be achieved…and since these results are largely a function of your key employees, compensation becomes a focus. As a business owner you have to determine the right mix of compensation components. These elements should include a strategic mix of core benefits, executive benefits, qualified retirement plans, supplemental retirement plans, salary, short-term incentives, long-term incentives and long-term equity incentives.

Ultimately the proverbial “rubber meets the road” when a rewards plan prompts employees to rise to a higher level of performance. For rewards to be effective they have to create increased focus on the part of participating employees – this focus is a direct result not only of financial reward, but also of a positive work environment and the path that you, as company owner, have drawn for their personal and professional development. Remember, money may be motivating, but so is an atmosphere where a culture of confidence exists.

At the end of the day, compensation can only do its part in changing results within an organization if the model and the compensation plan are understood and valued, results are achievable, and if employees are committed and feel a sense of ownership.

Results must also be concrete and measurable and communicated regularly. If these elements fall into place you will know that you’re paying your key people appropriately and you will also know what you’re getting in return.

About our Benefits Installment Author:

James E. (Jim) Moniz, CEO of Northeast VisionLink, a Massachusetts firm that specializes in structuring executive compensation. James E. Moniz is a national speaker on the topic of wealth management and on executive compensation.

Jim Moniz will be presenting at this years SHRM conference in Phoenx, be sure to check out our presentation: “Creating and Sustaining a Competitive Advantage, The Role and Impact of Effective Compensation and Rewards Strategies”

Executive Compensation as a Strategic Tool

As part of our series of articles by exceptional HR professionals, today we present article by a new guest author, Jim Moniz.

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With the year 2008 gone and its legacy of a weakened economy and even the most understated financial pundits already designating 2009 as volatile, many companies are reevaluating their business plans and shifting into survival mode. While attracting, retaining and motivating key employees are vital to the success of any business, the current economic environment may be the ideal time to re-think executive compensation measures.

The days of the “holiday bonus” may soon be by gone as companies – both private and public – progressively recognize there are other, more creative vehicles that can serve as incentive for retention. For instance, that annual check bestowed during the office holiday party is a short-lived and anticipated incentive and once received, what’s to stop employees from moving on to newer landscapes? This yearly “reward” come the end of December or the fiscal year is often looked upon as part and parcel of salary, essentially diminishing the true definition of performance incentive – and while the intention may be good, this type of across the board reward mechanism can alienate certain employees whose performance is consistently outstanding.

By creating a business environment that fosters achievement and implements long-term incentive programs, the loss of vital employees whose skill and knowledge are fundamental to the overall success of a company may be avoided.

For example, deferral plans are fast becoming a popular executive benefit, since they allow for pre-tax contributions that mirror 401(k) contributions lost under limitation rules. A deferral plan is the bonus that keeps on giving year-round as it allows employees to reduce their current income tax liability and watch their funds grow tax-deferred. In addition, the employer can make matching contributions to cover those contributions not allowed under a 401(k) plan, making the deferral plan a genuine incentive for longevity within a company.

Phantom stock is another incentive that can be tied exclusively to performance. Simply put, phantom stock is a promise to pay a bonus in the form of the equivalent of either the value of company shares or the increase in that value over a period of time. The most essential element of this incentive approach is its long-term understanding. Also, phantom stock plans are not tax-qualified, and as such not subject to the same tax rules as 401(k) plans. A company can promise a new and valuable executive this durable bonus every three or five years or over a longer period of time, making it attractive to remain for an extended run.

Another form of executive bonus is the performance unit – an offer to pay an executive a sum of cash at the end of a long-term performance period. The amount of a performance unit is based on attainment of certain pre-established financial objectives of the company. Some may define this brand of incentive as the ultimate performance carrot, as it consistently encourages an executive employee to tie his or her individual success into that of the company.

Company stock options are another form of incentive compensation appealing to many executive level employees. The amount of equity can be tied to the number of years in service, translating into potentially high returns for employee longevity.

It must be said that there are occasions when a well-timed “spontaneous” reward can be worth its proverbial weight in gold. A check for a modest amount in the aftermath of a key company success can go a long way toward providing management team members with a sense of company loyalty.

Finally, don’t discount other, more imaginative approaches to executive compensation. Options that should be considered are life insurance programs, health-club memberships, tuition reimbursement, flexible hours, and the leeway to work from a home office on occasion.

Ultimately, incentives should be connected to a company’s broad mission and scope of values. Companies must create an environment that fosters success and incentives should be tied to that success. Failure to keep an eye on that goal may result in lack of motivation for certain key employees, whose performance or lack of performance can make or break a business.

An effectively designed executive compensation program impacts the overall success of a company. A well integrated compensation arrangement can assist in promoting the core values of a company and help it along the path to continued success.

About our Guest Author:

James E. (Jim) Moniz, CEO of Northeast VisionLink, a Massachusetts firm that specializes in structuring executive compensation. James E. Moniz is a national speaker on the topic of wealth management and on executive compensation.