Creative Employee Incentive Plans Creating a Win-Win December 2016

Transcription

1 Creative Employee Incentive Plans Creating a Win-Win December

2 The Lanehaven Experience Key Components of a Plan Plan Structures Case Study

3 Two Perspectives Sally Hollis Owner Kathleen Walton Principal/Growth Consulting Leader 3

4 What s on your mind? Current challenges Examples of how you ve creatively used incentives Questions 4

5 The Lanehaven Experience 5

6 Goal: Recruit, retain and grow people 6

7 Sally Hollis Education: B.S., Mechanical Engineering Iowa State University MBA, University of Northern Iowa Work Experience: John Deere : Lanehaven Farms : 2013 current Lanehaven Farms 2017 will be 70 year anniversary! 25 employees 8,000 acres 2,000 sow hog operation 7

8 Lanehaven Farm s Experiences Complete benefit package key to recruiting Culture key to retain and grow Care and understand employees Create individual solutions: What benefits are important to them? Be hard-headed and warm-hearted Engage Develop Meaningful and challenging work Feedback is a gift Real-time & annual reviews aligned w/ core values Professional Problem solving based on processes not people 8

9 Lanehaven Farm s Core Values Efficient Systematically standardizing processes, flawlessly executing, and continuously improving Progressive Eagerly embracing leading edge practices Integrity Consistently honest, trustworthy, responsible, and accountable CustomerWOW! Proactively identifying customer desires and exceeding expectations Stewardship Passionately protecting and sustaining resources for future generations 10

10 Key Components of an Incentive Plan

11 Key Components of Incentive Plan Specific Performance Standards Significant Financial Reward Careful Selection of Participants Current and Deferred Pieces Standards Tied to Increase in Company Value 12

12 Types of Performance Standards Customer- Focused Measures Financially- Focused Measured HR Capabilities- Focused Measures On-time delivery Revenue growth Employee satisfaction Internal Process- Focused Measures Budget-to-actual expenses Cycle time Resource yields Turnover rates Safety rates Customer satisfaction Profit margins Absenteeism rates Teamwork effectiveness Customer growth and retention Return on invested capital Overtime management Growth in profitability 13

13 Key Components of Incentive Plan Careful Selection of Participants Key Employees v. Non-key Employees Team vs. Individual 14

14 Other Considerations Frequency of measurements and pay-outs Expectations management Doesn t become part of base comp What if performance standards aren t met? Communicate plan in writing Not a one-size-fits-all 15

15 Incentive Plan Structures 16

16 Using Benefits as Incentives Benefits are another form of incentives Focused on retention but does it drive over and above behavior? Doesn t have to be formal benefits health insurance, disability Much less complicated than a formal incentive plan Creative ideas: Educational opportunities Travel opportunities Offsets in remote locations Sponsoring an employee s child Remember may have tax implications 17

17 Equity Equity Description Grant of shares in company Example You are now the owner of ten shares of company stock Pros Cons Gives employee ownership in company Can be flexible in granting different class of shares, which limit rights Aligns enterprise level thinking with long-term value Dilutes ownership Non-targeted goals Creates taxable event for employee if not purchased Creates ownership rights (even with buy back provisions) Does not allow for creative, individually-targeted incentives 18

18 Phantom Stock/SARs Phantom Stock/Stock Appreciation Rights Description Example Pros Deferred Comp plan based on value of shares or increase in value of shares Phantom Stock: Your benefit is equal to the value of ten shares of company stock SAR: Your benefit is equal to the growth in the value of ten shares of company stock from issue date until retirement Value of benefit grows with company Gives employees economic benefit of ownership Does not dilute actual equity interests Cons Must follow all deferred comp rules Valuation is difficult and can cause friction Very complex 19

19 Options Options Description Example Contract with employee granting them option to purchase a set number of shares of the company You will have an option for the next ten years to purchase ten shares of the company at an exercise price of $20 per share Pros Cons Gives employee ownership in company Can be based on tenure or performance Can be structured in tax favorable manner for employee if ISO plan (capital gains when shares are ultimately sold) Very complex Difficult to amend without employee agreement Requirements for tax favorable treatment are significant Dilutes ownership If ISO, company will not receive comp deductions 20

20 Deferred Compensation Deferred Compensation Description Example Pros Cons Long-term incentive to be earned today but paid out at later date We will credit your account $1000 for each year that the company revenue growth exceeds 10% Focus on long-term Flexible in design Do not need to fund as you go Inflexible after plan is adopted Subject to high degree of regulatory restrictions Distributions are restricted (can only delay, not accelerate) No deduction for comp until year that participant pays tax 21

21 Qualified Plans Qualified Retirement Plan Description Examples Pros Cons Flexible retirement vehicle established by employer for benefit of employees Simple IRA 401(k) Traditional/Safe Harbor/Cross-Tested ESOP If structured properly, can be flexible Ability to target certain employees Creative measurement mechanisms that can be changed annually Can include owners (ability to put away pre-tax dollars with matching contribution) May need to over reward some employees Limited administrative duties Ongoing costs of administration 22

22 KCoe Ag Incentive Plan KCoe Ag Incentive Plan Description Example Pros Cons Company-wide incentive plan designed to influence behavior leading to greater profit a win-win If the team can reduce repairs by $50,000, the farm will provide a share the savings with each employee Drives desired outcomes Increases profitability Rewards employees without additional cost Requires some administrative work to facilitate Can demotivate employees if not administered properly Small chance of additional out of pocket cost May create bonus focused behavior 23

23 Case Study 24

24 Case Study: Goal Create management incentive plan for key managers at Nebraska location to align enterprise goals of asset preservation, longevity, and production/sustainability 25

25 Targeted Managers Position Overview Compensation General Manager Mid to late 40s With operations since 2008 $60,000 salary Housing Bonus Cow Managers (2) Early 40s $45,000 salary Housing Bonus Want a flexible structure to add future critical managers 26

26 But. What about the other employees? Contribute to operations Ambassadors for family in community Want to ensure low turn-over Obligation 27

27 Compensation Current Bonus Structure Fixed Tenure Bonus $500 per full year of employment, up to $5,000 Individual Performance Bonus Subjective gut feel + Years of Service 28

28 And, the winners are Cash Bonus Plan 401(k) with Cross-testing KCoe Ag Incentive Plan 29

29 Key Components of Incentive Plan Specific Performance Standards Significant Financial Reward Careful Selection of Participants Current and Deferred Pieces Standards Tied to Increase in Company Value 30

30 Key Components of Incentive Plan Careful Selection of Participants Key Employee Plan Teamfocused Plan for all Employees 31

31 Possible Performance Standards Specific Performance Standards Matrix of individual objectives Tailored to individual contributions Can include long-term objectives Per acre/head measurement To address growth component, bonus is $x growth target Average/rolling profitability measure Focus on asset preservation, production and profitability Create formula indexed on rolling five-year average Indexed so do not need to disclose actual numbers 32

32 Financial Reward Significant Financial Reward Decided on up to 30% of base for key managers subject to plan limitations split between current and deferred Alternative is to bank mortgage payment equivalent into plan Provide cost-sharing through Ag Incentive Plan to other employees 33

33 Current and Deferred Pieces Will have current bonus based upon satisfaction of performance standards Long-term focus through rolling profitability test Deferred comp piece through plan structure Current and Deferred Pieces 34

34 Tied to Increase in Company Value Five-year rolling profitability average focuses on company value Ag Incentive Plan tied to company profitability through cost savings Aligns employees and owners Standards Tied to Increase in Company Value 35

35 401(k) Plan with Cross Testing 401(k) Plan with Cross Testing Comp Limits Company Contributions Flexibility for Targeted Employees Set-up Costs Employee contribution limit of $18,000 ($24,000 if age 50 or over) Total employer/employee contribution limit of $53,000 In order to have targeted employee contributions, company has to provide either safe harbor contribution to all eligible employees or matching contribution based upon participating employee contributions. Ultimately, may end up making some contributions to non-targeted employees Can create custom bonus measures to drive behavior and reward Approximately $2,500-7,500 (depending on complexity of targeted measurement mechanisms) Ongoing Fees Approximately $3,000-4,000 36

36 Example: Tax Benefit to Owners Owner Employees Tax Benefit (at 40%) Pre-tax Employee Contributions $36,000 $14,400 Deductible Employer Matching Contribution $6,000 $2,400 Deductible Targeted Employee Bonus $12,000 $4,800 Total $54,000 $21,600 37

37 Example: Net Cost Net Cost to Company/Owners Total Non-owner Cash Cost: $35,800 Total Tax Benefit to Owners: (21,600) Tax Benefit to Company for Non-Owner Contributions: (14,320) Net Cost (Tax Benefit) to Farm: ($120) 38

38 KCoe Ag Incentive Plan Summary of Farm Incentive Plan KCoe Farms Loveland, CO Payment Distribution Quarterly Payment s Year End Payment Recommended Payment Weighting 10% 10% Payment Weighting 40% 60% Quantitative Components Included in Plan? Component Weighting Annual History Annual Goal Projected Savings Projected Payment Projected Payment per Employee Net Savings Repair & Maintenance Expenses YES 10% $ 178,715 $ 160,000 $ 18,715 $ 1,872 $ $ 16, Fuel Cost YES 10% $ 524,685 $ 500,000 $ 24,685 $ 2,469 $ $ 22, Fertilizer YES 10% $ 553,303 $ 525,000 $ 28,303 $ 2,830 $ $ 25, Chemical YES 10% $ 603,433 $ 575,000 $ 28,433 $ 2,843 $ $ 25, Other Costs YES 5% $ 1,474,611 $ 1,300,000 $ 174,611 $ 8,731 $ $ 165, Livestock Cost of Production YES 10% $ 410,046 $ 375,000 $ 35,046 $ 3,505 $ $ 31, Miscellaneous Expenses YES 10% $ 401,977 $ 325,000 $ 76,977 $ 7,698 $ $ 69,

39 KCoe Ag Incentive Plan Plan Accelerators/Decelerators Yield Increase for every 1% over 100% of History - % Decrease for every 1% below 100% of History - % $ Impact for each 1% Increase or Decrease Bonus Pool Funding Profitability Annual Bonus 100% for EBITA Greater Than 2,643,392 $ 57, Annual Bonus 75% for EBITA Greater Than 2,202,827 $ 43, Annual Bonus 50% for EBITA Greater Than 1,762,261 $ 28, Annual Bonus 25% for EBITA Greater Than 1,321,696 $ 14, Annual Bonus Not Funded for EBITDA Less Than 1,321,696 $ - Projected Savings Projected Payment Projected Payment per Employee Net Savings Estimated Plan 100% for Employees $ 386,770 $ 49,946 $ 2,497 $ 336,824 Additional Plan 100% for Managers $ 355,737 $ 7,471 $ 7,471 $ 348,266 Total Plan 100% $ 742,507 $ 57,417 $ - $ 685,090 40

40 Looking for more? Contact Kathleen Walton at: Phone: Contact Sally Hollis at: Phone: