HOW CEOS OF HIGH GROWTH COMPANIES PAY TOP PRODUCERS

Transcription

1 Brought to you by The VisionLink Advisory Group HOW CEOS OF HIGH GROWTH COMPANIES PAY TOP PRODUCERS CEO Leadership Network

2 Audio icon Real time feedback and interactivity Q/A pod, chat pod Minimize the control panel Handouts Take-away of presentation in chat area Questions to Webinar Host CEO Leadership Network

3 Today's Speakers Tom Miller CEO and Founder The VisionLink Advisory Group Dan Sullivan President Strategic Coach CEO Leadership Network

4 September 18, 2012 How CEOs of Successful Growth Companies Pay Top Producers

5 Value Creation and Sharing What Does it Really Mean? Case Study (Source: Chief Executive Magazine, May/June 2012 Edition) Keith Williams 5

6 Global independent safety science company Validates the safety of certain products and processes Puts the UL stamp of approval on products that have met its standards The company is 118 years old 6

7 Keith Williams Assumed leadership of UL in 2005 Company carrying considerable debt Losing market share Low employee morale UL had become bureaucratic and siloed Regional divisions undercutting each other 7

8 5 Core Changes Compensation (Value Sharing): Took away local measurements driving management incentive plans all paid on same metrics We live together and we die together Aligned everyone behind company success I call it pay the company first. Williams clearly defined what value creation meant and how it would be shared 8

9 Pay the Company First Basically, up to the company s operating profit target, all of the profits go to the company; and only after that target is met, do we start funding the incentive pool. Example: If UL s target 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 9

10 Pay the Company First Once value creation is defined, compensation can follow a formula for sharing value in a way that aligns key producers with the company s business plan and priorities. 10

11 Agree or Disagree? Willing to tie all executive incentives to the same metrics? Willing to identify a minimum return on equity threshold that must be met before any incentives are paid? Willing to share significant upside beyond the threshold (no cap)? 11

12 Today s Focus The relationship between growth and key producer compensation 12

13 Key Questions 1. What drives sustainable business growth? 2. What impact does compensation have? a) Does long-term value sharing really matter? b) If so, what does it impact? What does it change? (What are the costs of failing to use this approach?) c) How is long-term value shared most effectively with those who produce it? 13

14 Multiplying Growth 14

15 Your 10x Future Dan Sullivan

16 UA

17 UA

18 Passion Hero 10x Multiplier

19 UA

20 UA 3 Years

21 UA UA

22 UAT UA UA

23 UAT

24 Resourceful Alert R R A C Responsive Curious

25 Bigger Faster B F R R A C C E Cheaper Easier

26 UAT UA UA

27 UAT UA T UAT UAT UA UA UAT UAT UA T UA T UAT

28 UA Focus Productivity UA

29 UAT UA T UAT UAT UA UA UAT UAT UA T UA T UAT

30

31 Partnership Attitude Compelling Future Positive Work Environment Opportunities for Personal and Professional Growth Meaningful Financial Rewards 31

32 The role of compensation Message Partnership Proof Authentic value sharing Keys Clarity, Believability, Meaning 32

33 1. Message ( partnership ) We have a successful business model (we can produce profits) We have a dynamic business strategy (we can outperform the competition) We have a way to share value with team members who help us innovate, execute and transform our business Note emphasis on idea of value sharing rather than incentives or bonuses 33

34 2. Proof ( authentic value sharing ) We don t set your salaries based on market standards We don t pay bonuses as a percentage of salary We don t limit ownership value to our existing shareholders 34

35 Traditional Approach vs. Value Sharing Traditional Approach Value Sharing Approach Salaries based on market standards (the tyranny of the median ) Bonuses are then based on a percentage of salary (with a cap) Ownership is restricted to a small group Compensation is tightly budgeted Salaries based on your unique skills and expected contribution Bonuses reflect value you help create (short-term value sharing plan, with no cap) Ownership is something to be nurtured in everyone (and a longterm value sharing plan is essential) Compensation is a reflection of the return on human capital 35

36 Pay the Company First ROTRI Return on Total Rewards Investment Measuring the return on your compensation investment 36

37 How much is the Total Rewards Investment? Salaries Commissions Bonuses Deferred award accruals (LTIP) Core benefits Executive benefits Retirement contributions Payroll taxes 37

38 What return do you get on that investment? % 38

39 ROTRI Example: Capital Account Cost of Capital Capital Charge Operating Income Productivity Profit Total Rewards Investment ROTRI $ 20,000,000 12% $ 2,400,000 $ 10,000,000 $ 7,600,000 $ 25,000, % (ROTRI = Productivity Profit/Total Rewards Investment) 39

40 ROTRI Example: Capital Account Cost of Capital Capital Charge Operating Income Productivity Profit Total Rewards Investment ROTRI $ 20,000,000 12% $ 2,400,000 $ 10,000,000 $ 7,600,000 $ 25,000, % Variable Pay Plans (Value Sharing) are financed from Productivity Profit 40

41 Compensation Portfolio (How should the $25mm be allocated?) Qualified Retirement Plans Nonqualified Retirement Plans Executive Benefit Plans Core Health & Welfare Plans Salary Growth Incentives Performance Incentives Sales Incentives 41

42 Compensation Allocation Portfolios Performance Class Paid to help company meet its budgeted or targeted level of performance (short-term value sharing plan; bonuses; incentive plans) Message: Operate our current company successfully Growth Class Paid for building market (enterprise) value over time (long-term value sharing plan) Message: Build our future company 42

43 Future Company Present Company LTVSP Salaries STVSP Benefits 43

44 Why Long-Term Value Sharing Matters 44

45 Value Sharing: the Foundation 1. Shareholders (or owners) have identified the key indicator of long-term economic value; they have also identified the improvement in this indicator that is expected over time (e.g., today s EBITDA = $10mm; EBITDA in 5 years = $25mm) 2. Management has educated employees on what this indicator is and why it s important 3. Employees have identified specific ways they plan to contribute to the achievement of the expected results 4. The company has a concrete program for sharing the value that employees help create 5. Exceeding the expected results commits owners to sharing an even larger value 6. Employees must stick around to participate 45

46 What Happens When You Do It? #1 Value sharing attracts the best talent and magnifies results #2: Value sharing plans (effectively designed) reinforce the company s business model #3: Value sharing protects against bad profits and promotes good profits #4: Value sharing promotes an ownership mindset #5: Value sharing builds trust and accelerates results 46

47 When You Don t Do It: 1. You will not attract the best possible talent 2. You can t be certain that pay aligns with the business model 3. You might be promoting bad profits instead of good profits 4. You will not have a complete ownership mindset 5. Employee trust and confidence will not be as strong as possible 47

48 From Why to How 48

49 How to Share Long-Term Value Effectively Picture your future company Determine the right value to share with those who help create it Select the right plan Build it with care and know-how Communicate and promote it 49

50 Increase in Enterprise Value Base Value Employee Value Today Future Date (5 15 yrs) 50

51 Go to tools at Phantonstockonline.com 51

52 Build it with care and know-how Develop an Effective Financial Model 52

53 Sample LTIP Model P&L Forecast Target P&L Forecast P&L FORECAST Actual Projected Projected Projected Projected Projected Projected Projected Gross Revenue 107,030, ,663, ,162, ,286, ,429, ,044, ,651, ,848,824 Gross Margin 17,814,269 22,165,988 25,490,886 29,314,519 33,711,697 38,768,451 44,583,719 51,271,277 G&A (11,089,392) (14,407,892) (16,569,076) (19,054,437) (21,912,603) (25,199,493) (28,979,417) (33,326,330) Earnings Before Taxes 6,248,427 8,166,417 12,342,955 14,194,399 16,323,558 18,772,092 21,587,906 24,826,092 Debt 13,913,380 14,000,000 15,218,000 16,541,966 17,981,117 19,545,474 21,245,930 23,094,326 Long-term Debt 13,913,380 14,000,000 15,218,000 16,541,966 17,981,117 19,545,474 21,245,930 23,094,326 Share Price multiple Formula Share Price (after debt) Formula Value 16,627,467 22,996,104 38,143,699 50,727,140 59,378,355 69,417,919 81,061,972 94,559,761 Assumptions Increase in Gross Revenue 9.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% EBT as % of Gross Revenue 7.0% 9.2% 9.2% 9.2% 9.2% 9.2% 9.2% Increase in Debt 0.0% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 53

54 Sample LTIP Model PSO Projections PSO Projection (CO) - Target Formula Value $ 22,996,104 $ 38,143,699 $ 50,727,140 $ 59,378,355 $ 69,417,919 $ 81,061,972 $ 94,559,761 Increase in Formula Value From Inception - 15,147,595 27,731,037 36,382,252 46,421,815 58,065,868 71,563,657 Total Phantom Shares 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 Weighted Share Value (EOY) $ 2.30 $ 3.81 $ 5.07 $ 5.94 $ 6.94 $ 8.11 $ 9.46 TOTAL PLAN PROJECTION Annual Grants (BOY) - 296, , , , ,658 97,535 Annual Distributions $ - $ - $ - $ - $ 1,079,861 $ 577,365 $ 434,045 Cumulative Distributions $ - $ - $ - $ - $ 1,079,861 $ 1,657,226 $ 2,091,271 Vested Value (EOY) $ - $ - $ - $ 1,079,861 $ 577,365 $ 434,045 $ 441,837 Unvested Value (EOY) $ - $ 447,964 $ 1,054,184 $ 517,120 $ 392,516 $ 401,853 $ 410,531 Plan Value (EOY) $ - $ 447,964 $ 1,054,184 $ 1,596,981 $ 969,882 $ 835,897 $ 852,368 Cum Plan Value (Pd, Unpd, Vstd, Unvstd) $ - $ 447,964 $ 1,054,184 $ 1,596,981 $ 2,049,743 $ 2,493,123 $ 2,943,638 CPV as % of Increase in Formula Value 3.0% 3.8% 4.4% 4.4% 4.3% 4.1% Mary Jones Annual Grants (BOY) - 130,435 81,102 62,775 55,188 48,653 42,883 Annual Distributions $ - $ - $ - $ - $ 474,783 $ 253,850 $ 190,836 Cumulative Distributions $ - $ - $ - $ - $ 474,783 $ 728,633 $ 919,469 Vested Value (EOY) $ - $ - $ - $ 474,783 $ 253,850 $ 190,836 $ 194,263 Unvested Value (EOY) $ - $ 196,957 $ 463,493 $ 227,362 $ 172,578 $ 176,683 $ 180,498 Cumulative Plan Value $ - $ 196,957 $ 463,493 $ 702,145 $ 901,211 $ 1,096,152 $ 1,294,230 Sam Donalds Annual Grants (BOY) - 86,087 53,528 41,432 36,424 32,111 28,303 Annual Distributions $ - $ - $ - $ - $ 313,357 $ 167,541 $ 125,952 Cumulative Distributions $ - $ - $ - $ - $ 313,357 $ 480,898 $ 606,850 Vested Value (EOY) $ - $ - $ - $ 313,357 $ 167,541 $ 125,952 $ 128,213 Unvested Value (EOY) $ - $ 129,991 $ 305,906 $ 150,059 $ 113,901 $ 116,611 $ 119,129 Cumulative Plan Value $ - $ 129,991 $ 305,906 $ 463,416 $ 594,799 $ 723,460 $ 854,192 Sherry Davis Annual Grants (BOY) - 80,143 49,832 38,571 33,909 29,894 26,349 Annual Distributions $ - $ - $ - $ - $ 291,722 $ 155,974 $ 117,256 Cumulative Distributions $ - $ - $ - $ - $ 291,722 $ 447,695 $ 564,951 Vested Value (EOY) $ - $ - $ - $ 291,722 $ 155,974 $ 117,256 $ 119,361 Unvested Value (EOY) $ - $ 121,016 $ 284,785 $ 139,699 $ 106,037 $ 108,559 $ 110,904 Cumulative Plan Value $ - $ 121,016 $ 284,785 $ 431,420 $ 553,733 $ 673,511 $ 795,216 54

55 3. Keys to Success Clarity Believability Meaning 55

56 CEO Clarity Employee These are the specific results that create enough value to generate bonuses. This is how your plan works. I understand what results we re seeking. I see how I can contribute. I understand how the plan works. 56

57 CEO Believability Employee Here are the results we re expecting. Here s how we plan to get there. Here s why we re confident these results are achievable. I understand the results. I understand what has to happen to achieve them. I believe we can do it. 57

58 CEO Meaning Employee Here s how much you should expect to receive if we hit our minimum, expected and superior result levels. Each of those amounts is fair for the results achieved. I m enthused and grateful to be a part of this plan. 58

59 Communicate and Promote the Plan 1. Explain, celebrate and reinforce the total value proposition 2. Communicate a sense of partnership 3. Project the wealth multiplier opportunity 59

60 Employee Value Statement Sam oyee Donalds Value Statement - Sam Donalds - T Tier 1 Cash Needs Annual Salary $ 250,000 $ 257,500 $ 265,225 $ 273,182 $ 281,377 $ 289,819 Bonus $ 122,000 $ 125,660 $ 129,430 $ 133,313 $ 137,312 $ 141,431 Total Cash Received $ 372,000 $ 383,160 $ 394,655 $ 406,494 $ 418,689 $ 431,250 Security Needs Core Benefits $ 18,000 $ 18,540 $ 19,096 $ 19,860 $ 20,654 $ 21,481 Executive Benefits $ 10,000 $ 10,300 $ 10,609 $ 10,927 $ 11,255 $ 11,593 Total Value $ 28,000 $ 28,840 $ 29,705 $ 30,787 $ 31,910 $ 33,073 Wealth Accumulation Long-Term Incentive Plan (SAR) Annual Distribution $ - $ - $ - $ 474,783 $ 253,850 $ 190,836 Increase in Vested Value $ - $ - $ 474,783 $ (220,932) $ (63,014) $ 3,426 Retirement Plans 401(k) Company Match $ 13,500 $ 13,905 $ 14,322 $ 14,752 $ 15,194 $ 15,650 Deferred Comp Match $ - $ - $ - $ - $ - $ - Total Value Projection Total Cash Received $ 372,000 $ 383,160 $ 394,655 $ 406,494 $ 418,689 $ 431,250 Total Benefits Annual Value $ 28,000 $ 28,840 $ 29,705 $ 30,787 $ 31,910 $ 33,073 Annual Value of LTIP $ - $ - $ 474,783 $ 253,850 $ 190,836 $ 194,263 Annual Value of Ret Plan Contr's $ 13,500 $ 13,905 $ 14,322 $ 14,752 $ 15,194 $ 15,650 Total Annual Value $ 413,500 $ 425,905 $ 913,465 $ 705,884 $ 656,630 $ 674,236 Total Wealth Projection $ 413,500 $ 839,405 $ 1,752,870 $ 2,458,754 $ 3,115,383 $ 3,789,619 60

61 Line of Sight Rewards What s in it for me? Roles and Expectations My Contribution? Strategy How? Vision Where? 61

62 Where to Begin Alignment Appraisal A focused look at your current practices with a comparative eye on whether your company is building a Unified Financial Vision for Growing the Business Process online employee survey 62

63 Building a Unified Financial Vision for Growing the Business Vision IMPACT: Alignment Meaning Stewardship Partnership Reinforcement Structure Business Model Compensation GamePlan Focus Execution Sustained Results Culture of Confidence Growth Wealth Multiplier Mindset Strategy IMPACT: Compelling Connection Fairness Value-Sharing Engagement 63

64 Special Offer For today s webinar attendees only: Complimentary Let us know if you d like more information Pam at pregan@vladvisors.com Tom at tmiller@vladvisors.com 64

65 Creating Long-Term Value for Premier Talent Pay the company first; tie this to your explanation to employees about how you define value creation Share the upside value in clear, believable and meaningful ways Make sure a long-term plan locks them in Communicate, communicate, communicate 65

66 Questions 66

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