Current Trends in Compensation for ESOP Companies Midwest Regional ESOP Conference September 11, 2015

Transcription

1 Current Trends in Compensation for ESOP Companies 2015 Midwest Regional ESOP Conference September 11, 2015

2 INTRODUCTION TO DAKOTA SUPPLY GROUP Presented by: Melissa Lunak Director of Human Resources Dakota Supply Group

3 Dakota Supply Group Full-line Distributor of Electrical, Plumbing, HVAC/Refrig., Communications, Utility, Automation, Metering Technology and Waterworks Corporate headquarters: Fargo, ND 36 Branches throughout North Dakota, South Dakota, Montana, Minnesota, and Wisconsin Acquired 5 companies since 2012 Number of Associates has grown to over 770 currently S-Corporation ESOP since 1996 Stock Value grown in the last 10 years All Associates that meet eligibility can participate in the ESOP 3

4 Dakota Supply Group Recruitment: ESOP benefits incorporated into initial Offer Letter to prospective associates with a detailed explanation of the benefits of the ESOP and introduced to other Employee- Owners with large balances in their accounts All full-time Employee-Owners receive a complete benefit package of LTD, Life Insurance, Health/Dental Insurance, Supplemental Life, Optional STD and Vision Receive a base-salary based on the market, banding and grading, and published industry compensation studies with consideration made of the complete benefit package Also auto-enrolled into a 401k plan which is matched by DSG 50% of up to 6% of the employee s deferral amount 4

5 Dakota Supply Group Benefit Statement: Yearly is sent to all associates Outlines Benefits paid by DSG and Associate Paid Time Off Insurance Savings: 401K and ESOP Other Benefits Taxes Total Value of the Benefits Package Benefits Package as a % of Gross Earnings Total Value Compensation and Benefits Package 5

6 A TRUSTEE S PERSPECTIVE ON COMPENSATION IN ESOP COMPANIES Presented by: Neil M. Brozen, CPA BTC ESOP Services nbrozen@bankerstrust.com

7 Compensation in ESOP Companies Board Responsible for setting CEO comp and monitoring executive comp May delegate to comp committee Trustee Impact of unreasonable executive compensation Assisted by valuation firm Most influence in connection with ESOP acquisition Question: What should trustee do if believes exec comp is unreasonable? 7

8 Compensation Issues in ESOP Transaction Purchase of company stock trustee negotiates Seller and key executive comp Salary Bonus Benefits Other Management Incentive Plan (SARS) Total dilution Retention vs. performance Targets Vesting Sale of company: post-transaction compensation 8

9 Forms of Cash Compensation Base comp fixed salary Core compensation Year to year changes? Cash incentive bonus (used by 73% of respondents) Discretionary: 20% Formula/target: 49% (% of profit, sales growth, EBITDA) Cash deferred comp (used by 14% of respondents) - Fixed amount awarded in one year and paid in the future 9

10 Annual Incentive Performance Measures Measure 2010 Survey 2005 Survey Sales/revenue 34% 31% Earnings per share 26% 29% Operating income 25% 28% EBIT or EBITDA 25% 19% Cash Flow 26% 19% Net income 24% 24% Cost control/reduction 17% - Working Capital 4% - Source: Towers Watson 2010 Survey 10

11 Forms of Equity Compensation Stock options Allows recipient right to buy # of shares in the future at a fixed price Provides award equal to the increase in value of shares over time Stock appreciation rights (SARS) Similar to stock options except recipient receives cash value of increased share price rather than purchasing actual shares at a discount Restricted stock Gives recipient shares that will forfeit unless certain conditions (typically time) are met Phantom stock Similar to restricted stock except it provides a cash value equal to a certain number of shares Equity comp is used by 18% of respondents 11

12 Questions? Neil M. Brozen, CPA BTC ESOP Services

13 A COMPENSATION CONSULTANT S PERSPECTIVE ON COMPENSATION IN ESOP COMPANIES Presented by: Matt Keene Chartwell matt.keene@chartwellfa.com

14 DESIGNING A COMPENSATION PROGRAM

15 Compensation Philosophy Statement Expresses company s intent regarding executive compensation Helps to evidence a reasoned process Document, document, document! Often discusses: Positioning on total pay Aligning pay with corporate objectives (grow, diversify, etc.) Aligning pay with company culture Process for setting pay Goals and formulas for variable pay 15

16 Mix of Pay Intended Outcome? 16

17 COMPENSATION AND STRATEGIC PLANNING

18 Integrate Compensation in the Business Strategy Equity-based Compensation Vest/pay vs. Vest/hold Evergreen pools Dry powder reserve Equity Claims Equity Allocation Strategic Advisory Valuation Impact on Stakeholders Relative ownership Relative return rates Strategic Planning Leadership Team: Is succession planning aligned with strategic planning? Promote from within Recruit key executive talent (market cost, equity participation) 18

19 Valuation: Equity Compensation Current State 10% Phantom Stock 10% SARs EBITDA $20,000 $22,000 $22,000 Multiple 5.0x 5.0x 5.0x Enterprise Value $100,000 $110,000 $110,000 Add: Cash $25,000 $25,000 $25,000 Less: Debt -$5,000 -$5,000 -$5,000 Less: Market Value of SARs $0 -$1,000 Equity Value $120,000 $130,000 $129,000 Common Shares Outstanding 1,000 1,000 1,000 Phantom Stock Total Shares & Units Outstanding 1,000 1,110 1,000 Per Share Value $ $ $ Value of Equity Compensation $12,883 $1,000 Value of Other Equity $117,117 $129,000 Assume an equity-based executive compensation plan of 10% of fully diluted equity (110 units) 19

20 INCENTIVES

21 The ESOP as an Incentive Is the ESOP an incentive? Is the ESOP compensation? Most ESOP companies view an ESOP as ownership or retirement, and not as compensation when benchmarking Some companies with high levels of ESOP benefits do consider the ESOP as part of total compensation One approach is to offset the LTIP bucket by the annual ESOP account addition 21

22 Do Incentives Work? They may not motivate employees over the long run (motivation is intrinsic) They could produce burnout They may lead to myopia if improperly structured If properly structured, they can: Solidify link between employees efforts and successful company outcomes Make employees feel like valued partners Encourage creativity in spurring results 22

23 Why Mid-term Incentives? We see strong interest in mid-term incentives (3-6 years) Key employee retention ESOP benefits can seem distant to executive recruits Fosters annual grants tied to performance (no coasting as sometimes seen with high-value, one-time grants) Repurchase liability for pay-at-separation LTIP coincides with ESOP repurchase liability Company cash flow Participant taxation 23

24 Typical Mid-term LTIP Design Vest and pay approach Provides stacking annual grants with each new award being subject to a vesting schedule Example Year 1: Grant 1,000 phantom units that vest at end of Year 3 and are paid in Year 4 Year 2: Grant 1,000 phantom units that vest at end of Year 4 and are paid in Year 5 24

25 Mid-term Incentive Example Annual Grants; $100,000 Vested Value at Payout Grant Year ,000 1,000 1, ,000 1,000 1, ,000 1,000 1, ,000 1,000 1,000 Total Units Outstanding 1,000 2,000 3,000 3,000 3,000* 3,000* $100,000 value at vesting paid in lump sum 2014 Grant $ 100, Grant $ 100, Grant $ 100,000 Total Dollars to Exec $ - $ - $ - $ 100,000 $ 100,000 $ 100,000 *Post 2017 grants not shown to save space, but 3,000 total units are outstanding 25

26 Questions? Matt Keene Chartwell