2012 connell & partners fall pulse survey participant report

Connell & Partners 2012 Fall Pulse Survey – Compensation Responses to the Continuing Economic Uncertainty

Connell & Partners 2012 Compensation Response Pulse Survey 2

Introduction

The continuing weakness in the global economy as evidenced by the Q2 earnings season has resulted

in many companies missing revenue and earnings estimates and revising future estimates downward

for Q3 and in some cases for the remainder of the year. We will gain a better understanding of the

extent of the continuing challenges as Q3 earnings season kicks off in earnest. Recent news from

around the globe suggests that this weakness is anticipated for Q3 and at least into Q4.

In response to these challenges, our Pulse Survey endeavored to find out what, if anything, companies

might be doing from a compensation perspective in these uncertain times to ensure that their

employees remain engaged and incentivized to help their companies weather the economic storm.

We received responses from over 70 companies in various industries, sizes and stages. Some answers

allowed for multiple responses. The results are presented below:

Demographics

Responses generally reflect all industries, led by High-Tech, Software and/or Services (19.8%):

1.2%2.5%

7.4% 3.7%

2.5%

2.5%

11.1%

4.9%

4.9%7.4%

1.2%

6.2%

19.8%

8.6%

3.7%

1.2%11.1%

In which industry does your company primarily operate?Energy

Materials

Commercial & Professional Services

Consumer Durables & Apparel (Retail)

Consumer Services (Gaming, Education)Media

Healthcare Equipment & Services

Pharmaceuticals, Biotechnology, Life SciencesFinancial (Banking, Financial Services)

Insurance

Real Estate

High-Tech (Hardware)

High-Tech (Software and/or Services)

High-Tech (Hard- and Software)

Telecommunications

Utilities


Size ranges of respondents represented a diverse sample, as measured by employees and revenues:

0%

5%

10%

15%

20%

25%

30%

Less than 100

100 -499

500 -999

1,000 -2,999

3,000 -5,000

5,000 -9,999

10,000+

Pe

rce

nt

of

Re

spo

nd

en

ts

Number of Employees

Company Size - Employees

0%

5%

10%

15%

20%

25%

30%

Less than

$49M

$50M -$99M

$100M -$499M

$500M -$999M

$1.0B -$2.9B

$3.0B -$4.9B

$5.0B -$9.9B

$10B+ Do not know

Pe

rce

nt

of

Re

spo

nd

en

ts

Revenue Range

Company Size - Revenues


Summary Results – Key Findings

Are Companies Responding?

Surprisingly, approximately 7% of companies indicated that the broader macro-economic challenges

are not impacting their organizations in a negative way, and therefore, they do not see a need to do

anything at this time. Some companies, however (16%), are beginning to enact near-term solutions to

try to proactively stay ahead of potential challenges to come. While for many companies (45%), it’s

still too early to tell, and they are taking a “wait and see” approach to determine whether they need to

respond to the challenges, and will continue to monitor the situation.

If So, What are Companies Doing in the Short-Term?

Of the responses that indicated that their companies are trying to address potential challenges now, 71%

of them (12 of 17) are making changes to their short-term incentive plan (35% re-setting goals, 24%

adjusting the slope of their payout curve, and 15% are guaranteeing some level of funding for payouts).

Many others (39%; 5 of 17)) are either implementing retention plans or making additional equity

awards to ensure their “critical” and “key” talent remain retained and engaged.

What Impact is the Uncertainty Having on Your Compensation Plans?

The economic impact could potentially have a significant impact on employee motivation and

engagement, as 50% of companies (36 of 72) believe that their bonus plans will payout at some level

below target. A little over one-third (36%; 26 of 72) believe that they will pay out at target and an

apparent fortunate minority (14%; 10 of 72) anticipate above-target payouts.

Consistent with the sentiment of the target and below respondents for short-term incentives, 10% (6 of

61) believe that their merit adjustment pools will be lower than last year, while two-thirds of

companies believe that their merit increase budgets will be the same. Fortunately for some companies,

23% (14 of 61) anticipate merit budgets will be higher than last year, suggesting that there may be a

light at the end of the tunnel, and that while this year may be challenging, there may be a brighter days

ahead.

Overall, most companies anticipate funding merit adjustments pools between 2.5% - 3.5%. Only

approximately 3% believe that they will NOT fund merit increases next year. The chart below

highlights the anticipated merit budgets:

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

2.0% 2.5% 3.0% 3.5% 4.0% 5.0%

Pe

rce

nt

of

Co

mp

anie

s

Merit Increase Budget

Projected Merit Increase Budgets


So, What Can Companies Do For the Future?

While the majority of companies are taking the “wait and see approach” for future compensation plan

design changes, some companies are either actually beginning to make changes for the longer-term or

considering changes in the near future. We found that companies are exploring a variety of ways

within their compensation programs and structures to try to address some of the challenges brought

about by the economic uncertainty:

Changes Actually Being Implemented or Contemplated

In the Near Future

Already

Doing

Thinking About Doing

In the Near Future

1. Increasing LTI award sizes to enhance retention 15% 17%

2. Adjusting the performance period in the annual

bonus plan to something shorter than annual

(e.g., quarterly, semi-annually) in order to allow

for shorter performance periods, better forecast

accuracy, and opportunity to re-set goals if

macro factors outside of Company control

impact performance

9% 14%

3. Shift from a goals-based, prospective plan to more of a

profit-sharing retrospective approach (e.g., profits

greater than 5% growth) to incentive plans to mitigate

the challenge of forecasting goals in an uncertain

environment

7% 13%

4. Adjusting the mix of equity vehicles offered (e.g.,

introducing restricted stock or RSUs, or performance

shares based on operational performance to redirect

some of the focus away from near-term stock price

swings)

23% 12%

5. Adding a discretionary component to bonus plans to

allow for facts and circumstances beyond formulaic

results to be considered in determining the final payouts

or funding

32% 10%

6. Incorporating a relative performance factor into

incentive plan performance assessments to alleviate the

uncertainty of setting internal goals 19% 10%

7. Making equity grants more than once per year to smooth

out stock price volatility 3% 3%


Conclusion

In conclusion, while the future may continue to bring challenges, there are opportunities and

mechanisms from a compensation perspective to consider in trying to help keep your employees

engaged and motivated, which in turn, may help companies weather the economic storm.

Detailed Findings

6.8%

31.5%

45.2%

16.4%

Is your Company making any changes to its current incentive plans (e.g., adjusting targets, making additional equity grants, implementing a retention

plan) to address the broader economic uncertainty?

No, the broader economic

challenges are not impacting our

Company.

No, we will let our plans continue

as is.

No, not now, but we will continue to

monitor and assess.

Yes

N = 73


4.2%2.8%

13.9%

29.2%36.1%

8.3%

4.2%

1.4%

At what level do you currently expect your short-term incentive plan to fund?

Below the minimum to zero

At the minimum

Well below target

Somewhat below target

At target

Somewhat above target

Well above target

At the maximum

54.7%

8.0%

18.7%

18.7%

What are your plans for base salary increase budgets for 2013?

Same % as last year.

Lower % than last year.

Higher % than last year.

We haven't decided yet.

N = 75

N = 72


66.2%

11.3%

8.5%

2.8% 11.3%

Has your company thought about making future changes to your short-term incentive plan's performance period (e.g., less than a year,

quarterly, semi-annual)?

No, we haven't thought about it.

Yes, we thought about it but

decided against it.

Yes, we are already doing it.

Yes, and we have decided to

implement the change next year.

Yes, we will think about doing it in

the future.

47.9%

9.9%

32.4%

1.4%8.5%

Has your company thought about allowing for discretionary payouts either ins ide or outside of your existing incentive plans?


Yes, we thought about it but

decided against it.


Yes, and we have decided to

implement the change next year.

Yes, we will think about doing it in

the future.

N = 71

N = 71


75.8%

17.7%

3.2% 3.2%

Have you considered making equity awards more often than only once a year (e.g., to smooth out market volatility)?


Yes, we thought about it but decided against it.


Yes, we will think about doing it in the future.

53.8%

10.8%

23.1%

12.3%

Have you considered adjusting the use or types of different equity vehicles in your long-term incentive plan (e.g., incorporating or adding more of a full-

value vehicle l ike RS/RSUs/Performance Shares)?





N = 62

N = 65


57.1%

14.3%

18.6%

10.0%

Have you considered incorporating a relative performance factor in any of your incentive plans to alleviate some of the challenges of setting goals in an

uncertain environment?





73.2%

7.0%

7.0%

1.4% 11.3%

Have you considered shifting your plans from a prospective goals based plan (pre-established goals determine funding) to more of a profit sharing

plan?




Yes, and we have decided to implement the change next year.


N = 71

N = 70


Participants

The following chart illustrates those participants providing demographic information:

58.5%

9.2%

15.4%

16.9%

Have you considered increasing the size of LTI awards to enhance retention?





A123 Systems Egenera Ocean Spray

AIPSO EMC Optimization Group

Air Liquide EMD Millipore - Merck KgAa Optos

American Tower FM Global PartyLite Worldwide

American Water Gallagher Peoplefluent

Avid Goldman Philips

Benchmark Electronics GSI Group PTC

Black Duck Software Haemonetics RE/MAX

Bleck Design Group Hay Group Research Now

Blue Cross & Blue Shield of RI Hebrew SeniorLife RFMD

Bose Corporation Houghton Mifflin Harcourt Sapient Corporation

Boston Business Group Idenix Silicon Image

Boston Children's Hospital Kenexa Staples

Boston Red Sox Kitty Hawk Capital Sunovion Pharmaceuticals

Casa Systems Kronos The Carter Group

Charles River Laboratories Levitronix Technologies The Hanover Insurance Group

Choice Solutions MAPFRE Insurance Tufts Health Plan

Clean Harbors MathWorks Vistaprint

Comdel MCCA VivaKi

Covidien MITRE Waters Corporation

D&M Holdings Monster Worldwide Wright Express

Dana-Farber Cancer Institute NEI

Deluxe Corp Northeastern University

Draper Laboratory Nypro

Eastern Bank

N = 71


About Connell & Partners

Connell & Partners is a full-service executive compensation consulting firm, helping clients of all sizes

and industries, with an emphasis on high growth technologies and companies, to align their

compensation strategies to help drive the business. From benchmarking pay levels, to short- and long-

term incentive plan design, through transactions (IPO, M&A), and employing sound corporate

governance principles, we help our clients use compensation as a competitive advantage to attract,

retain, and reward their most critical assets.

Connell & Partners is an independently run division of Gallagher Benefit Services, which is a division

of Arthur J. Gallagher, a $2B publicly-traded company (NYSE:AJG).

About the Authors

Jack Connell

Jack is Founder and founder and Managing Director of Connell & Partners, Inc., an independently run

division of Gallagher Benefits Services (GBS), itself a division of Arthur J. Gallagher (NYSE:AJG).

Jack is a nationally recognized expert in executive compensation, incentive plan design (short-term and

long-term), linking pay and company performance, and total reward strategy development. He works

with organizations ranging from start-ups to Fortune 50 companies. He has worked on over 100 IPOs

over the course of his consulting career. He focuses on industries with intensive human capital needs,

including high technology and life sciences. He also has special expertise in mergers and acquisitions,

and turnarounds.

Jack has significant experience at both consulting firms and corporations, and brings both perspectives

to his work when advising clients. His consulting experience includes serving as Managing Director

and National High Technology and Life Science Practice Head for Pearl Meyer and Partners,

Managing Director and East Coast Practice Leader for iQuantic, Managing Director and National

Consulting Practice Leader of The Wilson Group, and President and Founder of Solutions at Work. His

corporate experience includes serving as Senior Vice President of Global HR for Geac Computer;

Senior Director of Compensation, Benefits, and HRIS at Avid Technology and Stratus Computer; and

various HR, and compensation and benefits roles at Digital Equipment Corporation and Data General

Corporation.

He earned a Bachelor's Degree in Economics from the University of Michigan and an MBA in

Organizational Behavior and Corporate Strategy from the University of Michigan Ross Graduate

School of Business. Jack has also been an adjunct professor at Bentley College and Babson College,

and an instructor for WorldatWork.

Jack has published more than 40 articles and book chapters, including articles in Forbes, WorldatWork

Journal, Chief Legal Executive, Mass High Tech, and Boston Business Journal. He has been quoted

extensively in such publications as The Wall Street Journal, Business Week, CFO Magazine/CFO.com,

Red Herring, USA Today, The San Jose Mercury News, Corporate Governance News, Employee

Benefits News, and Compliance Week. Jack speaks regularly at many national and regional

conferences.


Justin Fossbender

Justin is a Principal Consultant for Connell & Partners. He is responsible for client delivery and

business development for the firm.

Justin brings a balanced perspective to clients, having both significant consulting and in-house,

corporate senior leadership experience. He has been responsible for client service, delivery and

business development on the executive compensation consulting side at Hewitt, now AonHewitt, Fred

Cook & Company, and Watson Wyatt (now Towers Watson). He has also led significant change

management initiatives through his leadership of the compensation, benefit, talent management and

HR technology functions as Vice President of Total Rewards at Millipore Corporation, a $1.7B

leading-edge Life Science Company, until Millipore’s acquisition by Merck, KGaA and then Senior

Director of Total Rewards, HRIS and Talent Management at VCE, The Virtual Computing

Environment Company, a joint venture between EMC, Cisco Systems and VMware, focused on cloud

computing.

Through Justin’s consulting and in-house leadership experience, he has provided strategic advice and

counsel to Senior Management and Boards of Directors across all aspects of the executive

compensation area, including compensation strategy and philosophy development, short- and long-

term incentive plan design, M&A, employment arrangements, retention plan design, communications,

and corporate governance.

Justin graduated from Columbia University with a Bachelor of Arts degree. He then obtained a Juris

Doctor degree from New York Law School. He is licensed to practice law in the state of New York.

David Dreyfus

David is a Managing Consultant for Connell & Partners. He is responsible for day to day project

management and quality control for many of our clients.

David began his career in the Business Analyst program at Capital One Financial Corp. He worked on

the Sales Strategy and Analysis team in the Point of Sale Finance Division in Framingham, MA. There

he designed and implemented the sales compensation plans. He also worked on the Workforce

Planning team at Vistaprint, N.V. in Lexington, MA, a publically traded e-commerce company.

David graduated from the Olin Business School at Washington University in St. Louis with a Bachelor

of Science in Business Administration. There he double-majored in Finance and Economics.

Contact Information

Jack Connell Justin Fossbender David Dreyfus Managing Director Principal Consultant Managing Consultant

781.647.2739 781-496-3406 781.647.2722

[email protected] g [email protected] [email protected]

Visit our website at www.dolmatconnell.com.

mailto:[email protected]



http://www.dolmatconnell.com/

2012 connell & partners fall pulse survey participant report

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