global reward trendsweb.vdw.co.za/sara/file storage/documents/ara... · evp and employee engagement...
TRANSCRIPT
Performance related pay
2014
2
Our context
We simply cannot ignore our context anymore
Our context plays an important role in setting our Reward philosophies, policies and strategies
Global Reward Trends
2012
5
6
McKinsey research Sept 2012
90 Million people will lose their jobs by the year 2020
Who ate my job?
7
In our new world of work, unemployment is high yet skilled and talented people are in short supply
A big driver of Reward management in the future is Economics – Supply and Demand
5 Years Ago
Now
The Greatest Mismatch of All Time
8
Growt_ & P_ofitThe world’s most successful companies have this
one figured out
9
Top Remuneration Issues
1. The “wage gap” / Gini-coefficient
2. Performance Related Pay
3. LTI design
4. Selecting appropriate comparators
5. Pay restraint, Governance and Compliance
6. Best value for money spend/cost control
7. Remuneration committee performance
8. Board performance and measures
9
10
Changing Remuneration
11
Major guidelines and frameworks
Financial Stability Forum
Commission of European Union
Financial Services Authority
King III
JSE Listing requirements
Pillar III
12
The highest paid CEOs of 2012 USA
1. David Simon, Simon Property Group, $137.2 million, up 458 percent
2. Leslie Moonves, CBS, $68.4 million, up 20 percent
3. David M. Zaslav, Discovery Communications, $52.4 million, up 23 percent
4. Sanjay K. Jha, Motorola Mobility, $47.2 million, up 262 percent
5. Philippe P. Dauman, Viacom, $43.1 million, down 49 percent
6. David M. Cote, Honeywell International, $35.7 million, up 135 percent
7. Robert A. Iger, Walt Disney, $31.4 million, up 12 percent
8. Clarence P. Cazalot Jr., Marathon Oil, $29.9 million, up 239 percent
9. John P. Daane, Altera, $29.6, million, up 278 percent
10. Alan Mulally, Ford Motor, $29.5 million, up 11 percent
11. Gregory Q. Brown, Motorola Solutions, $29.3 million, up 113 percent
12. Richard C. Adkerson, Freeport-McMoRan, $28.4 million, down 19percent
13. Ian M. Cumming, Leucadia National, $28.2 million, up 531 percent
14. Brian L. Roberts, Comcast, $26.9 million, down 13 percent
15. Jeffrey L. Bewkes, Time Warner, $25.7 million, down 2 percent
13
The Gorilla of Wall Street, as Dick Fuld was
known, steered Lehman deep into the
business of subprime mortgages, bankrolling
lenders across the country that were making
convoluted loans to questionable borrowers.
Lehman even made its own subprime loans.
The firm took all those loans, whipped them
into bonds and passed on to investors billions
of dollars of what is now toxic debt. For all this
wealth destruction, Fuld raked in nearly $500
million in compensation (pay for
performance?) during his tenure as CEO,
which ended when Lehman did.
Rogues gallery – exhibit 1
Time Magazine: 25 people to blame for the financial crisis
14
Who decided banks had to be all things to all
customers? Sandy Weill did. Starting with a low-
end lender in Baltimore, he cobbled together the
first great financial supermarket, Citigroup. Along
the way, Weill's acquisitions (Smith Barney,
Travelers, etc.) and persistent lobbying shattered
Glass-Steagall, the law that limited the investing
risks banks could take. Rivals followed Citi. The
swollen banks are now one of the country's major
economic problems. Every major financial firm
seems too big to fail, leading the government to
spend hundreds of billions of dollars to keep them
afloat (taxpayers money!). The biggest problem
bank is Weill's Citigroup. The government has
already spent $45 billion trying to fix it.
Rogues gallery – exhibit 2
Time Magazine: 25 people to blame for the financial crisis
16
The formula exists…
Why are we more comfortable with sports peoples pay or actors pay?
It is because we can see what they do to earn their money…
17
Critical success factors for PM to work
1. The chief executive officer (CEO) owns performance
management in the organisation
2. A clear understanding of the corporate strategy by
all
3. Simple documentation
4. A conversation takes place
5. An output-oriented culture
18
The business case for PMFinancial Measures
Total Shareholder
Return
Return on
Equity
Return on
Assets
Cash Flow Return
on Investment
Real Growth
in Sales
Productivity Measures
Sales per
Employee
Income per
Employee
Real Growth in
Employees
0.0%
7.9%
4.4%
10.2%
4.5%
8%
4.7%
6.6%
1%
2.1%
$126,100
$169,900
$1,900
$5,700
1.1%
0.0%
Companies with
Performance
Management
Companies without
Performance
Management
437 Companies – Boston
Consulting Group
19
EVP and Employee Engagement
Finding the right people is hard enough;
keeping them motivated and engaged once on board is even harder
20
Creating the best Workplace on Earth
1. Let people be themselves
2. Unleash the flow of information
3. Magnify people’s strengths
4. Stand for more than shareholder value
5. Show how the daily work makes sense
6. Have rules people can believe in
HBR 2013
21
“Dream Company” Diagnostics
How close is your organisation to the ideal?
1. Let me be myself
2. Tell me what’s really going on
3. Discover and magnify my strengths
4. Make me proud I work here
5. Make my work meaningful
6. Don’t hinder me with stupid rules
HBR 2013
22
Keeping Talent – the 5 GREATS
Or Retention – the big 5
1. GREAT Company
2. GREAT Leaders
3. GREAT Culture
4. GREAT Roles / Career
5. GREAT RewardsGatherer and Craig
23
Reward categories influencing attraction,
motivation and retention of employees
Attract Retain Motivate
Monthly Salary/guaranteed
remuneration73.5% 19.7% 9.8%
Variable Pay 5.4% 22.1% 29.7%
Benefits 3.1% 7.0% 1.8%
Performance & career management 8.9% 27.0% 34.3%
Quality of work environment 1.8% 3.3% 6.2%
Work/home integration 7.3% 20.9% 18.1%
100% 100% 100%
Nienaber & Bussin, 2009
24
Performance Related Pay Frameworks
25
Remuneration Definitions and Terminology
Base / Basic Salary
+ Long-term Incentive
+ Short-term Incentive
Total
Earnings / Total Cost
to
Company
+ Car Benefit
+ Other Benefits
+ Cost of employee benefitsGuaranteed
Package / Total
Guaranteed
Package
Variable
Pay
Base /
Basic
Salary
Fixed
Pay
Total
Remuneration/ Total Cost of
Employment
Rolling
Incentive
26
The link between Performance and Pay
27
PRP – Performance Related Pay
There are 3 main methods of linking Pay to Performance:
1. Individual performance related pay – based on the performance
appraisal score. This is added to CTC and employee keeps it
forever
2. STI – short-term incentive scheme. This can be target based or
formula based
3. LTI – Long-term incentive scheme. A rolling cash incentive scheme
should be considered
28
First link - Merit Matrix for awarding individual
pay increases
29
STIs – second link• These are incentive schemes that reward superior performance over a period of
one year. Typically, they reward "what happened" last year. The main examples of STIs are:
• Profit Sharing (PS)
• Gain Sharing (GS)
• Bonus Schemes (BS)
• Commission Schemes (CS)
LTIs – third link
• These are incentive schemes that "look into the future" and reward superior performance over more than one year. Typical examples are:
• Rolling Incentives (RI)
• Value Add Schemes (VAS)
• Share Schemes (SS)
30
1. Example of profit-related formula
for an incentive fund
Formula = 10% of pre-tax profit that exceeds
8 % of the company’s capital employed
31
2. Bonus schemes
Unlike profit sharing and gainsharing, bonus schemes are often
not formula driven, but targets are set. Targets are typically
quantitative and qualitative in nature. Bonus schemes usually
have between 4 and 7 measures which are carefully chosen to
drive business strategy. Targets are usually expressed as
threshold (budget), target and stretch target. Most organisations
would choose a few targets related to the business as a whole
(business targets) and then a few for each function or division.
32
Example of Bonus Framework
Group Objectives (50%) Threshold(50%)
Target(100%)
Outstanding(150%)
1. Net Profit beforeTax (30%)
(30%) 100m 105m 110m
2. Sales Volume (20%) 500 510 520
Strategic Objectives(Function/ Division/ Department
(50%)
1. New productregistration
(20% 10 15 20
2. Employeedevelopment
(10%)
3. Implement newstrategy
(10%)
4. Implement (10%)
100%
33
The “Two Factor” Goal Orientated Approach
85% 95% 110% 125% 150%
75% 85% 100% 110% 125%
50% 75% 85% 95% 100%
Growth in
Sales
Exceptional
Target
Threshold
Threshold Target Exceptional
Company Profitability% Achievement
X
Target Payout
= Incentive R
Sales and Profitability
34
“Multiple Measures” Goal-orientated Approach (Matrix)
Performance Measures Weight 80 90 100 110 120 Score
Net Revenues 40% R10m R11m R12m R13m R14m 36
(Collections less returns)
Contribution Margin
(Net income before taxes 35% 12% 14% 16% 18% 20% 39
and profit sharing)
Customer Satisfaction
(Results of Customer 25% 80 85 90 95 98 25
Satisfaction Survey)
Payout Opportunity0 - 79 0
80 - 89 3%
90 - 99 5%
100 - 109 8%
110 - 119 12%
120 18%
100
35
3. Commission schemes
These are typically applied to sales and business development staff. They would earn a percentage of what they sold and the percentage is often set depending on the difficulty of selling and the average lead time for the sale to happen. The diagram below sets out the principle on a scale of 1 to 10.
0 (Easy sell/order taking) 5 (Average) 10 (Hard sell/cold calling)
Low percentage commission High percentage commission
36
Third link - LTI - Example of rolling bonus scheme
1 2 3 4 5 6 7
50% 30% 20%
Earnings 50% 30% 20%
50% 30% 20%
50% 30% 20%
50% 30% 20%
Total for year 50% 80% 100% 100% 100% Etc. Etc.
Year
37
PRP design considerations
38
Industry (or product) Maturity – this shapes the remuneration mix
EMBRYONIC GROWTH MATURE AGING
Common Strategies
Start up
New product development
Acquire market share
Find new markets
Consolidate position
Find and protect market niches
Become low cost producer
Cost reduction
Withdraw from unprofitable market segments
Industry Maturity
39
Determining the right level
Alignment
of all performance
measures to SHV
Long Term
Performance
Financial Structuring
Mergers &
Acquisitions
Strategy Formulation
Products & marketsProfitability
Working Capital
Product Volumes & Price
Product Mix
Equipment reliability
Production Cost
Maintenance Cost
Wastage (Yield)
Production Volume
Costs
Quality
Safety
Equipment uptime,
downtime & utilisation
Market
Company
BU
Site
System
Unit
Sub-system
Component
Shareholders
CEO / Board
Line
Management
Operational
Management
Team
leaders
Individual
Worker
Operational
Sec HrMin Shift Day Wk Month Qtr Yr Yrs
Tactical Strategic
40
Linking Pay to Performance
Disentangle skill from luck
The best way to avoid a “NO” vote at AGM
Targets are both quantitative and qualitative
Not just what was paid – how did you earn it?
The single best way to alleviate entitlement –
clear, robust scheme rules
When the rules are not clear, it creates entitlement
42
Short-term Incentives – market data
Annual Percentages
Paterson Grade Description P10 P25 P50 P75 P90
F Upper CEO and MD 6% 16% 49% 108% 186%
F Lower Executive / Director 3% 14% 35% 76% 129%
E Upper General Management 3% 11% 26% 60% 112%
E Lower Senior Management 2% 9% 21% 46% 95%
D Middle management 2% 7% 16% 27% 69%
C Advanced operational 1% 4% 8% 16% 35%
B, A Basic and operational skills 1% 4% 7% 13% 29%
43
Long term incentives – market data
Appreciation Share Multiples
Paterson Grade Description P10 P25 P50 P75 P90
F Upper CEO and MD 0.9 2.7 8.1 17.9 30.9
F Lower Executive / Director 0.6 2.4 5.8 12.6 21.4
E Upper General Management 0.4 1.8 4.4 9.9 18.6
E Lower Senior Management 0.3 1.4 3.5 7.7 15.8
D Middle management 0.3 1.2 2.6 4.4 11.4
C Advanced operational 0.1 0.6 1.4 2.6 5.7
B, A Basic and operational skills 0.1 0.6 1.2 2.2 4.8
44
Long term incentives (cont)
Full Share Multiples
Paterson
GradeDescription P10 P25 P50 P75 P90
F Upper CEO and MD 0.3 0.8 2.5 5.4 9.3
F Lower Executive / Director 0.2 0.7 1.7 3.8 6.5
E Upper General Management 0.1 0.5 1.3 3.0 5.6
E Lower Senior Management 0.1 0.4 1.1 2.3 4.8
D Middle management 0.1 0.4 0.8 1.3 3.5
C Advanced operational 0.0 0.2 0.4 0.8 1.7
B, A Basic and operational skills 0.0 0.2 0.4 0.7 1.5
45
WHAT IS IT EXACTLY?
Equal pay for work of equal value
The Wage Gap
46
Two aspects to “excessive” executive pay
1. The size of the pay gap (a social issue):
• “There is a strong sense of injustice that those at the top continue to reap
significant rewards, while the wages of ordinary workers are cut in real
terms and their jobs become more uncertain”
• “The growing pay gap has increased public distrust and disillusionment in
business”
2. Poor linkage of pay and performance (a business
issue)
47
2 common methods to calculate pay gap ratio (PGR)
1. CEO pay vs. lowest paid income group
PGR = CEO pay / median pay of lowest band of workers
PGR = 3, 555, 500 / 43, 484
PGR = 82
2. CEO pay vs. median of all other staff in the company
PGR = CEO pay / median pay of all workers in company
PGR = 3, 555, 500 / 258, 781
PGR = 14
48
Critical success factors for PRP to work
1. I understand what the organisation strategy is and
how my part fits in
2. I know exactly what I must do to earn a bonus
3. Simple and clear scheme rules that I can work out
easily what I can earn
4. My line of sight / locus of control is good
5. The enablers to help me perform are in place
‘Crisis’ in Mandarin apparently means
both ‘challenge’ and ‘opportunity’
What is Africa’s opportunity?
Growing!
At around 8%...
50
5
2
52
We need to act
now!
We only have till 2045 to get it all right. Then computers will take over everything we do…
THANK YOU
for this opportunityto be with you