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TRANSCRIPT
Is an ESOP Right for You?
Omaha, NE – October 9-10, 2019
Incentive Compensation Plans for ESOP Companies
Presented by:
Peter E. JonesHorizon Trust & Investment Management100 E. Campus View Blvd. Suite 250Columbus, Ohio [email protected]
Agenda• Measuring performance• Incentives and Incentive Compensation• Types of Incentive Compensation and
When to Use Which• Designing Compensation Plans
Incentive Compensation
Measuring Performance
• Managed Manchester United 1986-2013• Most successful manager in soccer history –
49 trophies; 38 at Man U• 13 Premier League titles• 5 FA Cups• 2 UEFA Champions League titles• 1998-1999 Treble – PL, FA Cup and UCL
Sir Alex Ferguson
• Three seasons at Manchester United with Sir Alex Ferguson
• 3 Premier league titles; 1 FA Cup; 1 Intercontinental Cup; and 1 UCL
• Age 29 sold to Lazio – won the Coppa D’Italia• Went to AC Milan, won Supercoppa Italiana and
played in another UCL final
Jaap Stam
• Played for Italy 126 times• Widely regarded as one of the greatest defenders of all-time• Best Defender trophy at age 39• Most appearances in Serie A – 647 games• Most appearances in UEFA – 174
Paolo Maldini
• Defensive midfielder• With Real Madrid, won 2 Spanish titles, UCL, Spanish
Super Cup, European Super Cup and Intercontinental Cup• Scored only 2 goals in 4 years• Sold to Chelsea• Attributed with redefining his position – the “Makelele
Role”
Claude Makelele
• Are you measuring the right thing?• Are you capturing why your team is
successful?• Are you incentivizing your Makelele?• An ESOP captures your Makeleles
What you measure matters…
Next Question: If we provide a financial incentive for performance that we want to to see will we get better performance?
Growing body of research suggests that the answer is often no.
Do incentives increase performance?
• Daniel Pink in his book Drivenotes:• Financial incentives work
when the task involves a simple set of rules with a clear destination
• Not for creative thinking –not for innovation
• The higher the financial incentive the worse the performance in creative problem solving
What does Mr. Pink Have to Say?
• London School of Economics reviewed 51 studies of incentive compensation plans impact on performance and found:
• “Negative impact on overall performance”
More Bad News
• Too Vague• Too Complex• Not directed at the right tasks – should
not be directed at creative problem solving
• Too deferred to incentivize behavior
Why Didn’t Those Financial Incentive Plans Work?
Pay them enough to take money off the table as an incentive.Identified the Building Blocks of Improved Performance• Autonomy • Mastery • PurposeThese are key building blocks of building “ownership thinking”
An ESOP is a purpose. Focus on building a community that provides for itself and benefits all members of the community.
What Does Pink Suggest?
• Driving performance when clear goals are available and clear routines will achieve goals? (E.g., sales, manufacturing productivity, safety protocols);
• Retention - good for sharing profit with people you have identified as people you wish to keep and benefit if the Company does well
When does Incentive Compensation Work?
• ESOP is “incentive” compensation – if the Company does well (performs), Participants will receive more in value
• Types Frequently Used with ESOPs• Stock Appreciation Rights (SARs)• Phantom Stock• Cash Bonus
• Other Types Used Less Often • Restricted Stock• Stock Options
Types of Incentive Compensation
• SARs and Phantom Stock are “synthetic equity”• No actual stock ownership• Contractual obligation of the company to pay cash at a set
point in time• All amounts are taxed as ordinary income• Comply with 409(p)• Can be performance based (only grant/vest when certain
financial targets are met)• Can be retention based (boosts compensation to the level
that gets them not to think about it)
SARs and Phantom Stock
• Payment in the amount of the FMV of the stock at the time of exercise less the FMV of the stock at the time of grant
• Only receive the appreciation in value of the stock over time
• Can be retention or performance based• Includes term of maturity, vesting, criteria for
issuance• Can be dilutive to common stock holders
Stock Appreciation Rights
• Payment in the amount of the full value of the FMV of the Company Stock at the time of payment
• Usually retention based• For mature ESOPs, used to supplement lack
of ESOP shares in circulation• Term of maturity, vesting, criteria for
issuance• Dilutive to common stock holders
Phantom Stock
• Promise to pay an amount at a future date• Can be based on performance/growth but not
necessarily tied to the value of the company• Taxed as ordinary income• Examples
• Bonus (short-term or long-term)• Nonqualified deferred compensation
Cash Bonus
• John Lewis Partnership• Employee-owned corporation in the UK• England’s largest department store• $13.4B in revenue• 100% owned by 81,000 employees• Revenues up 7.4% annually in last decade
INCLUDING the recession• Annual bonuses increase yearly pay as much
as 24%
Benefits of Cash Bonus Plan – Flexible Pay
• Board function • Compensation committee• Avoid conflicts of interest – don’t vote on
your own pay• Board has general corporate duty to
shareholder when setting pay• Impact of 409(p) in S Corporation• Trustee approval not required BUT…
Who Designs the Compensation Plan?
• Shorter term program has better chance to incentivize (Cash Bonus)
• Longer term program with vesting provisions good for retention (SARs and Phantom Stock)
• SARs and Phantom Stock well aligned with ESOP value drivers
Design Considerations
• SARs and Phantom Stock line-up well with growth in value anticipated by ESOP• Consider dilutive impact to value
• Overall compensation to executives is reasonable and competitive
• 409(p) relative to synthetic equity
Legal Considerations
Questions ?
Peter E. JonesHorizon Trust & Investment Management
100 E. Campus View Blvd. Suite 250Columbus, Ohio 43235