Course Materials TOTAL COMPENSATION. Julia A. Johnson Senior Manager Wipfli LLP Green Bay, Wisconsin

Transcription

1 Course Materials TOTAL COMPENSATION Julia A. Johnson Senior Manager Wipfli LLP Green Bay, Wisconsin August 10 & 11, 2017

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3 Total Compensation Graduate School of Banking August 2017 Session Highlights Purpose of a Total Compensation Plan Components of Total Compensation The Role of Each Component Compensation Strategy Considerations Definition of a Compensation Philosophy Total Compensation Mix 2 1

4 Session Highlights Developing a Base Compensation Structure Developing Annual Cash Incentives Long Term Incentive and Deferred Incentive Basics AIP and LTI Plan Documentation Compensation Risk Assessment Key Benefit Offerings and Considerations 3 Purpose of a Compensation Plan To ensure pay is competitive and aligned with the compensation philosophy To ensure pay is established and administered fairly and equitably for the work being performed To recognize the value each position and employee brings to the bank To attract, motivate, and retain talent To provide administrative guidelines for compensation-related decisions 4 2

5 Compensation Component Roles Compensation Component Attract Retain Short-term Motivate Long-term Change Behavior Provide Security/ Protection Base Salary X X Annual Incentives X X X X Long-Term Incentives X X X Basic Benefits Supplemental Benefits Supplemental Retirement Plan Perquisites X X X X X 5 Compensation Strategy Compensation Component 25 th Percentile (Lag) 50 th Percentile (Meet) 75 th Percentile (Lead) Base Salary Annual Incentives Long-Term Incentives Basic Benefits Supplemental Benefits Supplemental Retirement Plan Perquisites Total Compensation 6 3

6 Formal, Written Compensation Philosophy Board Compensation Committee Reward mix and market position (articulates the purpose of each component) Base compensation Annual incentive Long term incentive Reward focus (bank, team, individual) Retirement philosophy (SERP) Perquisites Compensation Philosophies Guides compensation decision making 7 Total Compensation Component Mix EXAMPLE Base Salary Annual Incentive Long- Term Incentive Benefits Retirement Perqs Total Comp Executives/ Senior Management Above Above Above Above At Below Above Management/ Supervisors At Above Above At At NA Above Employees Slightly Above At NA At At NA Slightly Above 8 4

7 Developing a Base Compensation Structure Overview of Base Compensation Structure Purpose and Objectives Philosophy and Strategy The Basic Steps Team and Tools Research and Analysis Documentation Communication Employee Questions WHAT YOU NEED TO KNOW WHAT YOU NEED TO DO WHAT YOU NEED TO SAY 10 5

8 Base Compensation Strategy Considerations EO SM/DM Staff 11 The Basic Steps Create a Compensation Committee Develop/update job descriptions Conduct internal equity analysis Conduct an external market analysis Design a salary structure Conduct a comparative ratio analysis Develop merit impact guidelines Create and execute communication plan Develop administration policies 12 6

9 Create Compensation Committee Usually comprised of senior management members and the human resources leader. It should consist of three or five members (an odd number) and represent a crosssection of the Bank. Committee members will need to make a long-term commitment and be willing to work together to make potentially tough but fair decisions (must be able to separate the people from the position). 13 Develop/Update Job Descriptions Well-designed compensation systems begin with clear documentation of job accountabilities, responsibilities, and qualifications: Title Exemption status (FLSA considerations) Reporting relationships Position summary Primary accountabilities and responsibilities Secondary responsibilities Education, experience, and other requirements Working conditions Employment At-Will and ADA disclaimer 14 7

10 Conduct an Internal Equity Analysis An internal equity analysis determines the relative value of each position to every other position within the bank on the basis of compensable factors. It is highly effective for a bank to establish a position s relative worth within the bank before it conducts an external analysis. Typically this analysis is accomplished through the Compensation Committee or an independent third party (to assist in testing the accuracy and completeness of the job descriptions. 15 Point Factor Evaluation Method The Point Factor Evaluation Method breaks jobs down into identifiable compensable factors by assigning levels and points within the evaluation criteria. This provides uniformity of evaluations, determines relative value of different positions, and addresses comparable worth issues. 16 8

11 Point Factor Evaluation Method Some of the most common factors are: Skills education, experience, complexity, initiative, and ingenuity Responsibilities contacts, equipment or process, confidential information, safety of others, and supervision of others Effort physical demands and mental or visual demands Skill Description Example Job Conditions working conditions and unavoidable hazards 17 Point Factor Evaluation Factors and Levels Points assigned to factors and levels Consider the job requirements only, not the job incumbent Assign an appropriate point value to each of these factors and levels. Factors and Levels Example 18 9

12 Point Factor Evaluation Sample Results Internal Equity Example 19 Conduct an External Analysis An external equity analysis determines the market value of each position by comparing it to published compensation data and/or to customized survey results. Use the job description to match the survey job descriptions to each position s role and responsibility. Do not rely solely upon job title as role, responsibilities may vary. A reputable survey will have an adequate sample size and sound compensation survey methodology practices

13 Conduct an External Analysis External Data and Format Considerations Survey name Survey job Demographic Number of organizations Aging Factor Weight Median (average where median not available) Weighted and Aged Bonus / Incentive Total Cash Compensation External Example 21 Design the Base Compensation Structure After completing the internal and external equity analyses, design the compensation structure. Typically, the external market analysis will be the primary consideration for the development and placement of positions within the salary structure. Sort positions by external market (equal value) and calculate a midpoint average for that particular group of positions

14 Design the Base Compensation Structure This midpoint average will assist you in defining the pay groups throughout the salary structure. Development of the salary structure typically begins with the top position; subsequent ranges are then developed on the basis of the remaining pay groups Typically, there are approximately 10% progressions between midpoints; however, there may be higher progressions between upper management positions All positions are then incorporated into the salary structure 23 Design the Base Compensation Structure Evaluate the preliminary salary structure to determine if the pay groups make sense. Consider the internal equity analysis and make any necessary adjustments on the basis of the relative value of the positions. Internal equity considerations are brought into focus if the value of the position internally differs from the external market and/or if external market data is unavailable given the uniqueness of the position

15 Base Compensation Structure Example Comp Structure Example 25 Conduct a Comparative Ratio Analysis A compa-ratio analysis allows the bank to determine where current rates of pay fall in relationship to the newly established salary structure midpoints. A highly effective tool for compensation administration to ensure fairness and equity. Compa-Ratio Example 26 13

16 Develop Merit Decisions Impact Worksheet Merit Increase Example 27 Develop Plan Administration Guidelines Develop a written compensation philosophy Outline plan objectives Identify who has responsibility for the plan Describe importance and use of job documentation Describe how the internal and external equity analysis process occurs Describe how the salary structure will be administered Outline how pay adjustments will be handled Update annually merit increase considerations Incorporate tools utilized 28 14

17 Plan Maintenance After a compensation structure has been designed, it is just as important to maintain its equity and consistency as the organization and market changes. The Bank should develop a plan to ensure, at a minimum, the following are addressed on a regular and ongoing basis. Job descriptions are updated annually Compensation structure is reviewed and are adjusted to reflect market structure movement Conduct a full review at least every three years Manage employees falling outside the established compensation structure ranges 29 Communications Plan Manage employee expectations Overcome entitlement mentality through communication Compensation is an emotional topic Important to communicate why and how the compensation plan was developed Good communications will show employees you want to be fair and consistent in wage administration Respond confidently and directly to questions 30 15

18 Why Base Compensation Plans May Fail Lack of compensation philosophy Lack of compensation strategy Inaccurate job descriptions System design flaws Poorly managed employee expectations Poorly trained managers and supervisors Plan is allowed to become outdated 31 Developing Annual Cash Incentives and Long Term Incentives 16

19 Importance of Plan Design Misaligned and/or flawed incentive plans encourage risk-taking behavior that may reward short-term gains without consideration of long-term risks, thereby jeopardizing the safety and soundness of financial institutions. 33 Corporate Governance Form an informed compensation committee composed of outside directors. Ensure all decisions impacting compensation risk are approved by the committee. Allow committee access to external experts. At the time payments are approved, have the committee conduct a postmortem opportunity to discuss necessary adjustments for the next plan year

20 Goal Setting Tie goals to budgeted financial results as derived from and aligned with the strategic plan. Determine who establishes team and/or individual goals. Establish goals before the performance period. Determine appropriate thresholds and maximums. Cap payouts at a reasonable level. 35 Annual Incentive Considerations What performance criteria are appropriate to use as a basis for annual incentive awards? Individual Department Bankwide CEO X EXEC/SM X X Exempt X X X Employees X X X 36 18

21 Annual Incentive Targets - Examples Target Ranges Tier Position As % of Salary I CEO 20-50% II Executive Management 15-35% III Department Managers and Commercial Bankers 10-25% IV Staff Support Managers 5-15% V Employees 3-10% 37 Performance Measures Can be measured and quantified Are tied to strategic plan Use absolute and/or relative goals Use gates /qualifiers to manage risk Balance bank, team, and individual Keep it simple and understandable 38 19

22 Stress Testing Run what-if scenarios for all incentive arrangements. Test scenarios against YTD results periodically. Adjust accounting accruals periodically to reflect likely outcomes. 39 Long-Term Incentives Create an equity stake perceived or real Increasing critical component to attract and retain talent Privately held banks competing with publicly traded institutions for top-tier talent Must be tied to senior management performance Should create an alignment of management priorities with shareholder priorities 40 20

23 Long-Term Incentives Philosophy What is the Bank s primary objective(s) in providing long-term incentive opportunities to executives? Equity opportunities are not appropriate at the Bank Provide long-term orientation Link executive financial reward opportunities with shareholders Retain executive talent Limit equity opportunities to key executives only Provide equity opportunities to broad key employee group Reward individual executive performance Reinforce teamwork among executive team Other: 41 Long-Term Incentive Options Stock Options Restricted Stock Phantom Stock Stock Appreciation Rights (SARS) Value Appreciation Rights (VARS) Performance Units Deferred Compensation Plan(s) Supplemental Executive Retirement Plan (SERP) 42 21

24 Descriptions LTI Option Stock Options Description Provide participants with the opportunity to purchase a fixed number of shares at a fixed price over a specified period of time after vesting requirements are met. Stock options provides the potential for substantial rewards without the use of cash resources, requires no upfront investment by the executive, promotes shareholder mentality to leadership, and raises capital. Stock options are most commonly found in public organizations, may dilute the ownership percentage of current shareholders, and are a market risk for the executive which recently has caused stock options to fall out of favor. The two types of stock options are incentive stock options and nonqualified stock options. Nonqualified stock options are more prevalent. Tax treatments for stock options would need to be considered. Restricted Stock Shares of stock are given or sold at a discount to an executive who is restricted from selling or transferring for a defined period of time. If the executive remains employed through the restricted period, the shares vest. There are typically a number of years between grant awards. It would be important to tie awards of stock to individual and Bank performance. There is no executive investment required therefore minimal risk to the executive with potentially high rewards.. 43 Descriptions LTI Option Phantom Stock/ Stock Appreciation Rights (SARS)/ Value Appreciation Rights (VARS) Performance Units Deferred Cash Compensation Plan Supplemental Retirement Plan (SERP) Description Provide participants with reward opportunities that mirror stock options without the use of stock. Rather they are tied to the appreciation of bank stock value and are typically used as incentives when stock is not available as is often the case in private/closely held banks. Provide participants with financial reward opportunities based on the achievement of predetermined long-term goals which are typically expressed in terms of corporate profitability rather than stock value. Provides participates with an annual cash contribution to the plan for achieving specific metrics and targets. These plans typically have a rolling vesting period with an annual interest rate applied each year. Provides participants with deferred compensation over a period of time after retirement. A supplement executive retirement plan provides participants with a defined amount of income beginning at retirement for a fixed number of years. Together the Bank and the executive determine the retirement shortfall of income and identify what amount of that shortfall will be paid to the executive on an annual basis

25 AIP and LTI Plan Documents Develop plan documents that clearly present plan features and provisions, including plan period, timing of payments, performance thresholds, expectations, etc. Reserve and protect rights of the bank. Do not alter the employment at-will status. Plan Example 45 Compensation Risk Assessment Inventory all compensation arrangements. Identify risks associated with each plan. Conduct a team risk assessment. Present review findings to compensation committee and/or board of directors. Modify incentive arrangements as needed

26 Key Benefit Offerings and Considerations Total Rewards Mindset The monetary and nonmonetary return provided to employees in exchange for their time, talents, efforts, and results. It refers to everything that employees value in the employment relationship. - WorldatWork 48 24

27 What A Total Rewards Mindset Involves It involves the deliberate integration of five key elements of: Compensation Benefits Work-Life Performance and Recognition Professional Development and Career Planning 49 Benefits Social Benefits Federal and State Unemployment (FUTA, SUTA) Workers Compensation Social Security (FICA) Group Benefits Medical, Dental, Vision, Drug Mental Life and AD&D Short and Long Term Disability Retirement 50 25

28 Benefits Salary Continuation Vacation Sick Leave Holiday Bereavement Jury Duty Military Inclement Weather Personal Days Breaks 51 Work-Life Paid and Unpaid Time Off FMLA PTO Policies Personal Leave Workplace Flexibility Alternative Work Arrangements Health and Well-Being HRA s Smoking Cessation Weight Loss Concierge Services 52 26

29 Work-Life Caring for Dependents Adoption Pet Insurance Financial Support Financial Planning Legal Support Community Involvement Professional Associations Community Activities School Activities 53 Performance and Recognition Performance Performance Planning Performance Feedback Recognition Acknowledgement Appreciation Cash and/or Noncash Rewards Formal or Informal 54 27

30 Development and Career Planning Development Opportunities Educational Assistance Corporate Universities On-the-Job Training Online or External Seminars Coaching and Mentoring Opportunities Internal or External Mentor Assignment Professional Memberships Leadership and Management Training Special Project Work 55 Development and Career Planning Advancement Opportunities Career Planning Skill Enhancement Promotion/Lateral Movement Succession Planning and Management 56 28

31 Total Compensation The role and goal of benefits in today s diverse and ever-changing work environment is to assist employees in effectively managing their personal life and work life. For many, this represents a cultural shift as to how (and potentially where) work is performed, how employees are managed, and how productivity is measured. 57 Questions Julia Johnson Senior Manager, Strategic Advisory Services jajohnson@wipfli.com