Performance or retention what do we pay for?

Transcription

1 Performance or retention what do we pay for? Sue Tosh Ronél Nienaber

2 What are performance based incentive programmes? The conscious use of reward programmes to penalise or reward performance

3 Where does it fit into the Total rewards model?

4 But what does compensation consist of? Basic salary Short term incentives Deferred incentives Long term incentives Restricted share plans Performance share plans Forfeitable share plans Option plans, with or without CPTs Claw backs Retention plans Are these all performance based incentives or do they play a role in retention? WHAT DO YOU THINK?

5 Purpose of incentives? Short term incentives Reward the employee s performance for reaching certain objectives over a short period of up to 12 months Long term incentives Incentives linked to the organisation s performance over a period of time measured in the underlying share price So why do we defer cash incentives into equity over a period of up to 3 years if we reward performance over a short period? So why do we use long-term incentives in our retention plans? Why do we use additional corporate performance targets (CPTs)?

6 Drivers for including CPTs in long term incentives King III: Refers to the link between incentives and performance in 9 practices Proxy advisors for a Say on Pay: Remuneration After reviewing a company s remuneration policy, STANLIB would consider voting against the remuneration policy where: Director remuneration is excessive in comparison to competitor companies. A poor performance management process is evident. Management performance targets are not aligned to long-term shareholder value creation. Proxy advisors

7 Drivers for including CPTs in long term incentives The Center On Executive Compensation is dedicated to developing and promoting principled pay and governance practices and advocating compensation policies that serve the best interests of shareholders and other corporate stakeholders. The Say on Pay vote asks investors to vote on the compensation of the top executives of the company

8 What have we seen this year? Why Spur's executive pay policy was shot down? 42.7% no vote Profit dropped by 13.1% yet still paid bonuses 29% no vote R12m pay out to Nick Wentzel after serving 13 months as the CEO 35% no vote Excessive executive bonuses when a $232m net loss was made Pay mix skewed towards short term incentives 22% no vote Poor disclosure of performance targets linked to incentive schemes

9 Citigroup In a stinging rebuke, Citigroup shareholders rebuffed the bank s $15million pay package for its chief executive, Vikram S. Pandit, marking the first time that stock owners have united in opposition to outsized compensation at a financial giant. About 55% of the shareholders voting were against the plan, which laid out compensation for the bank s five top executives, including Mr. Pandit. CEOs deserve good pay but there s good pay and there s obscene pay; It is too soon for the bank to start giving out generous pay packages again the company has been flat lining. There is a serious disconnect between pay and and performance.

10 According to the HBR no votes are given for 4 reasons A disconnect between pay and performance (92%) Poor pay practices (57%) such as discretionary awards, targeting pay at 75 th percentile, poor choice of performance measures and excessive termination awards Poor disclosure (35%) Inappropriately high levels of compensation without claw backs Source: HBR 2011/10

11 Why be bothered with the vote? November 20, :52 pm Two-strikes pay rule hits Australian boards By Alison Smith, Chief Corporate Correspondent New powers to give investors in Australia a greater say on executive pay have left at least a dozen of the country s companies at risk of facing a vote to re-elect the whole board next year. As the Australian annual meeting season draws to a close, the companies have become the first to be hit by the two strikes rule introduced by the government at the start of July. Charl Kocks, CEO of Ratings Afrika, said: "The remuneration committee should take a big vote against them as a sign they are losing the plot, and should take this criticism to heart." A remuneration expert, who attended Barloworld's AGM, said "ideally, you'd want a company to be getting a vote of at least 90%".

12 BUT: Do performance based incentives drive improved performance? According to the ILO: there is no empirical evidence that shows that so called pay for performance systems have a positive impact on the company s performance incentives contribute to the widening gap in income equality pay for performance encourages excessive risk taking pay for performance schemes have been found to be economically ineffective Source: Directors performance and remuneration

13 BUT: Do performance based incentives drive improved performance? The House of Commons Treasury Committee - May 2009 Whilst the causes of the financial crisis are numerous and diverse, it is clear that bonus-driven remuneration structures lead to reckless and excessive risk taking. Bonus scheme designs are flawed and not aligned with the interests of shareholders and the long term sustainability of organisations.

14 Incentives according to Kohn (2001) Incentives do not alter the attitudes that underlie our behaviours and rewards do not create lasting commitment. They merely, and temporarily, change what we do....the relationship between performance and rewards is questionable, and, by contrast, training and goalsetting programmes, have a far greater impact on productivity than performance-based incentive plans.

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16 SO: Do performance based incentives drive improved performance? Do incentives motivate higher levels of performance?: 72% of executive prefer fixed pay above a higher incentive Executives value deferred incentives significantly below the accounting cost thereof discounted by up to 50% over 3 years Executives would take a 28% cut in pay for their ideal job <50% of executives think their long term incentive is attractive Only a limited number of executives are motivated by highly leveraged and volatile incentives expect to always see bonus pay outs in these cases Source: PwC March 2012

17 So why pay for performance? Pay for retention!

18 Ways of paying for Retention Pay the highest salaries Give the biggest salary increases Introduce recognition programmes with monetary awards Bring in competitive benefits ( work from home, free food, flexible working hours, concierge services, pets children at work etc ) Implement retention/ short-term and long-term incentive schemes / deferred pay / lock-ins Share options Restricted shares Deferred cash Short term incentives 18

19 Would that help retention? Harder to poach people Competitors may not be able to afford this strategy People would feel recognised (for a short while at least) Benefit structure is designed to appeal to people we want to attract Put long lock-ins in and people won t be able to walk away (i.e. Golden handcuffs ) 19

20 But hold on, will this retain our top talent? Our competitors may be able to better our salaries and increases how can we afford this? Our employees might feel our recognition programme isn t fair People who hear about the retention plan but are not included, may become your next retention risk How are we going to implement all those benefits? We have generation X, Y and baby boomers how do we appeal to all employees? Won t competitor s just buy out the deferrals and lock-ins? Are we not just driving up the cost of employment for everyone? 20

21 Turnover is costly Even if we reduce turnover by a small amount it will save costs/ money (replacement of one person can cost 100% 200 % of their annual total employment cost) Get employees to input to and run the recognition programme Service providers can help share the cost between employer and employee If employees believe in our company s future they will stay for the payouts It is worth the investment to keep our key talent! 21

22 What about legislation and the regulators - do they support it? FSA Remuneration code retention awards should be for exceptions only (legal changes, mergers, changing product lines etc. King III retention awards should be ring-fenced and separately disclosed They should be paid at end of retention period and not at the beginning Retention awards should not be excessive in relation to annual total reward Should be linked to performance! 22

23 Remuneration reform landscape Global UK EU US SA Basel Comm. on Banking Supervision Financial Stability Board FSA BIS (Dept for Business Innovation & Skills) EC European Banking Authority European Parliament Multiple Regulators and Legislators SARB King III JSE Listings CRISA Compensation Policies Compensation Structures Compensation Disclosure Other Compensation Requirements eg. compensation and capital

24 Talent: Corporate gold dust Why have retention strategies failed? Why does gold dust fly away? Money money is always a factor when a good employee leaves for another company Conflict Personality conflicts with line managers / colleagues Lack of engagement Engagement, rewards and retention are closely related constructs that positively contribute to the EVP. The drivers of engagement include remuneration, work/life benefits, performance and recognition and development and career opportunities all components of the total rewards model.

25 The new Total Rewards model 25 LIVE Guaranteed (Base) Pay Rewards demonstrated, consistent and sustained personal capability Recognises the individual s capability to contribute to success Variable Pay STIs (Success Share) Recognises contribution to success by teams and business units Employee shares in the success LTIs (Wealth Creation) Rewards longer term contributions to the organisation s success May assist in retaining talent LEARN Individual Growth Investment in its employees Development and training Performance management Career management and enhancement Adapted: from J Schuster & P Zingheim

26 The new Total Rewards model 26 LOVE Positive Workplace Truly having a people focus and expressing this in the business strategy Building strong and credible leadership Creating a respectful workplace by emphasising values Ensuring that work is meaningful Involving employees Building trust and commitment Having open and transparent communication (all types) LEAVE A LEGACY Compelling Future Your company s vision and values Celebrating your company s growth and success Positioning your company as an employer of choice through its image and reputation Presenting your company as a winning one over the longer term success in the past, dealing with the current, building for the future

27 Pay for performance and retention I ll accept that elephants cannot fly and that fish cannot walk, but Kohn s argument that incentives plans cannot work defies the laws of nature... (Kozlowski, 2001) Design reward practices in such a manner that business goals are achieved in support of sound management practices, motivating employees to perform at consistently high levels. Design your incentive programs with well thought- through performance indicators, agree on a simple mix of pay programs and integrate with other components of the new total rewards model, and you are likely to also retain your top performers without having to design programmes specifically for purposes of retention.

28 Conclusion 28 Variable pay is the way to drive company, business unit and personal performance. It creates value for shareholders & stakeholders. Short term and Long term incentives are in place to: Attract and retain staff Reward employees for creating value Facilitate a high-performance culture If you talk about change, but you don t change the reward and recognition system, nothing changes Paul Allaire, CEO, Xerox Corp