Building Competitive Total Rewards for Executives
Human Resources Leadership Series – Cordia Resources and Human Capital Strategic Consulting
Recently I was a panelist with Amanda Devery, CCP, GRP, Vice President, Total Rewards for Envista on the webinar Building Competitive Total Rewards for Executives hosted by Cordia Resources and Human Capital Strategic Consulting. Here’s a recap of our discussion on constructing total rewards for executives and a few elaborations. (You know, the “what I wish I’d said” stuff.)
The Importance of a Total Rewards Philosophy
When asked about how to ensure that a total rewards philosophy is defined, communicated, and understood, Amanda was quick to establish the definition of what a total rewards philosophy is. Ironically, my question for all our clients, “What is your retirement plan supposed to do for the company?” is an attempt to establish this same foundation.
She described the total rewards philosophy as the thesis or underpinning for all compensation related decisions. It’s what determines the pay position strategy (percentile versus the market), the pay mix for executives (% salary, short term and long term incentives, competitive advantages based on your programs and equity considerations, etc.), and performance pay curve targets and thresholds.
Probably more importantly, a well conceived philosophy helps to ensure individual performance is aligned with the goals and objectives of the business. Executive pay packages are driven by a mix of incentive and performance compensation. Therefore, the balance of rewards comes from both financial and operational measures as well as tying in non-financial measures like individual performance. Those metrics alongside pay need to be considered from a thoughtful place of how they align to the strategic goals of the organization and then communicated so that there will be the best outcome.
This sort of strategic thoughtfulness makes sure you don’t lose employees to competitors and miss out on hiring good people, but also provides comfort that you’re not over-compensating employees either.
Amanda’s advice aligns nicely with our overarching theme: make sure employees understand their entire benefits package. She advised, particularly for leaders and executives, to take the time to educate on performance, metrics, short term and long term incentives, and make sure employees understand how they’re being rewarded and how they can influence business outcomes. Often useful in these situations is the total compensation statement.
If you have other stakeholders outside the business such as shareholders or multiple owners, this also needs to be communicated to them. One of the things I noticed was how Amanda, at a publicly-traded company, ends up examining the total rewards philosophy from multiple perspectives – the board, the leadership, the employees, the investors – and thinking through how each perceives the rewards strategy. What an incredibly useful exercise as a way to dial in alignment and consistency, and a tool for companies to use whether you have internal and external stakeholders or not! For publicly traded companies, the Compensation Discussion and Analysis located in the proxy is the story and narrative behind why they’re paying the executives the way they are and how it will benefit investors and the organization overall.
What do you wish stakeholders would consider when they’re developing these compensation plans?
One thing that would be useful for stakeholders to consider is that your providers would like a seat at the table so that they’ll know what your strategy is and how it will be carried out. Providers need to know what the goals and desired outcomes are to avoid providing a prescription without a proper diagnosis.
There’s a lot of different ways to accomplish your goals - for example, student loan payback programs can be combined with a retirement plan for either a short-term or long-term incentive. Executive compensation and deferred compensation plans can also be personalized so that executives are rewarded in a way that makes the most sense. Retirement plans, too, are often misunderstood. I always lobby for a seat at the table with our clients any time compensation and rewards and benefits are being discussed. There’s a lot you can – and can’t – do with the retirement plan in terms of rewards as well as favorably impacting company financials -- it’s an invaluable tool. And, retirement plans are part of long term and short term incentive plans depending on how you design them.
Another thing to keep in mind is the company culture - you need to have a real eye for what your executives will appreciate benefits-wise and what they’ll consider a reward. Bottom line: what’s the best use of your limited benefits budget and resources? Benefits aren’t exactly a company value-building center. Use your dollars wisely.
What to keep in mind / non-negotiables that all plans should have
Look at all the pieces of your compensation plan as a set of building blocks that combined form a complete benefits package for an employee (executive or not). You can add layers to fit the need you have. A retirement plan should be used as a starting point but it’s a multi-tool to an extent. For example, the match is part of overall compensation, but the profit-sharing element may serve a dual purpose: you may have certain groups of executives that you wish to reward with profit sharing -- that can be awarded as cash outside the plan or inside of the retirement plan for different tax advantages to the employee and the company.
But don’t you have to reward everyone equally inside the retirement plan? The answer is no, within reason; the IRS does have tests to make sure you’re not running afoul of the law. And when crafting any type of retirement plan, make sure to keep an eye on the tax implications and how they tie to the company financials. For example, non-qualified deferred compensation assets, while they are granted to the executive, still stay on the company’s books and are at risk to creditors until they are paid out to the employee.
Keep in mind that increasing retirement plan benefits isn’t always the best use of your compensation dollars - there may be other benefits that are much more appreciated. The student loan payback program is one such benefit that has been a big hit in many companies. And since it’s not an ERISA-covered benefit, you can be more flexible in choosing who has access to it.
What else can companies do that is creative or different?
Here are some ways companies can establish executive comp plans that are creative or different:
Integrating student loan payback programs into the retirement plan is theoretically possible, but there are lots of regulations to navigate. A stand alone SLP program can be used and tied to performance, used as a bonus or recruiting tool, or for long term incentive.
Health savings accounts are not well utilized but can be used as a secondary retirement and investment tool. Coaching or a tandem program can be offered to subsets of the company as a benefit.
Financial wellness programs tailored for executives help clearly crystalize and communicate the programs and intricacies of compensation plans and allow employees to plan for the future to meet their personal goals with coaching on the best way to use their resources.
Nonqualified deferred compensation plans are some of the most flexible and useful tools out there for rewarding and retaining employees. They’re typically used for making executives whole on retirement benefits, as a way to defer compensation to a different time for tax reasons, rewarding and retaining certain employees, or for quasi-ownership transfer.
How do you educate executives on total rewards?
Remind them that there are 4 times in your life when a paycheck can stop - the company sets up benefits to help the executive play defense, but playing offense is the executive’s job. This feeds back into clearly communicating their compensation and how performance and company metrics align with it.
How do you structure things differently for a high growth company?
First, take a step back and look at your compensation strategy for where you are TODAY, and be sure you include your providers in the conversation. Then examine what you have today and how it will impact your future. Consider revenue, cashflow, and reinvestment needs, projected staffing and growth, and when the company could hit certain milestones that make today’s decisions untenable.
Next, make all decisions while prioritizing flexibility, and also try to figure out at what point your plan or compensation package will need to change. While cashflow may take center stage for the time being, talent competition may take over at a certain point. It’s best to have iterations of the plan or planned indicators that it’s time to revisit the plan. Be mindful that you’re always trying to serve two masters: 1) short term objectives versus 2) long term impact.