November 20, 2014
Effective Incentive Planning
Quick History of VisionLink
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Founded in 1996
6 consultants with over 140 years experience
450 Clients in over 40 states and Canada
Focus: compensation management that
drives growth
“VisionLink” = rewards alignment between
shareholders and employees
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Four Most Desired Aspects of a Job
Compelling Future
Positive Work Environment
Opportunities for Personal
and Professional Growth
Meaningful Financial
Rewards
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Salaries
 Competitive with market standards?
 In compliance with FLSA guidelines?
 Managed within a flexible but effective structure?
Performance Incentives
 Tied to productivity gains?
 Clear, achievable and meaningful?
 Self-financing?
An Aligned
Compensation
Strategy
Sales Incentives
Nonqualified
Retirement
Plans
Qualified
Retirement
Plans
Executive
Benefit Plans
 Challenging yet achievable?
 Reinforcing the right behaviors?
 Differentiating your offering?
Salary
Growth Incentives
Performance
Incentives
Sales
Incentives
Core
Growth
Health &
Incentives
Welfare Plans
 Linked to a compelling future?
 Supporting an ownership mentality?
 Securing premier talent?
Core Benefits
 Responsive to today’s employee marketplace?
 Allocating resources where most needed?
 Evaluated to eliminate unnecessary expense?
Executive Benefits
 Flexible enough to address varying circumstances?
 Communicating a unique relationship?
 Reducing employee tax expense?
Qualified Retirement Plans
 Giving employees an opportunity to optimize retirement values?
 Operated with comprehensive fiduciary accountability?
 Avoiding conflicts and minimizing expenses?
Nonqualified Retirement Plans
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Optimizing tax-deferral opportunities?
Aligning long-term interests of employees with shareholders?
Structured to receive best possible P&L impact?
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What returns are we looking for from
our compensation investment?
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Premier talent magnet
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Quality retention
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High productivity
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Bonus Plan Types
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Executive/management incentive plan
Gain sharing plan
Team based plan
Project based bonuses
Retention bonuses
Hiring bonuses
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What’s the purpose of your bonus plan?
Motivate people?
Share profits?
Keep up with
market
standards?
Change
Behavior?
Attraction and
retention?
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Imagine…you call me one year from now.
“Craig, that plan
VisionLink helped us build
is having a tremendous
impact. Just wanted to
thank you.
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My follow up question
“What are you observing?”
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What I’d hope to hear
Sharper execution
2. Unified vision
3. Higher productivity (i.e., profits)
1.
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Where do the first two come from?
Sharper execution
2. Unified vision
1.
Clarity
 Believability
 Meaning
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CEO
Employee
Clarity
These are the
specific results
that create
enough value
to generate
bonuses. This
is how your
plan works.
I understand
what results
we’re seeking.
I see how I can
contribute. I
understand
how the plan
works.
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CEO
Employee
Believability
Here are the
results we’re
expecting.
Here’s how we
plan to get
there. Here’s
why we’re
confident
these results
are achievable.
I understand
the results. I
understand
what has to
happen to
achieve them.
I believe we
can do it.
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CEO
Employee
Meaning
Here’s how
much you
should expect
to receive if
we hit our
minimum,
expected and
superior result
levels.
Each of those
amounts is
fair for the
results
achieved. I’m
enthused and
grateful to be
a part of this
plan.
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Where does the third one come from?
3.
Higher productivity (i.e., profits)
Alignment between job duties and
organizational goals
 Individual involvement (faster,
easier, cheaper, bigger)
 Meaningful value

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Let’s discuss terms
Short-term
Incentive Plan
Bonus
Incentive
Plan
Value Sharing Plan
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A Value Sharing Plan…
…doesn’t try to “change behavior”
 …doesn’t try to motivate
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…makes a statement about:
 how the organization creates value
 how associates can contribute to that creation
 how the organization shares the value employees
help create
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An effective value sharing plan…
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Is tied to specific performance criteria
Is announced as early in the year as possible
Allows for some degree (15-25%) of
subjectivity
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Two structural approaches to
Value Sharing Plans
Both approaches seek alignment with critical
profitability and growth goals
 Profit Based Allocation
 Target Award (“percent of salary plan”)
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Profit
Based
Allocation
Target
Award
(PBA)
(TA)
A percentage of
annual profits awarded
to employees
Employees assigned
a “targeted” incentive
value – often based
on a percentage of salary
The award amount
is divided among
employees based on a
pre-determined formula
Achievement of award is tied to
multiple specific measurements
or “metrics.” Metrics
can vary person to person.
Paid at year-end
Typically paid at year end,
but may be quarterly.
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Profit
Based
Allocation
(PBA)
Focus
Solely annual profits
Value
May be open-ended
Design
Relatively simple
Essential
Strong Performance
Management System
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Target
Award
Focus
May include company, dept,
team & individual metrics
Value
Typically capped
Design
Can run from
basic to complex
Essential
Selecting the
right metrics
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VisionLink has developed a system of
combining the best of both approaches while
eliminating most of the problems.
Allows the company to set a minimum financial
threshold for the year.
2. This threshold must be met before the funding of
any awards.
3. A percentage of profits in excess of the threshold
will be credited to the pool
4. Values will be expressed to employees as a
percentage of salary
1.
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6 Step Process
2
Each level is determined based
on a forecasted profit value (e.g.,
$1,500,000, $2,000,000, $2,500,000)
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Three performance levels are
selected at the beginning of the year
(BOY) - Base, Target and Superior
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4
The Pool is allocated to
employees by tier or individually (e.g.,
40% to tier 1, 30% to tier 2, 30% to
tier 3)
A percentage of profits above a
minimum threshold is predetermined to be set aside for
employees - this is the Pool (e.g., 15%
above $1,500,000)
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Actual value at end-of-year will
be a factor of (a) final profit result, (b)
dept results, and (c) individual
employee performance
The value is converted to a
percentage of salary when expressed
to employees (e.g., "at Target your
award would be 10% of your salary" )
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Pool Funding and Allocation
Thresholds as % of PreBonus OP
Threshold $
0.0%
75.0%
1,500,000
100.0%
2,000,000
125.0%
2,500,000
150.0%
3,000,000
Incremental
Increase ($) in
Threshold
1,500,000
500,000
500,000
500,000
Cumulative ($)
Threshold
1,500,000
2,000,000
2,500,000
3,000,000
Incremental Incremental
Credit (%) at Credit ($) at
Threshold
Threshold
0.0%
12.5%
187,500
22.5%
112,500
27.5%
137,500
25.0%
125,000
Total Credit ($) at
Threshold
187,500
300,000
437,500
562,500
Pool Allocation
Tier
1
2
3
Allocation
50.0%
30.0%
20.0%
$ Amt @ Test $ Amt @ Base
191,250
62,500
114,750
37,500
76,500
25,000
$ Amt @
Target
150,000
90,000
60,000
$ Amt @ Superior
218,750
131,250
87,500
EE Allocation
PS
PS
PS
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Matrix Approach
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Two (or more) performance measures are linked
together
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The measures may be competing
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Highest payout follows successful maximization of
both factors
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Indicators
What specific and measurable indicators will
best reflect the improvements desired?
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Indicators
Identify the indicators that will be used to
measure performance in each area
For example:
 Company—Revenue Growth and Net Margin
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Company Performance Matrix
Revenue
Growth
10.2%
100%
120%
140%
160%
200%
9.4%
75%
100%
120%
140%
160%
8.5%
60%
75%
100%
120%
140%
7.7%
45%
60%
75%
100%
120%
6.8%
30%
45%
60%
75%
100%
13.0%
15.0%
17.0%
Net Margin
19.0%
21.0%
Actual Results
Revenue
Growth
Net Income
Multiplier
8.8%
17.1%
100%
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An employee in this plan…
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…will understand and respect the importance of
profits
…will understand what contribution he or she can
make to the generation of profits
…will understand what his value sharing potential
is at various performance levels
…will receive communication at various times
throughout the year about the results he and the
firm are on track to achieve
…will understand why his final award is what it is
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Balancing Short-and Long-Term Value
Sharing Programs
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Owners think about both short-term and long-term goals
Why would you want your employees to only think about
short-term goals?
Shouldn’t value-sharing programs reward for the
achievement of both?
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Future
Company
Present
Company
LTIP
Salaries
STIP
Benefits
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Why Long-Term Value Sharing
Matters
#1 Value sharing attracts the
best talent and magnifies
results
 Attracting the “right” people
▪ Willing and able to compete
▪ Assume stewardship role in
safeguarding shareholder interests
▪ Willing to share in risks and rewards
of value creation
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Why Long-Term Value Sharing
Matters
#2: Value sharing plans
(effectively designed)
reinforce the company’s
business model

Nurture a culture invested
in the business model
▪
▪
Reinforce leverage points
Reinforce roles and
expectations
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Why Long-Term Value Sharing
Matters
#3: Value sharing protects
against bad profits and
promotes good profits
 Everyone has an interest in good
profits if everyone’s wealth
multiplier rises or falls on the
ability of the company to sustain
the right kind of profitability.
▪
▪
Pay people in a way that
communicates long-term
profitability expectations
Protect company’s interest in
generating good profits
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Why Long-Term Value Sharing
Matters
#4: Value sharing promotes an
ownership mindset
 Build a rewards system that
communicate “what’s
important.”
▪
▪
Keep performance engine working
while moving the company forward
towards growth goals
Define “what’s important” the same
way ownership does—revenue/EBITDA
growth, profit/margin improvement, cost
management
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Why Long-Term Value Sharing
Matters
#5: Value sharing builds trust
and accelerates results
 Turn key people into “partners”
in building the future business
▪
▪
Value sharing communicates a
sense of fairness
Create a unified financial vision
for growing the company
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Why Long-Term Value Sharing
Matters
1.
2.
3.
4.
5.
Value sharing attracts the best
talent and magnifies results
Value sharing plans (effectively
designed) reinforce the
company’s business model
Value sharing protects against
bad profits and promotes good
profits
Value sharing promotes an
ownership mindset
Value sharing builds trust and
accelerates results
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How this happens
1. Paint a picture of the
future
2. Monetize it
3. Commit to sharing a
portion of it
4. Present it to your key
employees
5. Manage it right
6. Consistently reinforce it
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Yes
Full Value
Full Value or
Appreciation Only?
Grant Equity or
Not Equity?
Performance Based?
Appreciation
No
Reward for Value
Increase or Financial
Performance?
Yes
Stock Option
Performance Shares
Value Increase
Full Value or
Appreciation?
Performance Based?
AppreciationPerformance Based or
Employee Directed?
Employee Directed
Strategic Deferred
Compensation
Performance
Phantom Stock
Reward for Profit/Cash
Flow or Other Metrics?
Other Metrics
No
Yes
Phantom Stock
Option
Performance
Based
Restricted Stock
Full Value
Appreciation
Financial
Performance
No
Profits
Objectives
Performance Unit
Phantom Stock
Allocation or
Objectives Based?
Allocation
Profit Pool
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How can incentive plans be more
effective?
Payouts need to reflect performance
“About 1/3rd of companies pay out awards even when they
don’t achieve the minimum level of performance – a
practice, not surprisingly, that’s associated with the least
effective plans.”
A related tidbit: “Self-funded plans appear to be the most
successful at improving business performance.”
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How can incentive plans be more
effective?
Design and communication are “make or break”
factors.
“Plans reported to improve results significantly had
three outcomes in common, they:
- improved individual performance,
- improved performance in target areas, and
- engaged employees effectively.”
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How can incentive plans be more
effective?
“Almost any type plan can deliver
– if it’s properly designed and if it’s
supported by business literacy, consistent
communication, performance
management, and leadership
involvement.”
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Why do value sharing plans work?
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Require management to clearly define
strategy and establish priorities
Require communication of priorities and
expected achievement levels
Engage employees in the determination
of how they can contribute
Require ongoing communication of
performance versus expectations
Reinforce importance by “putting money
where the mouth is”
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VisionLink Philosophy
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Variable compensation is an investment, not an
expense
 Increase financial performance via “self funding”
programs
▪ Production, profits, and/or share value
 Recruit and retain quality employees
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Company performance is maximized when
owner and employee “visions” are linked
 Creates line of sight
 Win-win outcomes
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Q&A
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Thank you!
Craig Rutledge
Partner
(949) 265-5715
crutledge@vladvisors.com
www.vladvisors.com
www.phantomstockonline.com
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