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TOTAL COMPENSATION
Julia A. Johnson Senior Manager
Wipfli LLP Green Bay, Wisconsin [email protected]
920-662-2876
August 10 & 11, 2017
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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”
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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
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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
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Compensation Component Roles
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Compensation Component
Attract Retain
MotivateChange
Behavior
Provide
Security/
ProtectionShort-term Long-term
Base Salary X X
Annual Incentives X X X X
Long-Term Incentives X X X
Basic Benefits X
Supplemental Benefits X
Supplemental Retirement Plan X X
Perquisites X
Compensation Strategy
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Compensation Component
25th Percentile (Lag)
50th Percentile (Meet)
75th Percentile (Lead)
Base Salary
Annual Incentives
Long-Term Incentives
Basic Benefits
Supplemental Benefits
Supplemental Retirement Plan
Perquisites
Total Compensation
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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
Guides compensation decision making7
Compensation Philosophies
Total Compensation Component Mix
EXAMPLE
Base Salary
Annual Incentive
Long-Term
IncentiveBenefits Retirement Perqs
Total Comp
Executives/Senior
Management
AboveMarket
Above Market
Above Market
Above Market
At Market
Below Market
Above Market
Management/Supervisors
At Market
Above Market
Above Market
At Market
At Market
NAAbove Market
EmployeesSlightly Above Market
At Market
NAAt
MarketAt
MarketNA
Slightly Above Market
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Developing a Base Compensation Structure
Overview of Base Compensation Structure
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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
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Base Compensation Strategy Considerations
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EO
SM/DM
Staff
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 policies12
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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 cross-section 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).
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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
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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.
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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.
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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
Job Conditions – working conditions and unavoidable hazards
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Skill Description Example
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.
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Factors and Levels Example
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Point Factor Evaluation Sample Results
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Internal Equity Example
Conduct an External Market 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.
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Conduct an External Market 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
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External Market Example
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.
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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
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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.
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Base Compensation Structure Example
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Comp Structure Example
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.
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Compa-Ratio Example
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Develop Merit Decisions Impact Worksheet
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Merit Increase Example
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
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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
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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
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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
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Developing Annual Cash Incentives and Long Term Incentives
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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.
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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.
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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
Individual Department Bankwide
CEO X
EXEC/SM X X
Exempt X X X
Employees X X X
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What performance criteria are appropriate to use as a basis for annual incentive awards?
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Annual Incentive Targets - Examples
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Target Ranges
Tier Position As % of Salary
I CEO 20 - 50%
II Executive Management 15 - 35%
IIIDepartment Managers and
Commercial Bankers10 - 25%
IV Staff Support Managers 5 - 15%
V Employees 3 - 10%
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
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Stress Testing
Run “what-if” scenarios for all incentive arrangements.
Test scenarios against YTD results periodically.
Adjust accounting accruals periodically to reflect likely outcomes.
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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
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___ 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: __________________________________________
Long-Term Incentives Philosophy
What is the Bank’s primary objective(s) in providing long-term incentive opportunities to executives?
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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)
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Descriptions
LTI Option Description
Stock Options 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. .
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Descriptions
LTI Option Description
Phantom Stock/Stock Appreciation Rights (SARS)/Value Appreciation Rights (VARS)
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.
Performance Units
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.
Deferred Cash Compensation Plan
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.
Supplemental Retirement Plan (SERP)
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.
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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.
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Plan Example
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.
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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
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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
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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
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Benefits
Salary Continuation
– Vacation
– Sick Leave
– Holiday
– Bereavement
– Jury Duty
– Military
– Inclement Weather
– Personal Days
– Breaks
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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 Services52
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Work-Life
Caring for Dependents– Adoption
– Pet Insurance
Financial Support– Financial Planning
– Legal Support
Community Involvement– Professional Associations
– Community Activities
– School Activities
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Performance and Recognition
Performance– Performance Planning
– Performance Feedback
Recognition– Acknowledgement
– Appreciation
– Cash and/or Noncash Rewards
– Formal or Informal
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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
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Development and Career Planning
Advancement Opportunities– Career Planning
– Skill Enhancement
– Promotion/Lateral Movement
– Succession Planning and Management
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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.
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Questions
Julia JohnsonSenior Manager, Strategic Advisory Services
920.662.2876
www.wipfli.com
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