Tag Archive for: executive compensation

Update: Four Themes Impacting 2022 Compensation

At the start of the year, Lappley & Associates examined four important themes impacting compensation in 2022: competitiveness, pay equity, remote/flexible working arrangements, and Environmental, Social and Governance (ESG). These issues have become integral to compensation planning regardless of how businesses are performing. Despite supply chain disruptions, inflation and persistent labor shortages, CEO confidence remained high. Then a war with Ukraine and roiling stock market added more uncertainty to the picture.

As we near the mid-point of the year, it is clear there is no immediate fix to economic areas of concern. So, we asked industry peers and leaders we work with about how business conditions are affecting their compensation plans and progress in these areas. We also tapped fresh survey data to get a clearer picture. Here is our update:

Compensation Competitiveness

After a decade of salary increases centered at 3%, employers report 2022 salary increase budgets ranging from 3% to 4%, with some at 5% or higher. Recent pulse surveys by Korn Ferry and salary.com confirm increases at 3.5%.

With year-over-year inflation above 8%, employees are experiencing net income loss. However, companies are reluctant to increase salaries further as this would also increase long-term fixed costs. Instead, employers are giving bonuses to cushion inflation effect on their employees. This includes across the board for all employees, sign-on, referral and retention bonuses.

We expect businesses will expand annual and long-term incentive programs, both with number of plans and number of participants. This trend continues as companies focus on linking compensation more closely with organizational performance and lower employee fixed costs.

Photo courtesy of Pixabay

Pay Equity

Because of the tight labor market ? the number of job openings are almost double the number of workers seeking employment – employers are offering higher starting salaries to attract qualified talent. Often the result is compression with the newly hired worker making the same or more than experienced, longer-term employees. This creates disparities between subordinates and their supervisors. If compression is not addressed, it will lead to turnover among more senior or high-performing employees.

Pay equity is often the result of pay compression where pay is not related to factors recognized as legitimate reasons for compensation differences. This can result in legal problems, but more importantly affects the organization’s reputation. During recent conversations with consulting contacts, most organizations are addressing potential pay compression and equity problems.

Flexibility and Remote Working

Employees want autonomy to choose when and where they work. Leaders, on the other hand, are more concerned about maintaining morale and a strong culture in a remote or hybrid workspace. Work models are evolving to meet these mutual concerns, according to a recent Chief Executive survey:

  • One third report a mix of remote, hybrid and onsite workers depending on employee role or by department.
  • Another 31% of CEOs say they are fully in the office. Of those, 54% say fully in-office will be long-term and it is working well.
  • An additional 28% are adopting a hybrid model with equal halves setting in-office days/times and the other half opting for scheduling flexibility with no requirements.
  • Only 7% are adopting fully remote.
  • Flexible scheduling is reported to be the most effective method to maintain a strong culture and employee morale regardless of work model.

Approaches to remote working compensation are adapting to address new work models. WorldatWork recently released the results of its Geographic Pay Policies survey, which offers these insights:

  • Fifty-six percent of companies use metro/city location as the basis for determining pay differentials. Cost of labor is overwhelmingly a greater factor than cost of living in determining differentials.
  • Forty-five percent of organizations are applying pay differentials as a premium or discount to baseline pay structure while another 24% create base pay structures for each geographic location.
  • Employees (73%) expect that their pay to differ based on geographic location. Employees are saying (85%) that their organization is moderately to extremely transparent in communicating geographic practices.
  • For those organizations with geographic policies in place, 57% are considering modifying them with the increase of full-time remote work.
  • Remote working is valuable enough for 38% of employees to consider looking for new employment if it were to be discontinued.

Environmental, Social and Governance (ESG) Metrics

Environmental, Social and Governance (ESG) metrics are slowly factoring into executive incentive performance. Analysis of 2022 proxy statements from the 500 largest public companies showed approximately 50% included ESG in their performance measurement, representing 15% to 20% of incentive opportunity, and are most often reflected in annual plans. ESG measurements tended towards Diversity, Equity and Inclusion (DEI), as environmental efforts are often longer term and more difficult to place in a timetable. Medium and smaller companies have not typically used ESG metrics in executive pay evaluations.

In addition, DEI is becoming a factor in evaluating managerial performance. Often a scorecard with a variety of measures is used to fully capture DEI dimensions.

Contact Us

Neil Lappley is a leading expert on pay delivery and competitiveness compensation practice issues in the Midwest. He consults with clients on compensation design matters for executives and salaried employees, assessment of pay competitiveness, incentive compensation, conduct of compensation surveys, and salesforce compensation. He authors a widely distributed monthly newsletter and presents at state and local compensation and human resource conferences. Connect with Neil at (847) 921-2812 or nlappley@lappley.com.

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2022 Salary Increase Budgets

Will salary increase budgets rise or fall in 2022? Although employment has not yet returned to pre-pandemic levels, most executives are optimistic the economic recovery will continue, a sentiment that paves the way for higher wages.

In fact, a recent poll by Chief Executive shows CEOs anticipate both revenue growth (79%) and profit growth (68%) over the next 12 months despite setbacks that may have occurred for some in 2021. At the same time, there is growing uncertainty on many fronts. Looking ahead, the C-Suite is concerned about labor costs and shortages (63%); the overall economy (50%); workplace safety and ongoing Covid mandates and restrictions (48%); and supply chain issues (40%).

Photo courtesy of Pixabay

Against this backdrop, companies are facing one of the tightest labor markets in memory as they determine how to adjust 2022 salary increase budgets to attract and retain top talent.

To get a sense of what management teams are planning for salaries and wages in 2022, we have gathered compensation survey information from a variety of consulting sources including:

WorldatWork

WorldatWork’s 2021-2022 Salary Budget Survey reported that salary increase budgets rose to 3.0% in 2021. In addition, zero increase budgets dropped by half in most employee groups from 2020 levels, which were ten times higher than in 2019.

Not surprisingly, survey participants salary increase budgets this year varied across industries as the pandemic had varying impacts. For example, Mining, Quarrying, and Oil and Gas, saw salary increase budgets falling from 3.1% last year to 2.3% after rising for several years. On the other hand, Educational Services saw a large increase from 1.5% in 2020 to 2.5% in 2021. Salary increases also varied between companies in the same industry.

The survey projects median salary increase budgets will be 3.0% in 2022, while average 2022 salary budgets will be 3.3%. Survey participants predicted no significant differences between nonexempt employees, exempt employees, or executives.

According to survey participants and consistent with previous years, salary increase budgets continue to be greater in smaller companies, resulting in the average being higher than the median.

According to survey participants and consistent with previous years, salary increase budgets continue to be greater in smaller companies, resulting in the average being higher than the median.

Willis Watson Wyatt

According to the Willis Watson Wyatt General Industry Salary Budget Survey, respondents report only 3.0% intend to give no raises in 2022. This is a decrease from 8.0% earlier in 2021. The survey reports projected salary increases of 3.0% for executives, management, professional, and support staff for 2022. This is up from the 2.7% average increases companies gave their staff in 2021. Production and manual labor employees are slated for 2.8% increases, a slight rise from the 2.5% paid this year.

High-tech and pharmaceutical companies project the largest salary budget increases at 3.1%. Next are health care, media, and financial services organizations with 3.0%. Oil and gas companies, leisure and hospitality companies are budgeting salary increases of 2.4%. Retail organizations predict increases of 2.9% next year.

The survey found that top performers received larger pay increases than average-rated employees. Those receiving the highest performance rating received an average increase of 4.5%, 73% higher than the 2.6% granted to average evaluated performers. Note that Lappley & Associates has long advocated that top performers be recognized with increases double those of average rated performers.

Conference Board

According to the Conference Board, median total 2021 salary budget increases for 2021 are 3.0%, on par with the previous 10 years. The projections for 2022 are also at 3.0% and are expected to hold steady across employment categories.

Photo courtesy of Pixabay

National Association of Manufacturers (NAM)

In a survey taken in August of manufacturers conducted by the National Association of Manufacturers (NAM), participants said they plan to increase wages and full-time employment by 3.5% and 3.8%, respectively, in the next 12 months. NAM reports that manufacturers are continuing to invest in workers and capital at paces that indicate an extremely positive industry outlook for 2022.

Like other industries, manufacturers are facing workforce shortages along with supply chain disruptions, rising cost pressures, and increasing coronavirus cases.

Our Thoughts

It is interesting to note that salary budget increases for next year are consistent by survey source, although they seem to be getting larger as the year progresses. Furthermore, the issues of retention, upskilling and recruiting remain top-of-mind with management executives as they consider plans for next year. With that in mind, here are our predictions:

First, small to medium-sized companies (SME) may have a competitive hiring advantage with more flexibility, the absence of vaccine mandates, and a smaller regulatory burden. We predict they will adopt salary increase budgets of 3.3% to 4.0% in 2022 while large organizations will be closer to 3.0%. The difference between SME and large organization approaches reflects a pattern over the past several years. Further, more recent surveys are pushing expected increases higher.

Second, despite salary budget increases in 2022 exceeding recent years, there will be growing pressure from employees for larger pay increases. This will add to increased turnover risk as employees seek higher compensation. Although it may be temporary, inflation is real and having an impact on American households. For example, federal sources report wholesale prices climbed 8.3% from August 2020 to August 2021, while retail prices rose 5.3% over the same period. In addition, Price Waterhouse Cooper’s Health Research Institute is projecting a 6.5% medical cost trend in 2022, slightly lower than the 7.0% medical cost trend in 2021 and slightly higher than it was between 2016 and 2020.

Third, companies should examine their pay competitiveness levels using salary surveys that robustly test business type, along with competitors for people based on geography and other factors. Then evaluate how close your organization can come to meeting compensation strategy competitiveness goals based on available funding. At Lappley & Associates we have access to a large number of surveys making such an evaluation possible.

Let us Connect

If you liked this newsletter, please pass it along to colleagues who would be interested. And reach out if you would like to discuss further at nlappley@lappley.com or (847) 921-2812.

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Incentivizing Executive Compensation at Private Companies

When managed properly, private company executive compensation helps companies attract, keep, and motivate business leaders to achieve corporate objectives and generate financial returns. Many boards and recruiting teams at private companies struggle with the challenge, however, because they fail to consider the total compensation package or link it to desired corporate results.

According to executive recruiting software firm Thrive, opened executive searches grew by 18% in fourth quarter 2020 year-over-year with significant positive momentum swings in nearly all industries tracked. Although overall headcount is not expected to increase in 2021, demand for top performers is growing. To compete effectively for talent with public companies, executive recruiting teams are being challenged to develop more competitive compensation offers.

It is our experience that when executive pay aligns with corporate purpose, values, and strategies better performance is the result. A good private company executive compensation program begins with an organization’s strategic goals and business priorities. These objectives may have changed in the post-pandemic economy as some companies may have realigned their business purpose and strategies.

Photo courtesy of Pixabay

Although data about executive compensation at private firms is more difficult to obtain than pay at public companies, a WorldatWork biannual survey finds private firms are behaving more like their public company counterparts. In fact, spending on Short-Term Incentives (STIs) increased at private companies, reflecting 6.5% of operating profit compared to 6.0% in the prior survey. Moreover, an uptick in Long-Term Incentives (LTIs), from 54% to 62%, indicates private companies are taking a more holistic view to incentive management. An update to the survey is expected later this year.

With this data in mind, here are the pay variables and incentives to consider when preparing executive compensation plans:

Fixed Versus Variable Pay

Total compensation is made up of base salary (determined in advance and paid in cash), along with STIs and LTIs. Both types of incentives are variable or at risk and are typically contingent on achievement of organizational or individual goals.

The WorldatWork analysis shows that just under 65% of private company CEO compensation is variable. Reporting executives will have a somewhat higher percentage in fixed pay. When compared to public companies, small-cap companies pay approximately 70% of compensation in the form of variable payments.

Undoubtedly, as organizations reimagine the workplace in 2021 and determine how to adapt to future business needs, they are being challenged to keep up with the pace of change. For companies in transformation with ample resources to invest, greater emphasis should be placed on STIs to achieve short-term goals. Companies with less cash on hand and more focused on sustainability can incorporate LTIs.

Short-Term Incentives

According to the WorldatWork survey, Annual Incentive Plan (AIP) prevalence increased to 86%, which is up from two years earlier. Median target award levels are about 80% of salary for CEOs, although AIP opportunity often varies with industry, company size and appetite for risk. For positions reporting to the CEO, opportunity decreases by about half for each lower position level.

Most STI plans base payouts of performance against pre-established goals. Performance goals are generally derived from the organization’s budget. To a pronounced lesser extent, some companies prefer to base bonuses on after-the-fact assessment of performance.

Private companies typically use one to three performance measures, with profitability the most prevalent and revenue the second. In addition, we are finding a third measure related to Diversity, Equity, and Inclusion (DEI) being incorporated by approximately 25% of private organizations. DEI metrics will accelerate in coming years. The CEO is typically measured on corporate performance, while other executives are measured on both corporate and unit/division/personal performance.

Long-Term Incentives

Just over 6 out of 10 private companies have implemented LTI plans. That is up substantially over the past 12 years when only 35% reported having LTI programs in place.

Private companies offer three categories of long-term plans. Just over a third offer real equity programs, such as stock options, restricted stock units or restricted stock. Many owners are reluctant to part with real stock, however, as it dilutes their ownership. For companies that use real equity, total overhang is generally less than 10%.

Photo courtesy of Pixabay

Another option is phantom equity – used by 15% of organizations – including phantom stock and stock appreciation rights. The difficulty with these programs is the timing of reported results due to the lag in determining company values and the black box of valuations. The third alternative is cash-based performance awards used by 65% of organizations.

LTI eligibility is reserved for the CEO and other executives at the top level of the organization. Respondents related that median LTI incentive opportunity for CEOs is between 70% and 90%, falling about 30 percentage points for reporting positions.

Profitability measures are by far the most popular measure with performance plans, followed by a return-on-investment measure and revenue. Performance targets generally flow from budget or are an improvement over prior years. Cash payouts are primarily based on corporate results. Three years is the most common performance period, although it can vary from two to five years.

Summary

The robust economic recovery predicted by many experts will create fierce competition for executives who have proven they can perform under difficult circumstances. Organizations hoping to attract the best and the brightest must be ready with competitive compensation offers.

Copying another organization’s approach leads to suboptimal results. Make sure recruiting strategies and executive compensation packages are reality tested and aligned with corporate objectives.

Contact Us

Would you like to know more about private company executive pay practices or compensation planning for private companies? Please contact Neil Lappley at nlappley@lappley.com or call 847-921-2812.


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A Recruiting Opportunity for Private Companies

Changes to executive pay packages during the COVID-19 pandemic have been swift, revealing stark differences in how boards approach compensation for public and privately held companies. Many executives at public companies reliant on annual and long-term incentives (LTIs) are facing significant pay cuts in the wake of dwindling profits with more economic uncertainty ahead. For stable or growing privately held companies, this presents a buying opportunity to attract and capitalize on executive talent with the right compensation strategy.

Executive Pay Practices

Media coverage based on filings and disclosures required for public companies along with say on pay votes ensures most people are familiar with executive pay practices at public companies. This publicity and the large role played by proxy advisors has resulted in a standardization of executive compensation in public companies as no one seems to want to stand out. To play it safe, public companies typically target the market median with stock performance the largest component of pay results.

Photo courtesy of Pixabay

Private companies, on the other hand, without the limitations of public exposure can implement more creative pay programs that are crafted to each organization’s unique circumstances. With stock performance a non-factor, other innovative measures including non-financial metrics can play a more meaningful role.

Although pay practices for both public and private companies vary significantly depending upon the industry and type of ownership, all are designed to attract and retain top-notch talent. For private companies, this means making pay sufficient for the quality of executive they are seeking and aligned with the values and goals the organization has established.

However, in our current, challenging business climate, private companies have the distinct advantage of being more flexible, agile, and inclusive than their publicly traded counterparts. In that sense, it may be a golden opportunity to seek where the grass may be greener to upgrade or expand executive ranks.

The Elements of Executive Pay

Public company executive compensation is comprised of three components: base salary, annual or short-term incentives (STIs) and long-term incentives (LTIs). In public companies, incentives dominate executive pay, including annual incentives and long-term, equity-based incentives. Further, in public companies LTIs are the largest component of compensation.

In contrast, private company pay centers on cash compensation, emphasizing base salary and annual incentives. Cash pay is often positioned above the market median, with low or no LTI opportunity. However, this trend is changing as more private companies offer more incentive-based compensation as reported in the Compensation Advisory Board (CAP) and WorldatWork 2019 survey of Incentive Pay Practices.

Executive Pay Components

  Base Salary Annual or Short-Term Incentives Long-Term Incentives
Public Companies 1) 20% of compensation package
2) Some are temporarily reducing base salaries 		1) Financial incentives tied to key performance metrics
2) Sustainable Impact measures: Environmental, social and governance
3) Seeing reductions of 25% to 50% of the current plan target opportunity 		1) Some adjusting targets on a year-by-year approach
2) Others extending the performance period
Private Companies 1) Stressed
2) One-third to half of compensation 		1) Financial measures: profitability and revenue
2) Individual performance common
3) Threshold payment about 50%; maximum payout is 150% to 200% of target opportunity 		1) 60% offer LTIs
2) Cash-based plans most common
3) Phantom stock, or real stock vehicles added by minority of companies

Add LTIs to the Pay Mix

Long-term incentives are fast becoming a growing element of executive compensation for private companies. They are essential to attract talent in competition with public companies where LTIs are common. In addition, LTIs play a major role in company retention strategies and to motivate executives to achieve long-term objectives.

Photo courtesy of Pixabay

For owners at private companies, they must thoughtfully consider if and how they are willing to share ownership in the enterprise with other executives. In addition, they should consider succession plans and future liquidation or merger opportunities depending on their long-term plans for the business.

A typical sharing percentage range is between 5% -10%. Phantom stock is another vehicle often used, although these programs require sophisticated valuing studies and strong communications support. A final option is a long-term cash plan. This requires solid financial planning and transparency of key financials.

Benchmark for Success

Executive pay has come under increased scrutiny in the current business climate. New attitudes about work and pay practices are being shaped by the pandemic, as well as social and cultural trends in an election year like no other. Executives seeking to make meaningful contributions may find even greater opportunity at private companies embracing innovative strategies and pay practices. Private companies recruiting new talent can cast a wider net and utilize benchmarks for non-traditional sources and their market competitors.

Photo courtesy of Pixabay

Still, benchmarking in a rapidly changing business environment can be challenging, making salary projections more obscure. Regardless, the quality of survey data obtained for an executive search must meet high standards. Survey sources should be carefully examined to ensure data cuts are available based on industry and size, which are closely related to the level of executive compensation.

Summary

With less public scrutiny and fewer regulatory hurdles, private companies have more freedom to make proposed changes in creative ways that balance stakeholder interests, improve employee morale and boost the bottom line. Executives at public companies may be ready for a change if an opportunity promises a promotion or broader role or one with more autonomy and more responsibility.

Yes, pay will certainly be an important piece of the equation. However, at a time when job losses in the top ranks may be considerable, enterprising private companies should view this as a recruiting opportunity to build on for the future.

Contact Us

For help or information on this topic, you can email me at nlappley@lappley.com or call (847) 921-2812.

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New 2020 Compensation Planning Priorities

When we look back, 2020 will long be remembered as a year of massive change for business and industry on a scale not seen before.

The COVID-19 pandemic has plunged our economy into a global recession and put health and wellness at the center of workplace conversations. Worldwide protests supporting the #BlackLivesMatter movement have joined #MeToo voices urging meaningful community action on discrimination, pay equity, and inclusion.

In response, organizations are making significant changes to their business models and accelerating the adoption of Environmental, Social and Governess (ESG) criteria to guide business investment and decision-making. They recognize that their organizations’ stakeholders are motivated by more than a goal for increased revenues and profits; other success metrics include environmental, social responsibility, gender, and racial diversity measures to track progress on social and economic purpose. Some are calling this new integrated approach to corporate governance stakeholder capitalism.

In tandem with these changes, proactive CEOs and HR professionals are taking a step back to reassess their compensation programs, so they align with a more purpose-driven business model. This is an opportunity to transform massive challenges into meaningful change, but it will require a thoughtful and strategic compensation approach that looks at the following:

1) Assess critical job skills. Quite likely, as the result of an updated business model, critical skill jobs have changed. They should be identified and monitored for pay competitiveness. These employees are most susceptible to being recruited away.

For instance, purchasing professionals are dealing with disruptions in their supply chains, especially in manufacturing. Sourcing from India and China has become problematic during the pandemic. Employees that can fill supply chain gaps are highly valued and in great demand. Employers may need to prioritize their investments in these job skills even when resources are scarce.

2) Revisit your compensation strategy. This flows from the company’s purpose and business strategy and is part of the organization’s overall HR strategy. To the extent that your business model has changed, compensation strategy must also follow the organization’s purpose or why it exists. A recent Compensation Alert here takes you through the elements of establishing your strategy. A critical part of your updated strategy will be to reestablish your benchmark of competitive and comparable organizations, update your current competitiveness levels and determine your targeted level of competitiveness.

3) Take a fresh look at pay equity. Many employers have implemented pay equity analyses to identify whether they have gender or race-based compensation gaps. They have done this to promote fairness, retain talent, and mitigate risk. If you have not done a pay equity analysis already, you should begin the effort soon. If you have, dig deep into the data to determine what is driving pay disparity: the actions of certain managers or decision-makers; out-of-date policies or business practices; or unconscious biases within a division or department. You can learn more about Pay Equity and The Rules of Engagement here.

4) Review base salary and incentive plans. Many companies have taken salary actions in the wake of the COVID-19 health crisis. These include pay cuts, cancelled salary increases or freezes, delayed or deferred annual salary increases, and adjusted planned average salary increases. In addition, organizations have suspended promotional increases or added additional pay for essential work (often called hazard or hero pay), while others have reduced or suspended benefit programs. As the economy improves, business leaders must determine when and under what conditions salary actions taken during the health crisis will be lifted or withdrawn.

It is too early to forecast levels of average merit increases for 2021. It is more likely, however, that more companies will not be giving salary increases next year. Even more, this will vary by industry and region, so it is prudent to develop a good idea of what your competitors will be targeting.

Incentive plans have also taken a hit from the pandemic, as organizations have modified their short-term and annual incentive programs by reducing opportunity, deferring or delaying payments, and adjusting performance targets. Changes to long-term plans have been less prevalent. Consider the following actions:

  • Short-term plans: As you plan for the second half of the year and revenue and profit expectations crystalize, consider: increasing the use of management discretion in determining 2020 incentive/bonuses; changing performance measures consistent with repurposing of the company; and lowering performance targets, maximums and thresholds. Additionally, revisit base payouts on second half performance against second half goals.
  • Long-term plans: Take no actions for the next several months. Consider adjusting performance targets if goals become unattainable.

5) Do not overlook your sales force. The COVID-19 pandemic had a great effect on sales organizations. Orders for commercial and industrial goods were curtailed. Falling orders meant less revenue for sellers for sales compensation credit. Our work with clients indicates that most companies have implemented pay protection methods to replace some or all lost sales incentives for sellers. The most popular methods include pay guarantees, quota reductions and formula changes.

It is time to reset for the balance of the year. Sellers need to be reengaged to reactivate suspended opportunities and find new revenue. A good time to start fresh is July 1st, the start of the last half of the fiscal year for many organizations. But at the same time, discontinue pay protection programs. The sooner you are beyond pay protection programs the better. Consider the following actions to fast-track sales revenue:

  1. Redo quotas: Continued uncertainty will make it difficult to project expected revenue for the second half of the year. However, take into account new avenues for revenue based on your adapted business model as well as revenue purchasing customer patterns. Develop stretch goals.
  2. Review payout formulas: Thresholds, incentive rates, accelerators and caps should be reviewed.
  3. Jump start incentives: As an add on, use a combination of contests and spiffs to add excitement, and motivation. Provide both cash and non-cash awards. Keep the jump start short – a maximum of three months.

In Conclusion

Uncertainty and change will be the hallmarks for organizations during the remainder of 2020 and into 2021. Short of a crystal ball, prudent planning to address the workplace issues of our time is your best bet to make your culture stronger and better equipped for future growth.

Despite current economic hardships, visionary business leaders who understand where and how to prioritize investments in talent will seize the opportunity to recruit the best and the brightest for the road ahead.

Contact Us

To discuss how to adjust your organization’s compensation strategy and develop more meaningful benchmarks and metrics to make your workplace stronger, please contact Neil Lappley at (847) 921-2812 or nlappley@lappleiy.com.

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[Comp Alert May 2018] Tax Reform’s Impact on Compensation

Late last year, Congress passed and President Trump signed into law the Tax Cuts and Jobs Act (TCJA). The sweeping tax reform law reduces the marginal corporate tax rate at the federal level from 35 percent to 21 percent. This and other changes to tax law are boosting profits and will save businesses billions in taxes this year. So, how are they spending all that money?

Most companies are reinvesting their tax savings in strategic ways that drive business performance. So far, shareholders are reaping the greatest rewards, according to an analysis by investor Paul Tudor Jones’ Just Capital. Job creation is the second largest area for investment with 20 percent allocated. Jones’ nonprofit is tracking spending by companies in the Russell 1000; 133 companies have announced their intentions to date.

In addition, a recent Ernst & Young (EY) survey finds most employers are either planning to or have already made changes to enhance compensation through bonuses, salary increases and other pay benefits. Seventy three percent of companies surveyed expect to accelerate mergers and acquisitions.

Considering these and other trends, now is a good time to revisit your business compensation strategy to take advantage of opportunities that effect employee pay. Before making any long-term decisions, however, let your company’s business goals be your guide so that tax savings are invested where they will do the most good.

Making Tax Reform Pay

Tax cuts have contributed to growing optimism about the U.S. business outlook. And that optimism has translated into a strong economy.

Still, companies must be nimble to adapt to changes in the new tax law. Making the right strategic moves on where to invest tax savings requires thoughtful planning. Here are a few areas to consider:

1. Equal Pay – As more people keep a close eye on the pay gap, employers everywhere are working to eliminate wage discrimination based on sex, race, age, disability and other classes protected by federal laws. In this environment, they are evaluating how they can structure their compensation system so that it works for all employees. This means developing policies and compensation strategies that reward people performing well in the same jobs with similar work experiences, skills and education equally.

Yet, implementing changes means choosing a structure that pays internal employees fairly and is competitive externally. Consider using a portion of the tax break to identify any anomalies in your compensation structure. Then, develop solutions to pay disparity that can be implemented in phases over a reasonable time-period, as budget allows.

2. Shareholder Return – Shareholders who have invested in your organization expect a fair return. You can pass along tax savings to shareholders with an increase in dividends. This can take the form of a one-time payment or an increase in the quarterly rate. Another option: share buybacks.

3. Business Expansion – Companies who want to expand geographically, diversify product offerings or tap into new customers may choose to invest their tax savings in a merger or acquisition. With M&As, compensation programs must also be merged. Make sure your compensation strategy includes these important elements:

  • Competitive Pay Analysis – As the market for top talent gets tighter, attracting and retaining employees gets more challenging. This may be a good time to revisit the competitiveness goal defined in your organization’s overall compensation strategy. Consider using the tax reduction to fill in pay gaps. Look at national, regional and local market trends. Increases may be either to the entire organization or to select segments where compensation has increased faster than overall market wages.
  • Base Salary – The annual salary measures ongoing job worth and ongoing job performance. Under the TCJA, the performance-based compensation exception to executives $1 million pay cap has been eliminated. Now, compensation for the CEO, CFO and the three other highest paid executives is capped at $1 million regardless of whether compensation is performance-based or not.
  • Annual Incentives or Bonus Plans – These reward executives for reaching annual milestones or other incentivized, short-term financial goals. Cash is still the dominate incentive for private companies. Be sure to set goals for profitability or revenue growth as key performance measures. In January hundreds of companies announced employee bonuses resulting from the tax reform law. Although the pace of these announcements has slowed, more and more companies are following the national bonus pay trend.
  • Long-Term Incentives – This incentive rewards executives who create long-term value, a win-win for all when strategic objectives are met. You will also want to specify the length of the performance period, eligibility requirements, incentive opportunities, performance measures, and the payout or holdback schedule.

Whether your business is small and closely held or ranks in the Fortune 500, the new tax law will have wide-ranging implications for your compensation plans in 2018 and beyond. Please contact me at (847) 921-2812 or nlappley@lappley.com if you would like to discuss further. Also, feel free to share this article with anyone who might be interested.

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