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Welcome to The JoyPowered® Workspace Podcast, where we talk about embracing joy in the workplace. I’m Susan White, owner of Susan Tinder White Consulting. With me is my dear friend and co-host JoDee Curtis, owner of Purple Ink, an HR consulting firm. Our topic today is executive comp and incentive compensation.
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Our guest today is going to be Jennifer Loftus. This is Jennifer’s second time with us, as she was the star of our Compensation 101 episode that launched on September 16, 2019. We received great feedback on this show and a number of requests to ask Jennifer to come back to cover executive compensation and give us any other incentive program advice she might have. As you recall, Jennifer is a founding partner of and national director for Astron Solutions. Welcome back, Jennifer.
Jennifer, thanks so much for joining us again. We have all heard the terms incentive, bonus, and variable compensation, but what are they, and how did they really differ from each other?
Certainly, and JoDee and Susan, thank you so much for having me back. It’s a pleasure and an honor to be here. So let’s dive into our topic that we’re talking about here. And as we’re thinking about these terms, “variable compensation,” “bonus,” “incentive,” a lot of times in casual conversation, or even in the workplace, we’ll use those terms interchangeably, but really, although they are related, they are distinct. So if I’m…if I’m thinking about this, first I’m going to start big picture, and that big picture is variable compensation. That’s the umbrella term. So everything that we give to an employee that is not fixed, like, think about someone’s salary, right, or their hourly rate. Basically, they know what they’re going to get each paycheck, but variable compensation, it might go up, it might be down, it might not be there at all, right? So that’s that umbrella term. And under variable compensation, we have bonus and incentive. And these are two terms that really get used interchangeably, but there are some key distinctions between them. If I start with the more complicated of the two, if you will, incentives, that’s where I, as the employee, I have a goal that’s set for me and I know that if I achieve that goal, I will receive a certain reward, right? Maybe it’s $1,000, $10,000, two weeks paid vacation, right, whatever that might be. I know if I achieve the goal, there’s a reward that I’m going to get. So that’s what an incentive is, as opposed to a bonus, where the employee doesn’t know that it’s coming and they don’t necessarily know what they did to earn that compensation, so it might be like, “Hey, we had a great year this year. Thanks, everyone. Here’s $500,” something like that. So that’s the distinction between a bonus and an incentive.
You know, Jennifer, as you’re talking, I keep thinking, I was talking to my 17 year old nephew yesterday. He was telling me he got a promotion at the local carwash…
Congratulations to him.
…and he said that now he won’t…and he gets pretty big tips at the carwash, but now he’s going to be paid a flat hourly rate, but he’ll earn incentives on sales.
I said, what is…what does that mean to you? And he said, “I have no idea, but they told me it was a promotion.”
Oh my gosh, you know, I could tell you…I can reflect back on early in my career when we were recruiting for jobs that have…were incentive-based, and I can remember that we, as recruiters, we didn’t really understand the plan, and so we were having a very difficult time explaining it to the candidate. And so we had kind of, like, a go back to school type of event where we just really sat down with a blackboard with the line of business, understood that incentive plan. You wouldn’t believe how much better our recruiting got when we understood what it was it was going to drive. We wanted to drive behavior. So it doesn’t surprise me at all that your nephew’s got a job he doesn’t even know what those events are based on.
He’s very excited, though.
Aw, so sweet. So, Jennifer, I know a lot of organizations that I talk to, they’re hesitant about using variable comp, because there’s this belief that employees want to know how much it’s going to be in their paycheck consistently. What do you say to these organizations? Why might they want to consider changing things up and maybe using incentives or bonuses?
Mm hmm, exactly. And if I think first from the employee’s perspective, there is a certain level of comfort in knowing that I’m going to get x hundreds or x thousands of dollars every paycheck, and that uncertainty that goes along with variable compensation, whether it’s a bonus or incentive, can be unsettling to employees and to employers alike. But there’s a lot of good potential that can come out of using variable comp. And the first is driving performance. So if I build on the example of your nephew who just got promoted there, right, so now, assuming there’s some education in terms of what that sales incentive is based on, now he will know, oh, I need to do this, right, I need to get more sales or upsell for custom packages, things like that. Not only does that help him, but also now the organization is increasing their revenue. Perhaps they’re seeing an increase in sales of services that maybe had fallen off in the past, right? So it all comes back to driving performance in the organization, driving performance of…you know, to a higher level and to stimulate business where there might not have been some before, in addition to this helps employees to achieve goals that have been set for them. Because they might say, “Well, why should I invest the effort? Why should I care? Why should I take the time to achieve that goal? Well, hey, if I do, I’m gonna get this reward.” And for a lot of people, that extra take home pay could be very beneficial, particularly around the end of the year, the holidays, those sorts of things. And lastly, as I’m an employer and thinking about why I might want to explore using variable compensation, keep in mind that this expands that employee’s total rewards package without adding to fixed costs, so we’re not increasing that salary burden. If there’s performance, then they get paid, and we’re happy to pay because there’s performance, but if there isn’t, we’re not taking on that additional payroll, if you will. So those are three reasons why I would encourage those who are hesitant to start exploring variable compensation.
And so, you just mentioned a few, but overall, what are the some of the necessary elements for a successful incentive plan?
Certainly. Well, there are a number of them. We don’t have enough time in your podcast to go through all of them, but…so I’ll stick to the most critical ones. And the first is, assuming you want to use an incentive as opposed to a bonus, that you have actual goals for your employees to achieve. And also very important that those those goals are measurable, right? A lot of times I work with clients and they say, we want to do an incentive and here’s the goal. I would say, okay, well, in your accounting system and your payroll system, whatever system, your purchasing system, can you track metrics related to this goal? And many times they’ll say, no, we can’t. So then we might say, well, okay, then how is this going to work? Right? So we want to make sure we’ve got those goals and we have ways to measure them. The third thing we need to have is what’s called line of sight, S-I-G-H-T. And that means that I, as an employee, the actions that I take in my job can actually make that goal happen, you know, that I can achieve that goal, so I have control over that. If we don’t have line of sight, that doesn’t mean that we shouldn’t implement a variable comp plan, but we have to think about, you know, are we driving more overall organizational performance, maybe a bonus is more important or appropriate. So we’ve got to have that line of sight. Last two items that are essential for success, frequent communication. This is not the kind of thing where we say, oh, January 1, here we go. Here are the goals. We’ll see you December 31. Now, we have to have constant feedback, letting people know where are we in our performance, vis a vis those goals, what may have changed to the external environment that could help or hinder our success in achieving those goals. So that frequent communication and going hand in hand with that, transparency, right, we have to share the good, we have to share the not so good. We’re not keeping secrets when it comes to an incentive or variable compensation plan, so everyone needs to know where they stand at all times.
I think that makes such good sense. And I think back about my example, where we had a part of our recruiting team that was focused on trying to attract talent on an incentive plan, we learned from that first time experience that we needed to be part of every incentive change meeting, we needed to be just right there elbow to elbow with the line of business people, because we’re the front…front line that was going to be selling the incentive program as one of our total rewards. Communicate, communicate, communicate.
Jennifer, in your practice, do you see incentives used primarily for executives? Are you seeing it offered across the board? All employees?
Oh, yes. And let me preface my response with, first, clarification. So when I hear the word “executive,” I tend to think people who are in the C-suite, so, like, a Chief Executive Officer, Chief Financial Officer, although titles vary widely from one organization to another, but I’m…”executive” to me means that really top layer of leadership. And if we were having this discussion probably 20 years ago, that would be an easy question to answer. I’d say, yeah, this is for executives and it’s really not part of the total rewards package for everyone else in the organization. And times have changed. Employers have realized that variable compensation can be appropriate for all levels in the organization, from the CEO all the way down to whatever is that most entry level position, right? So you’ve got opportunity, as long as there is line of sight. Now, in practice, I’m really seeing something kind of in the middle there. So many of my clients that I work with are expanding variable comp opportunities down through middle management to individual contributor professionals. And as we get more into the hourly employees, it depends on the role, because they may have safety incentives or they may have sales incentives that they’re working with. So there may be tailored programs that work for those hourly positions. But for the most part, my clients, they are using variable compensation much more broadly than in the past.
You know, Jennifer, that reminds me, too, many moons ago, I worked for a company that owned a travel agency. And of course, most people don’t use travel agents anymore, at least for airline flights, I think people use them for cruises or big packages. But I remember being appalled one day when I discovered that the airlines – and this was 20 years ago, probably – the airlines would have different incentives going on to incent the travel agent to sell so many flights for them. So they were, of course, directing their customers to a particular airline. And I remember thinking, “You should always be looking at the cheapest price!” Right? Like, it never dawned on me that they might have incentives to sell certain airlines or flights. Surprising, really, to think about people we work with or sales people or customer service people that might have a specific incentive, like the car wash guy.
Exactly. And if we think about – this is a little bit of more of a negative example – but think about Wells Fargo a few years back, where all of their branch staff were incentivized to open accounts and sell more product. And that can show you the downside of incentives, but also helping us to say, hey, this person that I’m working with, are they on an incentive? Do they have my best interests at heart or is there something else working behind the scenes?
Right, exactly. So, Jennifer, if I’m thinking about implementing a variable comp plan, where should I start?
Ooh, alright. So, if we’re thinking about implementing a variable comp plan, there’s a few starting points where we should begin, and the first is that we want to ask a lot of questions. Right? People often assume that, alright, let’s implement a variable comp plan, let’s implement a bonus plan, and this is something that I can whip up over the weekend in my HR silo and I’m good to go. No. Take the opposite of that. So first, we want to ask a lot of questions related to the topics we talked about just a few moments ago. So goals, measurability, line of sight, communication, transparency. Do we have those? Yes, great. If not, can we build them? Right? And then how much commitment are we going to have around those? After that, let’s assume that we have all of those in place or can get them in place in the next couple of months, then I would start small and I would run a pilot. Let’s focus on one department or one function where we think, yes, we can track measurable goals, we’ve got that commitment to communication. Let’s pilot it there and see how it goes. Maybe we need to make some tweaks. Maybe there’s some things we hadn’t considered. And we can do that in a relatively safe environment before expanding out to the entire organization. In addition, we want to make sure that we’re not working in our silo of HR, so let’s work with finance, let’s work with our line managers or the leaders of that line department, so we’re getting their views and their input to make this program as successful as possible. So for example, one organization that I worked with many years ago, healthcare organization, well known name, and they were trying to enhance their business operations. So they were having difficulty collecting on the receivables. Their purchasing department wasn’t always looking at the lowest price, but still quality products to buy. So he said, all right, let’s start with an incentive related to the accounting department. Figured out what kind of metrics we could implement, worked with the accounting department directly, their leadership, built that plan, did some tweaking and a pilot test, and then expanded that content out to purchasing, and then it…and even HR in terms of talent acquisition. So you can start small with a pilot and then build out successfully from there.
I like that approach.
Jennifer, what makes executive compensation different than regular compensation? Who gets it? Why is a company smart, potentially, to design an approach that works?
Susan, excellent question. Because a lot of times when we talk about incentives, people immediately start thinking executive. So it’s important to explore this concept of executive compensation. And it may seem like there’s a lot of difference between, you know, quote, unquote, “regular” or staff compensation and executive comp. After all, there are people who specialize in just executive compensation. And certainly there are nuances, but in reality, it’s very similar to the comp that you and I receive, right, from our employers. The two main differences that I see are elements of the total rewards package, that being either – depending if you’re a for profit or not for profit, publicly held, privately held – long term incentives and/or stock, and then perquisites. And in today’s world we really don’t see as much with perks like we did, again, 10, 15, 20 years ago. So now that key differentiator comes with the long term incentives and/or stock. So the second part of your question says, you know, why should we design an approach that works for our organization? Well, really, that’s not limited to executive compensation. We want to have an approach for all of our compensation, for every employee, that makes sense. And that all ties back to compensation philosophy and strategy, and also our finances. And I think we talked about that on our first podcast when we were talking about compensation. But if I’m also thinking about why it’s smart for executive comp, to really tie that back to our philosophy and our strategy, it’s because of the…well, two reasons, really. One, the costs related to executive comp, right? We’re talking big ticket employees here, if you will, and big ticket packages, and also the visibility that their comp packages will often receive in the media. You know, if we’re nonprofit, it’s on our 990, so people have a window into our organization, and we don’t want to leave people doubting or questioning, right, why is this the package that it is.
I know we’re going to dig into the elements of some of that long term incentive compensation that are part of the compensation package, but before we do that, I know you mentioned about perquisites, which used to be very common. What are some of those perquisites that were common, and why did they die?
Mm hmm. So if I get my laundry list of perks that executives used to receive, well, the company car, first class airline travel, membership dues at a country club, membership dues at the airline clubs like the United club or, you know, Delta has theirs and so forth, spouse travel, meals, right, there were a lot of these perks, the additional life insurance, medical benefits, that were extra. Why did they die out? Transparency. People started to hear about this, and they would ask, “Well, why is that CEO always flying first class when they’re only flying to Atlanta?” Right? Assuming if they’re coming from New York, it’s an hour and a half flight. I think coach is okay. Now, if they were going to Japan or Hawaii, okay, long distance trip, makes sense, right? So that…that stakeholder transparency, people were questioning and saying you…Is this the best use of an organization’s funds? You saw that particularly with nonprofit organizations, on the for profit side, particularly with the publicly traded companies. In some instances, they were saying, this company is not doing well at all, right, and this leader may be driving this company into the ground. So why are they getting all this? Right? Let’s…let’s look at the message we’re sending. So that’s why we’ve seen that shift away from a lot of those perks. And now you still have, you know, first class travel for international flights, right? That kind of a thing. Maybe there’s an organization provided car or car allowance if this person does a lot of traveling, right, and driving. So does the perk make sense vis a vis what that incumbent does?
I bet some of our listeners still work at companies where a number of the things you mentioned are still offered, and so I think it’s good for them and for all of us to sort of know the trend is away from that. I remember, it wasn’t that long ago, we heard about… was it the CEO? One of the CEOs in the in the continuum of CEOs at GE, that used to have a second airplane that would go to wherever he went on the company airline, but a second jet would also go in case something happened to the first one, because it was so important that he not miss that next meeting. Yeah, I don’t know. I don’t know if that was GE or not, but it was a story I thought, oh, my goodness, I think that’s a perquisite that could probably go away.
Yes. As someone who spent a lot of hours in airports, yeah, that would be a nice luxury to have, but probably not the best use of the company’s dollars.
You know, I worked for a firm, again, early in my career that had incredible perks for their executives or partners, and when the firm got bought out, they did away with all of those. Now, the salaries were substantially increased, but they did away with all the perks, and I thought that was an interesting philosophy, to basically say, “We’re gonna pay you more, but then you can pay for those things yourself.” I do think it…it created a better transparency.
There’s nothing worse than getting on an airplane, a bunch of people from the same company, and you realize that the bosses are sitting up in first class and the schmucks like me are back at coach. That just doesn’t feel good. So I’m kind of glad…I’m glad the trend is…
…democratize, right? Yeah.
Well, Jennifer, what are some of the common elements of executive compensation packages?
If I think about an executive compensation package, there’s salary, like we’ve just talked about here. There will also be some kind of short term incentive, and when I’m saying short term, that means that that incentive will be paid out within a year’s time. Right? So the goals are something that we’re going to be able to hit within a year. Building on that, we’ve also got, of course, our benefits package. Right? The health insurance, the retirement plan, the paid time off, if they’re actually able to use it. Right? So all of those same elements that you or I as staff employees might receive. And then we get into that long term incentive, which may be in cash, it may be stock options, or phantom stock. We could have a whole separate podcast just talking about stock and the various iterations of that. But no matter the form, whether you’re choosing a long term incentive that pays out in cash or some kind of stock vehicle, the point is that we want our executives not only to be thinking about the here and now, but also down the road. Right? So these are focusing the executives on the long term. So three to five years from now, these are the goals that should be achieved, or this is where we think the stock should be at this point. Right? So we’re making…as executives, we’re making decisions that not only help us be successful today, but also down the road. Right? Because they have that line of sight, which you or I, let’s say, in the HR department wouldn’t necessarily have. Perks, there may be some perks like like we’ve talked about, and again, as long as they’re tied into that role and the role’s needs and travel, for example, that can still be an appropriate fit. One other element of executive comp that we don’t always see with the whole rest of the organization are additional retirement options. So there may be a deferred compensation plan where they’re not getting the tax breaks or the benefits that come along with, say, a 401(k) or a 403(b) plan, but they’re able to put away more money towards retirement, so that can be an additional benefit for your executives.
Jennifer, thank you for that. It was, I think, really helpful. I know our listeners are interested. What is the difference between stock options and RSUs? I know they both involve stock, but what is the difference?
Mm hmm, exactly. And stock can get so complicated, because you’ve mentioned two options there. Stock – no pun intended – stock options and RSUs, or restricted stock units. And then we can also get into stock purchase plans and phantom stock and restricted stock grants and…and all these things. It becomes exceedingly complicated. But let’s focus on those two main ones that you’ve mentioned, because these are probably top of mind for most of your listeners. So if we think about a stock option, what is that? So this is going to be for our publicly traded companies, where they are giving their employees what are called “stock options,” which means that they have the opportunity to purchase stock at a certain price point. Right? So if I think back to…oh, again, you know, 20 years, you know, a lot of companies were giving out stock options. I had a lot of friends who did that, and they would hold on to those stock options and as soon as they would vest, they would buy the shares and then sell them, and they would make a nice profit off of that. So that was some additional compensation for them. There are tax implications associated with stock options, but for the most part, for purposes of our podcast, what you need to know is that someone has to hold on to those shares for at least a year. Right? That’s…that’s the main goal there. And that’s changed since the last 20 years or so. But stock options can be issued to employees, non-employees, members of the board, for example, Board of Directors, there’s a lot of rules related to them. Now the other one, a restricted stock unit or an RSU, you know, what is that? How does that differ? Well, RSUs are a lot like phantom stock, because if I’m the employee and I receive this RSU, I don’t actually own part of the company like I would with a stock option. On the other hand, it’s a little bit like paper ownership or paper money in some ways. So you’re seeing restricted stock units more with privately held, for profit organizations who want to mimic the idea of stock options so they can say to their candidates or to their employees, “Well, we’re privately held, so we don’t have stock, but we’re going to try and mimic that for you.” So that way, you’re still getting the benefit, as it were, of stock. Right? Seeing your hard work have a positive impact in our company’s valuation, which then can turn into more income down the road for you. So that’s the short course on the difference between stock options and RSUs.
Earlier in my career, I received stock options, and some of them were underwater by the time they expired, but some that actually matured, I was able to buy the stock at a great price. The gain I made from that, I bought two cemetery plots for my husband and I, and he still hasn’t forgiven me. He’s always…he’s always saying, “That’s what you decided to do with that long term incentive?” I said, “Long term here, the key is long term! It’s a real estate investment for the long term,” but he’s…still kind of a sore subject around my house.
Well, if we ever meet him, we’ll be sure not to mention that. But that’s very wise, thinking about long term. And also, you know, if you think about that option, it wasn’t money that you necessarily had, you know, that you took out of a savings account quickly and you put it towards something you need – all of us will need, of course – and very, very wise. I like it.
I do too. Susan, I think you took the term “long term” to a whole new level.
I did indeed.
To eternity. Yes.
So Jennifer, how does executive comp differ in for profit versus non-profit organizations?
Well, one big difference is what we’ve been talking about here related to stock. Whether, you know, in the for profit, whether you’re publicly traded or privately held, you can get some kind of stock activity happening there, but when you’re in a nonprofit organization, that doesn’t exist. So that is one key difference between those compensation packages. The other has to do with the laws surrounding executive compensation. So if I think about my publicly traded organizations, they are dealing with the SEC, the Securities and Exchange Commission, and that’s going to impact what’s happening with executive comp, because so much of their packages are going to be tied with long term incentives and stocks and so forth. If I think about nonprofit organizations, on the other hand, they are concerned with the IRS, the Internal Revenue Service, and their intermediate sanctions. And, again, we could have a whole podcast just talking about the IRS intermediate sanctions, but the…the short synopsis of those is that board members have a fiduciary responsibility to make sure that the organization’s income and revenues are being spent appropriately and not overcompensating the executives. And so every year, there needs to be a study done on executive compensation to make sure that it is within market and no one has been overcompensated, because if an executive is found to be overcompensated, there are penalties and fines that can be levied against that executive, against those board members who approved that compensation package. And depending on how egregious the overcompensation was, in theory, that nonprofit could lose their nonprofit tax status, so there’s a lot at stake. So for our nonprofit organizations, they want to make sure that they get that executive comp, quote, unquote, “right.” The third element that differs is the amount of transparency. Now, certainly, with our for profit organizations and the ones that are publicly traded, right, we hear about them on the news, their stockholder meetings, so there’s a lot that goes on there. Our privately held for profits, it’s a little different. Right? Those internal owners, of course, will know what’s happening, and depending on what’s happening, maybe that might make it into the news, but it’s not quite as transparent, especially with family owned businesses. You don’t see as much transparency there. With our nonprofit organizations, you’ve got the IRS Form 990. Right? So you’ve got transparency there. Our funders, our donors, the organizations we get grants from, they’re all going to look at executive comp and say…Is this appropriate? Is this the right use of dollars? The public may weigh in as well. So you’ve got so many stakeholders that we have to be aware of their perspectives and how that then impacts executive comp.
I’ve done a little work with some not for profits, and I’ve…I was so surprised those 990s are available. Anybody, any public person, could go out, take a look, and see the compensation, the perks of any nonprofit executive. Very surprising. Good idea to be transparent. Good idea.
Exactly. Yes. And…and part of the…you know, we talked about perks a few moments ago, and the 990 form went through a change a few years back, and when that change happened, that’s when the value of the perks that were being given to nonprofit executives really came to the forefront and people started to say, “Oh, why are you paying for this? Why are you paying for that?” Or internally, the boards or the executives said to themselves, “I don’t know if we want to tell everyone that we’re paying for this or that, and so let’s let’s shift those dollars into a different aspect of the executive comp program.”
Very interesting. So Jennifer, who needs to be involved in an executive compensation process in any organization?
So executive comp is not a siloed activity, you know, for the domain of the one or two executive comp specialists on your staff. Certainly HR needs to be involved. It’s critical that they are part of that process, because they’ve got the insight on compensation, the expertise related to compensation and total rewards, and all the different surveys for benchmarking, but we need to expand out, so we should have our board of directors or Board of Trustees, whatever they’re called in your organization, they need to be in involved. It may not be the whole board, it might be the executive committee, an HR and governance committee, a finance committee, for example, but some part of the board needs to be involved. In addition, you may want to bring in some outside consultants to help. Right? To do their own review and say, “yes, we don’t have overcompensation,” or “this might be a concern, how do we rework our compensation package?”. Legal counsel may be appropriate as well, depending on, you know, if we’ve got a contract involved with some of the executives, and do we need to renegotiate contracts. And last but not least, I’m going to caveat this to a certain extent, our CEO, President, Executive Director, whoever that top leader is in the organization should be involved. How are they involved? Well, they can give their recommendations on salary increases, bonuses, total rewards package adjustments for the people below them, for the executives who report into them, so that might be a CFO, a CMO, a CHRO, for example. But that top leader should not be involved in approving his or her own compensation package. Right? That is truly the responsibility of the board.
Jennifer, you mentioned a minute ago, too, about having a comp study or getting market data to ensure that executive comp is appropriate. Do you recommend that, or even is it required for some organizations, that that be done annually, or can you go a couple years?
Oh, yes, that’s often a question related to everything in compensation. Do we have to look at this annually, or can we do it, say, every other year? Best practice is every year. Yes. Okay. So that’s my recommendation. Because as markets change, you may have turnover and you’re dealing with a different set of incumbents, you may have board turnover and they may have different philosophies than the previous board members. So best practice is to do that review every year, and in fact, for the nonprofits, on their 990 form, before they list out the compensation for the executives, there’s a series of questions with check box answers that need to be responded to, and one of those is “Did you do a compensation study for that year?”. Right? So the IRS is even saying, yeah, this is a good idea, let’s…let’s stay on top of that.
Yeah. By the way, we’ve mentioned form 990 a couple times. Now, if some of our listeners are not familiar with that form, it’s…I think of it sort of as a tax return for nonprofit. Although, nonprofits don’t pay tax, generally, so it’s really considered to be an informational return, where donors or other people can go view some of this information.
Absolutely. Yes, that’s a perfect way to think about it. It’s like our 1040 that we submit each year, the nonprofits submit that 990. And we talked about a little bit earlier about transparency and the availability of these forms. One website that I go to is…it used to be called GuideStar, G-U-I-D-E-S-T-A-R, guidestar.org. They recently merged with another organization called Candid, C-A-N-D-I-D. Anyone, you can set up an account, there’s no charge, you can go in there and look up all of these tax forms for any nonprofit that you can think of and they have in their database.
So Jennifer, there’s been a lot of noise every time there’s, like, annual meetings of some of the really large corporations in the world, where shareholders…sometimes there’s activists talking about the CEO pay, often there’ll be a proxy…or I’m sorry, not a proxy, a…what do you call it? A…one of the things they vote on.
Yes. Mm hmm. Yeah. Yeah. And, of course, I’m blanking on it as well.
Can’t think of the word.
Yeah. “Say on Pay” is the general term that we’re thinking about here.
Yeah. Well, and I’d love your perspective on it, the Say on Pay. Are executives out there earning too much? What’s going on in your from your world?
Wow, what a loaded question. Oh, my gosh, because it’s really a spectrum of responses that I could give here. And I can certainly think of some egregious examples in the for profit space of leaders who are making millions and millions of dollars and driving companies into the ground. Yeah. Like, why are we paying them that much, you know, either do something different or exit them and let’s get some new leadership in there. On the other end of the extreme, and I have to chuckle, because with my students where I teach an undergraduate class in HR, when we get to the lesson on compensation, we always talk about this topic, and there’s a case study that we do related to CVS pharmacies, and the question that’s posed is exactly the one that you’ve asked here. Should the CEO make that much? And the students, without fail, always say that the CEO should make the same as their retail staff. Right? So everyone should be making $15 an hour. And on the one hand, I can appreciate that. Right? You don’t want such a difference in pay that we’re hearing about in the news. At the same time, the CEO, the CFO, all of those roles, there’s much more complexity than a retail clerk, let’s say. Not to say that either job is not important; rather, they both are to the success of the organization. But with executives, there’s a lot more risk, there’s a lot more complexity, and because of that the rewards should be higher. Right? More than $15 an hour and our basic health insurance, let’s say. But if I think about most of my clients, they’re in the middle of that spectrum, where when I do an analysis for them, I don’t see that they are necessarily overpaid vis a vis the market data that we have, whether we’re looking at base pay or incentives or the total rewards package. Now, certainly there may be an outlier here or there that ties back to unique skill sets, but that person has and the supply and demand for that talent particularly in a national recruiting market. But for the most part, if my clients shared their information broadly with everyone listening to this podcast, I don’t think anyone would say, “Wow, these people are terribly overpaid in the in the millions of dollars and and something needs to be done here.” But there are examples out there, and we hear them on the news, where that is the case.
Jennifer, we heard at the beginning of the pandemic that executives in many organizations were taking pay cuts.
Is it too early to tell still what impact the pandemic might have on executive comp or how that might play out going forward?
Oh, that is the second hottest question of the year. Right? Executive comp was number one, and this is number two here. Yes. You know, in terms of executive comp, and staff compensation as well, a lot of unknowns around what is the long term impact of COVID-19 on people’s salaries and bonuses and benefits plans. To your point, I know of many organizations where the executives took a pay cut, some were larger than others, a lot of that hinged on the industry that those organizations were in and how COVID impacted their revenue. So some, I think about…let’s say those in the hospitality industry, are decimated. Right? Because no one is traveling for months and months, so larger cuts, there are certainly no bonuses unless it’s going to be some kind of retention tool a golden handcuff. If I think about those in healthcare, you know, unfortunately, some of those organizations, their business was booming, albeit for the wrong reasons, but, you know…so that may help them. At the same time, reimbursements may not be where they need to be, so they may…may be facing some challenging times as well. Some manufacturing, on the other hand, can’t get the product out fast enough, and there, we could say, well, there’s no need for a pay cut, and in fact, maybe we need variable comp all around for everyone, just to keep up with the demand for our product. So lots of unknowns. I suspect that we are going to see, overall, a slight decline in base compensation, we’ll probably see more of a decline in total cash compensation, which is base plus bonus or incentive, because of the economic impacts of this year. And how that plays out into 2021 and ’22 will depend on how long we’re in this situation. Right? When does a vaccine come? Is it effective? When does the economy get jumpstarted again? When can we open up our businesses and our restaurants and our movie theaters like we’re used to?
Yeah, it is so interesting to me to think about, as…as you mentioned, the impact, that some organizations are thriving more than others and yet some, as you said, were decimated by it, and it’ll be interesting to see what comes out of that.
Yes, yes. And hopefully, good all around. That’s…that’s what we’re looking for. For those who face those challenges, how can they re-energize themselves and maybe change their product or service mix to be successful in our, quote, unquote, “new normal”?
Amen. So Jennifer, what else do our listeners need to know?
Oh, what else do our listeners need to know? They need to know stakeholder transparency. That is essential. And we’ve been talking about that over the last few minutes here, so keep that in mind. Because even if you think that we are a privately held company, no one’s going to know what we pay our executives, people find a way. It will come out. And in light of that, you want to ask yourself a few questions as you are designing incentive plans, executive compensation plans. Ask yourself, if I was that third party stakeholder, what would I think of this? Would I think this is a good use of funds? Would I think it’s a waste? Would I have questions? Are there ethical issues, perhaps, related to this? So always keep that third party stakeholder point of view in mind when you’re doing your compensation work. Also, for our nonprofit listeners, ask yourself, if I donated funds to this organization, would I be comfortable with how they’re being spent? Or for both our not for profit and our for profit organizations, if this comp program or if this executive was on the front page of – insert your favorite newspaper here – how comfortable would I feel about that? Or if CNN was broadcasting this, would I be comfortable with this comp package or would I have some issues? And if your gut is telling you I think there’s some issues here, take the time, go back, investigate, rework as necessary, so that way, you’ve got that full confidence in your programs and in your recommendations.
Yeah, I do think that’s so interesting. I’ve spent my entire career in privately held organizations, and Susan spent most of hers in publicly held, and so I’m always fascinated to see in the newspaper when they publish salaries. Of course, you know, governmental units do that, too…publicly held companies. I just always, like, cringe at the thought of my salary being in the paper, which I’m sure it never will be, but I’m always fascinated by what’s going through people’s minds when they see their salary blasted in the newspaper.
So I think it’s always tough after you have a particularly difficult year in a publicly traded company, and then the annual report comes out and you realize that the CEO took home quite a bit of money, I think it can be troubling. So I think that’s such great advice for us, Jennifer.
Yeah. And Jennifer, how can our listeners reach out to you if they’re interested in finding out more or using your services?
Thank you. Yes. And certainly, if anyone listening to this podcast has questions, I’m happy to connect with you on LinkedIn. Also, you can visit my company’s website. So the company name is Astron Solutions, that’s A-S-T-R-O-N, and then solutions, plural, all one word, dot com.
Thank you so much.
Jennifer, it’s been a pleasure. Thanks for coming.
Oh, thank you for having me.
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JoDee, for this episode, we have a best practice sharing, where we get a chance to share some of the great ideas we’ve heard from many of our listeners. So today, we asked, “How are you supporting your employees’ mental health during these challenging times?” and we heard a number of things.
So the first one was that one company hired a fitness coach to create and deliver, not classes for their employees, but kids’ fitness classes that he delivers via Zoom for children going to school virtually. I love that.
I think that’s a trend, that companies now are thinking about the whole family as a part of their benefits and not just the employee themselves. So…
So true. So there’s a company named Nimbus out of Massachusetts, and they began a first virtual ukulele building class, kind of a… Yes, they sent everyone a kit, and then they had instructions on how to do it yourself. I thought that was really fun. And then another company out of Massachusetts named Arachis. They ended up doing a virtual cocktail making class with a instructor. Now, I’ve seen this really pick up in popularity. I’m going to be going to a virtual conference next week, it’s actually the Vermont and New Hampshire SHRM conference, and they have as one of their activities at the end of the day a cocktail making class, and they’re going to send you all the ingredients you need to have…they’re not going to send you the ingredients, but I think that’s so clever, and you’ll all make the drink together.
I love it. And another one we heard from, a company hired homework helpers who their employees could engage for their children who they didn’t feel equipped to help. I know if my kids were home, I would definitely be using that benefit right now.
I know. I admire every parent out there, any listener that you’re helping with your children’s homework or their daily work activities because they’re going to school remotely, I admire you. Really, you’re heroes. And so the final one we heard about was Rome Therapeutics. They recently hired a stand up comic to perform over Zoom, which I thought was a great idea, you know, trying to bring levity to it. Be careful. Every time anybody hires a comedian, I think you better screen all the material first, please. We want to make sure they don’t cross lines, they’re not offensive. But boy, if you could keep it clean, what a great way to pick up spirits during these challenging times.
Yeah, you know, it’s funny, one time when I was an internal HR director, I hired a comedian for a…an internal event where we also invited our clients, too, and I had heard him speak before, but I can tell you the entire time he was talking, I was praying, like, please don’t say anything offensive, so it was very nerve wracking experience for me to worry about that, but it was a big hit.
Wonderful. And I think for your mental health right now, anything that we can do to help our employees with their resiliency makes good sense. Great.
Love it. Susan, we have a listener question today. The question is, “Why are companies so reluctant to give feedback to job candidates who don’t get the role? Secondly, why do they often only give employee references as job title and date of employment, and if they have been given permission, even salary information?”
I do think this is very true. I believe that companies, when they’re turning someone down for a job, they’re reluctant to be very transparent. I think the fear is that…will this candidate be angry and come back after me? Will they read into it that they’ve been discriminated in some way, shape, or form? So I think that with risk concerns, that most businesses are very reluctant. Now, I will tell you that I hope that I…what I’m hearing is that there may be a turn in that, that employers are recognizing that it’s very important to have a great candidate experience. And candidates will tell you, they just want to know. They’re not…they’re not there to fight with you. They just want to understand what could they do better the next time. So I am…as I talk to HR professionals, I do hear them saying, you know, I am trying very hard to tell them what it was. Sometimes it truly is that they were the second best candidate, we hired somebody else who met 99% of what we needed, and this person had 94%, they were great. We couldn’t hire them, because we found the better candidate. But sometimes there is something that happened during the process. Maybe they really blew it in one of the interviews. And if I can give them the feedback that they started talking about XYZ, and in our company, that’s something that we don’t endorse or don’t believe in or we don’t…it’s not consistent with how we approach things. If you can do it, it’s such a gift and I think it’s going to help your employment brand. So I’m a fan of being as honest as you humanly can be. Now, I think that is why, also, on the second part of that question, companies, when someone has left them, they get called for references, and the company who’s trying to hire them want to know…how was their attendance? You know, what was their team spirit like? Is this somebody who really produced quality results? Companies are reluctant to share that information, because again, they don’t want to have an angry ex-employee, or they don’t want to share some information. Maybe they got rid of somebody because they weren’t a great performer at project management or whatever. They just want to keep it close to the vest and it’s about risk mitigation. Right, wrong, I don’t know. But I don’t see that trend changing very much. JoDee, what are you seeing or hearing?
Yeah, I agree. It’s just a tough dilemma. I mean, I’ve had the same thing happen to me, where people have called for references and it’s…it’s just a tough area, right, to be totally transparent and honest, and you don’t want to hurt the person and yet you want to help the company looking to hire them, and I…it’s much simpler to say, we just give out the dates of employment, right? It’s sort of an easy go to.
And you’re consistent about it, so even if you have a great employee versus not so great, if you’re consistent, there is, you know, risk mitigation there.
So good luck to all of you who are facing that. We love transparency where you can have it. We also understand that you’re trying to balance risk.
JoDee, it’s time for in the news. The EEOC announced in June 2020 that employers cannot require employees to undergo COVID-19 antibody testing before permitting employees to reenter the workplace. I can see why employers want to. It gives you some sense of comfort. We don’t know if antibodies is going to protect you for…for very long, but you can see why they’d want to. But the EEOC has come out strongly about this, and what they’re saying is you can take employees’ temperatures before they enter your workplace, you can require employees to stay home if they exhibit any kind of symptoms that could be interpreted to be COVID-19, you can require all of your employees to take a COVID-19 test before coming into work, and you can require a note from a doctor certifying fitness for duty. Of course, during a pandemic, do you really want your employees to have to go to a doctor? I think that’s something to consider. The one thing you cannot do is have them take a COVID-19 antibody testing.
Lots of new rules coming out around that, for sure.
That’s right. Well, thank you so much for joining today.
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