Over the years we've seen certain problems crop up on a regular basis. Though common, the following short list of pitfalls often have innovative and even bold solutions that turn blunders into opportunities. In some cases they can be avoided entirely.
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1. Mistaken Exempt/Non-Exempt Determination.
There have been several multimillion-dollar suits and settlements. The names read like a Who's Who of major American companies: IBM, Farmers Insurance, Walmart, Wells Fargo, just to name a few. These companies appear to have taken an aggressive stance, and lost. Deciding wrong—or worse, guessing wrong - can be embarrassing and expensive. This is not an issue to ignore.
2. Thinking Phantom Stock is really Stock.
There are few words less understood in executive compensation than "Phantom Stock." We have served as an expert witness where the definition of just what is and is not Phantom Stock came into play. Here's a hint: it's called "phantom" for a reason.
3. Waiting too long to provide stock options prior to an IPO.
If you wait until two months before an IPO to install your first stock option plan, you've waited too long. Here's anther hint: it will be very difficult to convince an outside party that the options you granted in March at $0.50/share were fairly priced even though the IPO occurred one month later at $10.00/share.
4. "Trust Me" plans in executive compensation.
We see these plans all the time: the owner or the Board issues a vague statement that is supposed to describe a compensation plan but in the end, all the words really say is, "Trust me to treat you right." And then the owner or Board wonders why the participants seem less than thrilled about this new "plan."
5. Failing to update salary structures periodically, or repeatedly doing so by just adding 4%.
We are not the kind of consultant that urges a client to do a full-blown market analysis and salary program update every year. Most plans have a useful life of three to four years, depending on changes in the market and changes in the company. On the other hand, simply adding 4% to salary ranges for three or four years is also not likely to work. Salary programs need updating periodically; the frequency depends on how much has changed in your company and in the market.
6. Thinking employees understand and value their benefits.
You've probably heard about "the hidden paycheck" but have you thought about what those words actually mean? Your company is spending a small—or not so small—fortune on benefits. Yet all you hear when you ask employees to pay another few bucks each month to cover a portion of the increased premium are complaints. Well-run companies, large and small, provide annual benefit statements to remind employees of the value of the compensation that they don't see in every paycheck. Isn't it time you got some credit for all the money you've been paying to provide benefits to your employees?
Read more about our Benefit Statements services
7. Making incentive plans too complicated, or spreading too little incentive over too many objectives and requirements.
This one's scary. We've seen dozens of plans that are so over-designed as to make them almost useless. Think about the impact of a plan that tells the participant that he or she has an incentive maximum opportunity of 10%(!) of base pay and all he or she has to do is work on the 20 goals listed in the memo. To add some spice to the mix, why not make a few of them completely beyond the control of the participant. Then give yourself a few seconds to think about why no one is excited - or motivated - about the plan.
8. Thinking a 4% merit budget is too small to really make a difference in recognizing performance.
Merit budgets are tight; they've always been tight and always will be tight. But that doesn't mean a company can't do things to make sure it's getting the most bang for the limited bucks. Consider a Merit Increase Matrix. Consider tying increases to where the salary falls in the salary range (you do have a salary range for each job, right?).
9. Failing to document an incentive plan; failing to communicate it properly.
This is a cousin to the Trust Me blunder. No one likes paperwork and people like reading "legalese" even less. But every year there are lawsuits or just angry looks when it turns out there was a surprise lurking in the details. Any good plan, especially any plan that will be in place for several years, deserves a plan document.
10. Determining stock grants before 123R calculations are determined.
Which came first, the chicken or the egg? Maybe we'll never know—but we do know we cannot do a first rate job of developing a stock granting framework without knowing the 123R costs. Before trying to allocate the precious resource— your stock—try some "what ifs" with your 123R calculations. By the way, your auditor cannot prepare the 123R estimates, but we can. Then your auditor can audit what we've estimated (more information).