David Mansbach, co-president, North America, at HVS Executive Search in Mineola, N.Y., and longtime consultant to the restaurant and hospitality industries, knows that the best compensation packages aren’t all about the numbers. Mansbach has outlined here some winning strategies.
TOTAL REWARDS
When designing an effective compensation plan to attract and retain the highest performers, it is critical to consider the total rewards package. While money is a key driver, senior executives place great value on other rewards such as:
Benefits—Programs an employer uses to supplement the cash compensation that employees receive, like health, income protection, savings and retirement programs.
Work-Life—A specific set of organizational practices, policies and programs, plus a philosophy that actively supports efforts to help employees achieve success both at work and home.
Performance and Recognition—Performance is the alignment of organizational, team and individual efforts toward the achievement of business goals; recognition acknowledges or gives special attention to employee actions, efforts, behavior or performance. It meets an intrinsic psychological need for appreciation of one’s efforts and supports business strategy by reinforcing certain behaviors that contribute to organizational success. I have found that a simple “thank you” or compliment for a job well done can have as great an effect as a cash bonus.
Development and Career Opportunities—As it pertains to total rewards, development is defined as a set of learning experiences designed to enhance employees’ applied skills and competencies. Development engages employees to perform better and engages leaders to advance their organizations’ people strategies. An effective development program will lead to career opportunities, a plan for employees to advance their career goals. When executed correctly the company will support career opportunities so the best and brightest are deployed in positions that enable them to deliver their greatest value.
Long-Term Incentive Planning—When it comes to the design of executive-level, long-term incentive plans, I have found that many companies are losing out on a great opportunity to align rewards with company objectives. The foundation to a successful long-term incentive plan is to review the objectives of the organization constantly. Analyze the company mission and vision statement, core values, culture and external business environments. That will help you create an ideal position for implementing or reviewing programs.
KEY QUESTIONS TO CONSIDER:
What is the current business situation and business plan—growing, maturing or declining? Is the goal to push for maximum short-term growth or is the organization trying to create a company that is “built to last”? What need is the company trying to address via its equity program—attracting and retaining good employees, motivating employees to perform better or creating a culture in which all are focused on company performance? What incentive programs are affordable in terms of impacts on cash flow, dilution and unwanted turnover?
TYPES OF PROGRAMS TO CONSIDER
Stock Options—Right to purchase shares of company stock at a specified price when they become exercisable. Participant realizes value when stock price rises above the exercise price.
Performance Options/Shares—Stock options earned based on performance attainment, usually over a multiyear period. Performance can affect number of options earned or number vesting.
Stock Appreciation Rights, or SARs—Works like stock options, except no stock is bought or sold, allowing the participant to realize share appreciation without having to front the money.
Stock Grants—Can be structured as direct grants of full-value shares or annual incentive plan earnings paid out in shares/restricted shares.
Restricted Stock—Full Value Stock earned based on time of service. Popular variation is Performance Restricted Stock, which is based on attainment of performance goals.
Delayed Issuance Awards—Restricted unit, deferred stock or phantom stock. Similar to restricted stock, except actual shares are issued only after vesting date occurs or performance criteria are satisfied.
Employee Stock Ownership Plans, or ESOPs—Broad-based, tax-qualified, defined-contribution retirement plans that make the company’s employees shareholders. Contributions are made by employer and must be invested in company stock.
Employee Stock Purchase Plans, or ESPPs, and Nonqualified Stock Purchase Plans—ESPPs allow employees to purchase stock through payroll deductions, typically at a discount to fair-market value, or FMV. If holding periods are met, employee is not taxed until sale. In nonqualified stock purchase plans, the company sells stock to employees at or below FMV.
401(k)—Used primarily as a retirement savings vehicle that allow employees to defer income on a pre-tax basis to save for retirement purposes. The employer may make matching contributions in company stock, and participants may invest their elective deferrals in company stock.
Nonqualified Deferred Compensation—Used primarily as a retirement savings vehicle. It is important to note that the new section 409A of the Internal Revenue Code dramatically revises the tax rules controlling nonqualified deferred compensation.
MAXIMIZE YOUR ORGANIZATIONAL COMPENSATION PHILOSOPHY
While most companies within the chain restaurant industry purport to have an organizational compensation philosophy, I have found that many companies don’t take full advantage of a program’s potential. A well-crafted compensation philosophy will provide your organization with a roadmap supporting short and long-term business strategies. Taking full advantage of a well-thought-out and strategic program will set you apart from your competition.