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THE EXCHANGE March, 2014

EVOLVING view of e x e c u t i v e b e n e f i t s A n

The Lions and the Lambs…

Boards of Directors and their Corporate Governances

A Business Plan tool



Can C H A N G E S





Don’t Blame the


Organizational Climate:

The Driver of Peak Performance


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C O N T E N T S 1 4


Can Changes be Painless? Submitted by Lynn Thompson, BullseyeEngagment

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An Evolving View of Executive Benefits Submitted by Robert D. Birdsell, Grahall/EB

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The Lions and the Lambs on Behavior of Boards of Directors Submitted by Michael Dennis Graham, Grahall LLCc

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Don’t Blame the Internet Submitted by Jim Finklestein, FutureSense, Inc.

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The Driver of Peak Performance Submitted by SES Advisors, Inc.

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Despite Landing the cover of VOGUE, Yahoo’s Marissa Mayer trails supermodel Gisele B ü n d c h e n in realized earnings

Submitted by Main Data Group, Inc.













Thinking Mechanisms that Support Change Submitted by Marvin L. Smith, Deliberate Synergy ESOPS


A Business Succession Planning Tool Worth Considering Submitted by Tabitha Croscut & Chuck Coyne, SES Advisors, Inc. REWARDS


The Gaping Hole in Your Benchmarking Strategy Critical Executive Retirement Data An Interview with Bruce Brownell, Fulcrum Partners, LLC



Can it be Big Data? Transforming Data into Insight Submitted by Michael Dennis Graham, GRAHALL, LLC



Is the CEO Paid Too Much? A Customer Perspective Submitted by Charles Patton, GRAHALL, LLC



C O L U M N S 5

Letter from the Editor



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10 Bookstop: BOARD OF DIRECTORS by Michael Dennis Graham, Grahall, LLC 12 March’s Shape of the Month: Boards of Directors

We hope you enjoy our March issue of The People Strategy Exchange. Missed last month’s issue? Find it here at


As we continue our investigation of People Strategy we ask for your direct feedback about our endeavor. Please share your

thoughts and ideas for stories, contribute to the discussion through our feedback options, most importantly SPEAK UP about what you want to read and better understand about how people strategy can drive your organizational performance and success.


Letter from our Editor…


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It is madness some might say that no one now holds a potential winning bracket for the NCAA basketball games. Perhaps Warren Buffett can breathe a sigh of relief that his $1 billion is still safe in his checking account (or under his mattress or wherever billionaires stash their cash). But perhaps Buffett had faith in the upsets or hedged his bet with an insurance policy from Lloyds. The upsets seen in the NCAA tournament will leave “bracketeers” shaking their heads for months, and college basketball coaches worrying about contracts. But let’s leave madness, upsets and worry aside. In this issue of PSX we provide insight and intelligence into areas of people strategy. Our contributors this month address a wide range of topics from practical to strategic, from thoughtful to spirited, and in all cases providing perspectives you may not have considered. We invite you this month to investigate using ESOPs as a succession planning tool and identifying ways to enhance executive benefits without increasing costs; find ways to make performance appraisals not just painless but fun (yes FUN!), consider CEO pay from a customer’s perspective, help you to analyze your board’s contribution, and whether you are using the data at hand to discover new insights to drive organizational performance. We hope to provoke some dialogue with these and our other articles, columns, and topics. Join the conversation and become part of the robust exchange of information. To leave us your feedback, critiques, and suggestions click here. (Just, please, don’t remind us of our busted brackets! And to all of you still with shovels and windshield scrapers in hand, know we are all hoping that April’s showers will be rain and not snow.) All the best,

link to our JANUARY AND FEBRUARY ISSUES People Strategy Exchange




u t o r s    



C o n t r i

MARCH 2014 Lynn Thompson,

Lynn is Director of Alliances & Business Development at BullseyeEngagement. For our March issue, Lynn submitted the article Can Change be Painless? She is responsible for identifying and supporting Partners be they referral, technology or reseller partners. Most recently, Lynn was the liaison to KeneXa, an IBM company. Lynn brings more than 24 years experience in Human Resource related applications. She held sales and marketing positions at IBM, Lawson, Kronos and Lynn also spent time in several start ups including Emlogis where she was VP of Sales and Thrion where she served as both CMO and VP of Sales. Lynn can be reached at

Bob Birdsell, Managing Director for Grahall/EBS. For our March issue, Bob Birdsell

has penned the article An Evolving View of Executive Benefits. Grahall/EBS is a firm specializing in the discovery of new and innovative executive benefit programs designed to replace existing plans which have become obsolete in the current regulatory and tax environment. Bob has invested the last 25 years of his career in assisting organizations in creating, implementing, and administering state of the art benefit programs for organizations in numerous industries. Bob can be reached at

Bruce Brownell

comes the article that discusses critical executive From retirement data in his article The Gaping Hole in Your Benchmarking Strategy. Bruce Brownell, a founder of Fulcrum Partners, LLC, is responsible for analysis, design, integration, administration and communication of executive compensation and benefit strategies. With more than 25 years in financial consulting, including the past 15 years exclusively in Executive Benefits, Bruce has consulted in for-profit industries, including engineering, manufacturing, distribution, health care and technology. Bruce can be reached at

Jim Finkelstein pens the monthly column for PSX titled “Igniting the Fuse”.

For this March issue Jim writes about Don’t Blame the Internet. Jim, President & CEO, FutureSense, Inc., has over 37 years of consulting and corporate experience, and has specialized in business and people strategy, motivation and reward, and organizational assessment, development, communications, and transformation. Jim’s experience has included being a Partner in a Big Five firm; a CEO of a professional services firm; a corporate executive for Fortune 500 companies; and an entrepreneur with his current company, FutureSense, Inc. Jim can be reached at

b u t o r s Michael Graham

C o n t

Michael leads Grahall Paid Fairly and Grahall HR Ac-

cess. Grahall is an intellectual capital firm whose comprehensive services help organizations maximize the value exchange between organizations and individuals.. Michael Graham has over 38 years of experience in the compensation and benefits field advising organizations in all industries. This month, Michael penned the articles on The Lion and The Lamb, and Big Data. Michael can be reached at or through


Craig Main of Main Data Group, comes an study which compares the

Compensation of Yahoo’s CEO Marissa Mayer with supermodel Gisele Bündchen. Main Data Group is a provider of high-resolution executive compensation data. We have a robust cloud-based platform which streamlines peer comparison work for compensation professionals. Our breadth-of-data and ease-of-use go above and beyond what is offered by any other product currently available. Information and analyses in this article were developed using the Main Data Group Snapshot Data™ executive compensation benchmarking tool. Our analyses are based on information disclosed in SEC filings. To learn more about Snapshot Data™ or to request a free two-week trial, e-mail us at or call us at (408) 776-1000 x106.

Marvin Smith

of Deliberate Synergy offers the third in his series of

“ Blinding Glimpses into the Obvious ” with a discussion of Thinking

Mechanisms that Support Change. Deliberate Synergy puts innovation into practice with people, strategic initiatives and incentives that foster sustainability. Marvin has 30+ years of experience in facilitative consulting that covers all aspects of innovation. Including those who have direct responsibility, leadership and the culture and skills needed to cope with 21st century complexities. Marvin can be reached at

Jay Wolf

is President of the JCris Consulting Group in New York. This month, Jay submitted the article Organizational Climate. Jay is a former Peak Performance Coach at the Center for Enhanced Performance at the United States Military Academy at West Point, New York. He can be reached at

r i b u t o r s


/ MARCH 2014

Tim McConnell,

contributor to our January and February issues of THE EXCHANGE for People Strategy, iss an HR Strategist and Organizational Architect with McConnell HR Consulting Inc. of Ottawa and New York. Tim can be reached at

Charles Patton

submitted the third article in his series: Is the CEO paid too much? This month, he examines the query from a Customer’s perspective. . Charles leads Grahall’s Online Solutions business. He specializes in all aspects of reward strategy, executive compensation, including equity-based compensation, short-term and long-term cash incentive/retention compensation, executive employment arrangements, benefits and development rewards. Charles can be reached at

Tabitha Croscut

, co-authored the article A Business Planning Tool Worth Considering with Chuck Coyne. Tabitha is principal of SES Advisors, Inc. and comanaging shareholder of its sister boutique ESOP law firm of Steiker, Fischer, Edwards and Greenapple, P.C. Tabitha focuses her practice on ESOPs as a succession and employee compensation strategy, advising on transactions of up to five hundred million dollars; advising companies on executive compensation plans; and assisting business owners with their estate planning needs. Contact Tabitha: 802.860.4077

Chuck Coyne

co-authored the article A Business Planning Tool Worth Considerting with Tabitha Croscut. Chuck is a Managing Director of Empire Valuation Consultants, LLC a national in-

dependent business valuation firm with offices in New York City, Rochester, NY, Cleveland, OH, and West Hartford, CT. He has been providing privately held companies with business valuations, ownership succession planning assistance, mergers and acquisition assistance and ESOP transaction analysis for over 25 years. Chuck is an Accredited Senior Appraiser (ASA) with the American Society of Appraisers and has an MBA in Finance and Accounting from the University of Hartford. To Contact Chuck: 860.233.6552


Releases that deserve a



the book stop

on your bookshelf By Lou V Mar 26, 2014 As promised the book delivers with great insight and perspective on the importance of good AND relevant governance to a company's success. And how rewards can help to drive evolutionary governance. This is not only a must read for boards but also for shareholders who need to know how effectively their investments are overseen. The information is timely and useful.


For more information on CEO Succession Plans, visit to find the Board of Directors Governance & Rewards book written by Michael Dennis Graham, Grahall, LLC

SHAPE OF THE MONTH: G o v e r n a n c e

A r c h i t e c t u r e

Lead Directors & Non-CEO Chairs

…As March finishes and April begins most Boards are evaluating their governance and typically at the top of their list is the leadership of the Board. When Boards that have CEO chairman combined roles (approximately 50%) think about leadership they evaluate the lead director route or the non-CEO chairman route. Often numbers are quoted without context. Grahall believes that size has an impact on the choices boards need to make. As can be seen in the graph size does matter when it comes to the preferred approach in this instance.



MARCH 2014


Can C h a n g e be P a i n l e s s ?

“Data collected becomes actionable…” In any organization, change is painful, even change for the better. And, changing software is no exception.

Author, Lynn Thompson

When implementing new software

Director BullseyeEngagement

solutions, it is best to get buy-in in

Alliances and Business Development

advance to foster acceptance and

compliance. Toward this end, there are things an organization can do to get buy-in, but, the chosen solution can also make a difference. In the Performance Management space, employee appraisals have long been lengthy, repetitive tomes that are completed to meet the requirement, then filed until the next year. Along comes BullseyeEngagement, the brain child of Adeel Zaidi, Bullseye’s CEO. Knowing that appraisals are necessary, he didn’t believe they had to be painful. His idea was to convert long text based forms into a user friendly and fun… yes fun, process. The user completes the majority of the appraisal by pointing and clicking on a


”When implementing new software solutions, it is best to get buy-in…” colorful Bullseye where each segment represents an element of the appraisal and each ring of the Bullseye, the score. What used to take an hour or more can now be done in a matter of minutes. And any commentary needed can still be added. The end result is that the process is more quickly adopted improving compliance. Data collected becomes actionable information resulting in improved performance. It is a short step from there to mapping pay to performance. ◘◘◘

- Lynn Thompson

“His idea was to convert long text based forms into a user friendly and fun… yes fun process.”



Innovation and transformation are the catch phrases of today’s business world. And there is not a place more in need of such change as executive benefits. I would like to share with you an innovative executive benefit concept which will transform how executive benefits are perceived by the participants, and the way they are delivered by sponsoring organizations.


Time to get on board and update your executive benefit portfolio


here are two questions that must be answered before this new executive benefit

concept can be advanced for consideration: 1. What types of benefits do executives and other highly compensated individuals’ need that they can’t easily secure without the aid of their employer, and what role is there for the employer? 2. How can the sponsoring employer deliver these benefits without incurring a new expense?

In this article you can find the answers to these fundamental questions..





Although the programs outlined above will continue to play a role in the benefit portfolios of most highly compensated executives, their luster and effectiveness have faded in recent years. Few companies today offer either traditional defined benefit or defined contribution pension plans, the limits on 401(k) plans continue to frustrate both the executive and the sponsoring company, major constraints and paralyzing regulations placed on deferred compensation plans and supplemental retirement plans have also eroded the opportunity for executives to accumulate money for retirement and other personal needs. Even stock plans have not been immune to substantial changes imposed by Congress. These changes include the expensing of options, and now the latest burden which demands that organizations validate the amount of awards delivered under the theory of "Say on Pay“. (And of course, stock plans are only available to public companies.) The only benefit plans that have not been adversely impacted by new regulatory restrictions are the group insurance plans; though, these plans offer little assistance to the executive in creating wealth in his or her lifetime. And, notably, the only compensation plans that have been unscathed by restrictive regulations and/or new laws are bonus programs.


et’s return to the original questions and delve more deeply…


Traditionally, organizations have made the following programs available to their executives:


What types of benefits do executives and other highly compensated individuals’ need that they can’t easily secure without the aid of their organization? The answer to this question rests first in responding to two other questions: “What organization sponsored benefits have executives come to enjoy?” And, equally significant: “Have these benefits been marginalized under new regulations and laws which restrict their effectiveness and value?”


"What types of benefits do executives and other highly compensated individuals’ need that they can’t easily secure without the aid of their organization, and what role is there for the employer?”

“How can the sponsoring employer deliver these benefits without incurring a new expense?”

Most executives and other highly compensated individuals need just three key benefits to achieve personal financial security: •

First, they need the means to secure adequate protection for themselves and their families in the event of a pre-mature death or disability.

Second, they need a tax efficient device that can aid them in accumulating capital for retirement and other personal needs.

Third, they need to have the means to protect their assets from taxes and from the long term adverse effects of age.

Most organizations, and especially larger ones, are able to create leverage that results in both accessibility and cost efficiency that is not possible on a “One-Off” basis. Further, when properly designed, the programs can be secured without adding an expense to the firm, even in cases where they are new programs for key contributors. The leverage described above can take on several forms which include:   


Negotiating contracts with providers for lower fees and more expansive services that are not possible on a “One-Off” individual basis. Establishing sophisticated online enrollment and ongoing administrative capabilities that are also difficult to achieve on a “One-Off” individual basis. Introducing financial and risk pool leverage which enhances the ultimate benefits delivered.

e believe that executive needs (as described above) can be met with the addition of a voluntary program that is safe from the paralyzing restrictions imposed on traditional programs AND can be implemented at little or no additional cost to organizations. If it sounds too good to be true, it’s NOT, but the first step an organization should take is to confirm executive needs. To confirm the needs, the organization could conduct a survey among the likely eligible population or a small fraction thereof if the premise outlined above has validity within the organization.


– – – –

Very interested ___ Interested ___ Curious ___ Not interested ___

B) If your company were to offer a new voluntary benefit program that would incorporate a tax advantaged savings element similar to a nonqualified deferred compensation or contain Roth type characteristics, how important would that feature be to you? – – – –

Very important ____ Important ____ Curious ____ Not important ____

C) How important would it be to incorporate a “Long Term Care” provision in the plan? – – – –

Very important ____ Important ____ Somewhat important _____ Not important _____

D) If you indicated either an interest in learning more about the program(s) outlined above, would the fact that the company does not intend to contribute to the program, other than by providing access to the program, alter your interest in the program? – – – –

Not at all ___ Somewhat ___ Not sure ___ Probably ___

E) What other issues relating to a supplemental/ voluntary benefit program are important to you?


A) If your company were to offer a new voluntary benefit program that would allow you to protect yourself and your family in the event of premature death or disability how would you describe your interest in such a program:


There are only a few questions required to validate the premise. They are:


Transformative executive benefits have arrived


ow let’s zero in for a moment on the concept of a adding a valuable program for

executives but NOT increasing cost. As you might imagine, in this economic environment, organizations are wary of adding any new programs that might increase cost. However, in the program we have devised called an ESP (Executive Security Plan) organizations can enhance the programs offered to its executives through after tax savings in a form reminiscent of secular trusts and, through expense reallocation be able to manage costs. The best part of the ESP is that it removes the “organizational shield” if you will and puts the executive in charge of the program. The concepts introduced in this article are coming and if you do not introduce them to your organization, you will not just be unprogressive and non-innovative but may risk losing your key executives and contributors as your competitors embrace these important enhancements. ◘◘◘ Robert D. Birdsell

In an article of this nature it is not possible to study all of the specific approaches that would be available to organizations seeking to update an executive benefit portfolio which would be more reflective of the needs of the modern executive.

For more specific information on this don’t hesitate to contact me at and look to my article in last month’s THE EXCHANGE for People Strategy eMagazine, (page 62)


T H E E X C H A N G E f o r P e o p l e S t r a t e g y


The Lions and The Lambs Michael Dennis Graham Grahall, LLC


arch is said to come in like a lion and out like a lamb and whether this is a tribute to the weather or the relative position of constellations Leo and Aries, I will let you decide. March also has its share of important dates such as the Ides of March (3/15), St. Patricks’ Day (3/17), and the arrival of spring (3/21). In addition to these there are other events (according to including (I kid you not) National Pig Day, Multiple Personality Day, Ear Muff Day, National Chip and Dip Day, and Bunsen Burner Day (who comes up with these?).


But more to the point of People Strategy , there are other important things that happen in the month of March. Many public companies (with calendar year ends) and their auditors are busy because annual reports are released, proxies are released, and annual shareholders meetings get under way. And all of these closely watched activities involve the Board of Directors. And much like the Month of March itself, Boards can be lions or lambs when it comes to corporate governance. Let’s cover some background on Boards. In corporations, ownership and control are intended to be separate, the church and state, if you will of corporate politics. The company’s board is expected to oversee and direct (therefore, the name directors) the company’s business affairs protecting the owners (i.e. shareholders or the public). The board at its “50,000 foot” level examines the company’s business strategy and its execution with the singular intent of legally, ethically and logically sustaining and growing the business to the ultimate benefit of shareholders. And shareholders, if they don’t like the board can “vote them off the island.” Or at least that is how it is supposed to work. The CEO reports to the board and the board oversees the CEOs activities and compensation. But like the fox watching the chicken coop, the CEO is in many instances also the chairman of the board.

Board duties include: Establish board governance practices and objectives

Ensure the availability of adequate financial resources

Focus on CEO and top executive selection and succession

Authorize annual and capital budgets

Develop and implement CEO, executive and company performance and pay programs

Evaluate and corroborate the organization's performance

No doubt boards and their directors have important roles in the life and sustainability of a corporation. This is a complex web however. Industry differences, competition,



company size and business plans all influence the type of board that would be most effective. However, companies in the same industry or companies of the same size are not the same and will not have the same needs of their boards. Essentially, no two organizations are the same and therefore, no two organizations will have the same relationship with, or expectations of, their board of directors. Further every organization and for that matter every industry evolves over time, requiring that the board role evolve over time as well. These facts demand that a board’s role – and the way it is paid – will vary from company to company and change at any one company over time as the industry grows and matures and as the company does the same. Boards should have different governance models based each board’s role and responsibilities. Boards (and the individual directors) should also have different rewards structures that are aligned with roles and responsibilities which must change as the company evolves.

Here is our key message: Board governance practices need to be situational. Faulty and dated board governance and reward practices have contributed to some epic business failures (Enron and Lehman Brother come immediately to mind). As companies change, board governance and rewards must change in concert to meet new demands. One of the most significant impacts on a company, and therefore on its board, is its industry’s maturity level. At Grahall we measure the industry maturity level based on average company size, growth in revenues, profits and cash flow return on investment (CFROI) and have identified eight distinct levels. We believe that over time all industries will likely move through these phases which we have designated as “start-up” through “negative and declining”. These eight phases challenge directors to govern in very different ways and to exert more or less control over company management. As you might guess, each of these industry evolutionary phases impose a different set of


challenges and these challenges are best met by different types of boards and very different types of governance.

The challenge is that at each phase of industry maturity the board should govern differently, and boards may benefit greatly from different directors with different skill sets. Few Boards understand this, let alone manage this change effectively. Organizations in one industry phase can have very different business strategies at the general, value chain and specific business strategy levels. These different strategies demand different governance models. A company in a start-up industry phase with a “cost based” general business strategy will have significantly different issues once its industry moves to the growth phase. Likewise, a company with a “cost based” business strategy will have different needs than one with a “differentiated” business strategy regardless of the industry phase. As each industry rolls through the inevitable stages of maturity and each organization refines its business strategies, boards need to continually evaluate and modify their governance models. Successful governance models at one stage of the industry or company development may not be successful in the subsequent stages.

The Lion and The Lamb Grahall has studied the most and least successful patterns of governance of the various industries and companies within each of the more than 1,000 companies in our data base. We have found a correlation between the phase of the industry, the level of board governance and the resulting company performance. Let’s look at these stages and their ideal boards…



Industry Phase One – Start-up industries are generally made up of small organizations which are not earning their cost of capital. In our analysis, both biotechnology and alternative energy carriers are good examples of start-up industries. Our research indicates that the most successful companies at this phase have boards that do not operate in an overly controlling manner; rather they provide significantly more freedom to the CEO and his management team. We refer to these boards as “contractual or informational boards.” These successful start-up companies have boards that have learned to work closely with a strong CEO/management team and bring distinct business expertise and “added value” such as expansive contacts to help with financing, production or distribution, or marketing, advertising and promotion.

Industry Phase Two – The growth industry category is made up of small to medium sized organizations that are rapidly increasing their CFROI but are still only making a marginal amount of CFROI since most of the earnings are being reinvested in the businesses. Industries in this phase range from diversified metals to publishing. At this maturity level successful companies typically need a constructively engaged board and a strong but not imperial CEO/management team. We refer to this phase as “balance to grow.” The power between the board and the management team should be actively balanced on most issues but critically on the strategic business model choices.

Industry Phase Three – In the peak industry phase we tend to see that organizations are beginning to consolidate and CFROI is increasing over the prior two phases. This gives the industry phase a fairly positive CFROI. Industries in this stage include home entertainment software and metal/glass containers. Most successful organizations at this maturity level have shifted to a stronger more involved board of directors that can ask the difficult questions and be ready to relieve the company of its CEO and key members of management if the company begins to falter.


Industry Phase Four - Mature and Flat category is characterized by companies that have a high but static level of CFROI. Oil and gas storage, transportation, and specialized consumer services fall in this category. The most successful organizations at this maturity level appear to need a strong and very engaged board that has the willpower to ask the tough questions of the management team and take the harsh but necessary steps if the answers are not satisfactory. This is where in successful organizations we see not only stronger boards, but also stronger individual board members with robust CV’s who demonstrate more independence from the CEO and management team. Companies in more mature industries need boards with the constitution, expertise and willingness to challenge once proven but possibly outdated processes. This is a challenge for many boards since the organization’s measures of success such as return on investment and return on assets are high compared to other companies and other industries. This is not a time to take an approach of “if it’s not broken don’t fix it” because the company regardless of its apparent solid performance may quickly start to decline if standard operating procedures aren’t questioned.

The Lion Industry Phase Five – The average company is in decline and CFROI has decreased over time or is trending downward. Industries classified in this phase include health care services and packaged foods and meats. Most successful organizations at this maturity level need a balance of power that leans toward the board and away from the CEO/management team. Often the CEO and management team think that the decline is both temporary and externally created and therefore not something that they can control. Boards need to be up to the task of questioning and challenging the CEO and the management team.



Industry Phase Six – Consolidating industries are those that are seeing their CFROI rate of decrease over time as a result of fewer companies competing for the same customers. An industry classified in this phase is broadcasting. Most successful organizations at this maturity level need a board that is sensitive to the need for survival and depending upon the “path forward” for the company the board/CEO balance can range from a 50/50 to 75/25 to 25/75.

Industry Phase Seven – Negative and Bottoming Out industries are those that are seeing CFROI declining over time but where the CFROI is also trending downward at an historic level. Industries classified in this phase are Cable, Satellite and Diversified Chemicals. Most successful organizations at this maturity level need a strong CEO and a board that can assist the CEO in developing the company’s new value proposition for the shareholders.

and The Lamb Industry Phase Eight – Negative and Declining industries are those that have a negative CFROI and are still seeing their CFROI decrease over time or trend downward. Industries classified in this phase are Mortgage, REIT’s, and Trucking. Most successful organizations at this maturity level need a strong CEO and a contractual board. Boards with companies at this phase need to be able to recruit the very best turnaround CEO talent and then just get out of the way.



learly the most successful boards at one stage of industry development

are not likely to be the most successful in the next stage of development without a significant change in their governance model. While this makes sense when thought about conceptually, it is more difficult to manage in reality. Does a board of directors in a start-up company need to change to remain effective as that company matures? That’s an easy, “YES.” How do the board and company proactively manage that change? For that question there is not such an easy answer. Let’s look at some real world examples of boards in a few of these industry maturity levels that provide good examples of the impacts (both good and bad) that different board governance models have made on companies. Alleghany Corp. is a good example of an organization that has a more involved Board of Directors. When Grahall’s contribution index is applied to Alleghany’s Board of Directors, the contribution index delivers scores in the upper quartile for contribution. It is very involved and the climb in the stock over the last 10 years speaks for itself. The organization is consistently (and at a lower risk level) one of the top performers in the sector and for that matter all sectors. Its stock is up 250% in the last 10 years since the Board reasserted itself, brought in a new CEO and provided incentives for that CEO to require the organization to perform at a superior level. There is nothing magical or high tech about this company. It is at its heart an insurance company, one of the oldest industries around. Is the Board responsible for the fantastic stock appreciation? No, but the Board of Directors choose the new CEO and created the right environment for that CEO to excel and maintains close vigilance over the strategy and operations. When Nardelli took over at Home Depot in December of 2000, the Board took a back seat. Nardelli moved to cut costs that also managed to undermine customer service. (Not surprising since he had no retail experience.) The result was that the share price flat lined against their key competitor, Lowes, who was making big gains in the marketplace much to the dissatisfaction of Home Depot shareholders. Home Depot’s Board sat on the sidelines (as indicated by their lower quartile contribution ratings) until January of 2007, when Nardelli was fired taking with him a severance package worth an estimated $210 million; a nice sum for a guy whose claim to fame was six years of mismanagement. After Nardelli’s departure the Board reasserted itself and Grahall calculates its board Contribution rating is now near the 75th percentile. The stock price has also risen nicely since.



Just recently there was a debate regarding Jamie Damon and the JP Morgan Chase’s Board of Directors governance. The governance dispute was unfortunately played out in public in the form of whether Jamie should be both CEO and Board Chairman. If anyone thinks this is an unimportant point, consider that there were veiled threats of his resigning if the Chairmanship of the board was taken away from him. Whether he is the Chairman and CEO or “just” the CEO isn’t the core issue. The core issue is since JP Morgan is a mature company (even TBTF: Too Big To Fail) in a mature industry our research and intuition would indicate that the future success of the organization depends on the Board being much more involved than they have been historically. For more on this issue see the January issue of the People Strategy Exchange. The Reality of the Current Board Governance Ideally, a company would have a situational and dynamic board comprised of individuals with the appropriate experience to shape and enhance the organization’s value in each stage of the industry cycle and based on its unique business strategy. In reality though, boards are far more entrenched. The selection and election process is far from “democratic” or even constructive. Board members are usually some form of “insider,” either a company executive or someone known well by the current board or management. Rarely are there competing candidates so the election is essentially won before any votes are cast. Too often board member removal is conditioned only on age (with mandatory retirement most often at age 72 or so) rather than on knowledge and experience in dealing with the business and governance issues the company currently


faces. And often for companies in a turnaround situation, the board comprises the same people who helped the company get into the mess in the first place. Our experience and research has taught us that the board can have a significant impact on an organization far beyond its governance decisions. So if board members are selected and elected without considering what they bring in terms of knowledge, experience and credibility, they could be doing a disservice to the company and its shareholders. Board Development and Assessment Directors need to assess themselves individually and collectively against the current and future needs of the company they are governing. This assessment needs to occur at regular intervals and particularly when economic or business strategy changes occur that may drive the company in a new direction. When board seats become available, candidates should be sought who can help address the company’s specific business issues, not just business issues in general. Unfortunately, most boards do not effectively self-evaluate often enough or well, primarily because they have neither the framework, the tools nor in some cases the willingness to do so. Investing the time in this effort, though, could contribute greatly to the company’s overall value. Boards Must Be Situational and Adaptive

In the end, governance is adaptive and situational and must be a constant subject of evaluation and dialogue. It might be entirely appropriate for a Board to be a lion (for example, in mature companies in mature industries) or to be a lamb (for example, in start-up and turn-around situations). Most critically, board governance must evolve with the company and the “nature of that beast” (i.e., the board) must be appropriate for the company’s situation.

– Michael Dennis Graham




Don’t Blame the Internet    

By: Jim Finkelstein President and CEO, FutureSense, Inc. (with Melissa Mead)


icture this. You are at a staff meeting. You are sitting in one of fifteen padded maroon “rollie” chairs that encircle one of those long, oval-shaped tables. Your boss is ranting and raving about prospective ideas and projects, and regurgitating all of it onto you and your cohorts, when suddenly out of nowhere, a Facebook notification finds its way onto your iPhone, and just so happens to be the most enticing and irresistible thing that’s come your way all day. So naturally (yet secretively)


you cradle your phone in your lap, glancing up every so often, so as to appear immersed in the topic of the meeting. That one Facebook notification urged you to read the comment that someone posted on your wall, and triggered you to then creep on their wall, and so on and so on. It’s a vicious circle.

The Blame Game Pan the room. “Who can you blame this time for your ill-mannered behavior during the staff meeting?” It seems we always need to place blame on someone or something outside of ourselves. Will you blame your boss for not being entertaining enough? Or how about that barista who didn’t make your triple-tall upside-down caramel macchiato fast enough, prompting you to a) leave the coffee-shop empty-handed, and b) show up to your meeting both decaffeinated and in a sour mood. Or, are you going to dig so deep as to blame Mark Zuckerberg himself for creating Facebook in the first place which then distracted you in your meeting.

A Culture of Mistrust Even though we are a culture that

companies that so mistrust the people

thrives on productivity, we are building a

they hire that they take away

culture of mistrust. We don’t trust the

employees’ access to the internet.

people we hire to do the job for which

Where does this productivity paranoia

we hired them. We blame the internet

come from? Why do companies want

and social media for distracting them

the keys (aka the passwords) to

when really it is our own failure to

employees’ “kingdoms” of chits and

motivate and inspire these people that

chats, of notes and notables?

impacts productivity. There are



our eyes to our computer screen is so delightful that it feels it ought to be illegal. There’s certainly something to be said about the sensation you get when you sit down at your favorite spot on the couch after a long day, log onto Facebook or your other social media pages, and just cruise. No agenda. No other distractions but those on the screen before you.

Distraction: An Age Old Challenge This “social surfing” behavior is often perceived to be that of a “distracted” human being. However, this particular behavior may instead be an approach to unwinding after a long (and hopefully) productive day of work, wherever that may be... the classroom, the office, the track, etc. Social media and networking may be the cocktail hour, if you will, of the 21st century. Even though these “unwinders” are spending their evenings gallivanting in and out of social media spaces/circles, they’re being a whole lot more productive than those just staring blindly into the abyss of their television screens or into their martini, gimlet, or tom collins. Those behind their computer or phone screens are communicating. And communications, after all, continues to promote progress and productivity, and thus, remains a positive force. Also, (you know this, so don’t lie to yourself) there was plenty to distract us before the Internet and other electronic technology came about. This isn’t to say that the times haven’t changed -- because they certainly have. Some people are convinced that the internet and other high-tech communication gizmos and gadgets aren’t exactly ‘tools’ for enhancing productivity, but rather, are evil time-stealers designed to distract and diminish productivity.


I G N I T I N G THE POWER OF PEOPLE MARCH 20144Don’t Blame the Internet

flash-drive short of getting high off of the technology at our fingertips, and when gluing


Of course, no one is perfect. We all have those days when we feel like we’re one USB

The Internet is a Friend But consider this: the Internet is a friend, not a foe. It is a vast and universal communication and research tool that is imbued with the capability to enhance productivity with a capital “P”. It allows the world to be at our fingertips any hour of the day. Before the Internet, computers, and all that jazz, there were plenty of distractions, so we think it’s a little overzealous to accuse the Internet of being the grandest distraction of them all. Pre-1980s, reading on the job was considered a distraction. Nowadays, reading is considered “real work,” but catching someone on Facebook is deemed the new and harmful distraction. Yes, the Internet can be overwhelming and can cause occasional lost tracks of time. But it is vital to realize that the capabilities of the Internet can be used to advance and enhance both social and work-related productivity. The Internet is a tool, not an excuse. It is the biggest and most convenient friend out there, and it yearns to be taken advantage of. So go ahead. Surf the web. Just don’t blame the Internet. ◘◘◘

- Jim Finkelstein, President and CEO, FutureSense, Inc. (with Melissa Mead)




Organizational Climate: The Driver of Peak Performance Creating a positive organizational climate is the responsibility of the leader. It is the number one priority of any superior leader who is committed to achieving peak performance from his team. Jay Wolf Principal JCris Consulting Group


The greatest asset of any group, or organization is their human capital. Whether you are talking about a family, team, or business the most important goal is the achievement and performance of all its team members. In today’s economy, it is more important than ever to have a high performing work force. How many times have you gone into a restaurant, retail store, or even a medical facility and after trying to engage an employee, realize they are unmotivated, unfocused, and doing as little as they possibly can and still collect a paycheck. These types of employees are at best complying with the basic requirements of the job. Any business that employs this type of work force faces the risk and real possibility of losing clients forever; a result you wouldn’t want in a good economy let alone in the type of economy we are experiencing today.


Ah, then there is that rare moment when as soon as you walk into an establishment, you sense there is something very different going on. The employees are smiling, happy, and want to engage with you. They are focused, knowledgeable, motivated and want to help you have an enjoyable experience. These types of employees are exhibiting, what we call “discretionary effort”. They are going beyond the bare basics, giving 110%. Discretionary effort is what employees give when they are performing at peak levels.

So, how do you find, hire, or develop an employee that gives discretionary effort. Is there a particular trait to look for in the hiring process? Can you teach, train, or develop an employee to give discretionary effort? The thing to understand is that discretionary effort is an outcome of a positive organizational climate. Organizational climate is the employee’s perception of “what it’s like to work here”. It is made up of six dimensions; CLARITY – when the employee or direct report knows exactly what is expected of them, what their success looks like in the eyes of their leader, and how their role fits into the vision of the team and organization; RESPONSIBILTY – when employees or direct reports feel they have a lot of authority delegated to them, and they are going to be held fully accountable for their results; FLEXIBILITY – when employees or direct reports feel there isn’t a lot of unnecessary rules and that new ideas and diverse opinions are accepted freely; STANDARDS – when employees or direct reports feel that challenging and achievable goals are being set for individuals and mediocrity is not tolerated; REWARDS – when employees or direct reports feel they are being recognized in a way that resonates with them for a job well done; and TEAM COMMITMENT – the feeling by employees and direct reports that everyone is on the same page and working towards a common goal. Creating a positive organizational climate is the responsibility of the leader. It is the number one priority of any superior leader who is committed to achieving peak performance from his team. Superior leaders are constantly checking in, observing, and


trying to improve the climate in which their teams are functioning. They know that peak performance is the way to achieving desired results. When a superior leader faces a negative organizational climate created by his or her boss, he or she will filter out that negativity and create a positive climate for their direct reports.

This discussion has been focused on organizational climate as it applies to the business world but the thing to remember is positive organizational climate can drive peak performance in every situation where a leader is responsible for the performance of others. Whether you are a leader at work, a coach of an athletic team, or even a parent, your main responsibility is to create an environment – i.e., an organizational climate – that will motivate others to perform at their peak level. That is the definition of success. Remember that achievement is a result of performance, performance is a result of effort, and effort is a result of organizational climate. ◘◘◘


- Jay Wolf, Principal, JCRIS Consulting Group


WELCOME TO PAIDFAIRLY.COM Are you being paid fairly? Search our FREE Online Salary Survey to learn what you should be getting paid. Compensation touches our lives in more ways than we imagine. It determines what house we live in, car we drive, college our kids attend, vacations we take, our ability to retire on time and how we live our lives. Therefore, it is very important to know if you are being paid fairly. Paidfairly interpolates and then extrapolates real employer-reported salary data points based on revenue, industry and location. In turn, helping anyone gauge their current salary or a potential salary offer, and know if they are being paid fairly.












Company Research

Despite landing the cover of V O G U E ,

Yahoo's CEO Marissa Mayer supermodel Gisele Bündchen in realized earnings

t r a i l s

© Main Data Group, Inc. (408) 776 – 1000.


In July 2012, reinvigorated technology giant Yahoo made headlines when they chose 37-year-old Marissa Mayer, a former Google VP, to be their second new CEO in a year. Much of the news coverage focused on the new CEO’s compensation package, but values published by media outlets varied widely, with reports ranging from a $59 million total for her first year as CEO to $100 or $129 million over her first five years. These figures, however sensational they may be as news items, do not tell the whole story. A little over a year later, the actual value of Mayer’s compensation is coming into sharper focus. More companies each year are beginning to report the realized pay of their top executives, and while definitions of the term vary from one firm to another, the underlying idea is that realized pay provides a more accurate view of the value of compensation that an executive actually receives. Mayer’s case offers a chance to examine the importance of realized pay in understanding the true value of executive compensation packages. Main Data Group followed up on Mayer’s compensation after a full year, and compiled this brief study comparing her “total” compensation figures as reported in Yahoo’s Summary Compensation and Realized Pay tables.

Realizable Pay According to the CD&A section of Yahoo’s 2012 proxy, Mayer’s annual base salary as outlined in her offer letter at the time of her hire was $1 million and her annual performance bonus target was set at 200% of salary, or $2 million. Her annual equity award for 2012 was valued at $12 million. She also received two one-time equity grants, one a retention award granted half in options and half in stock for a total of $30 million, and the other a “Make-Whole” award, intended to replace $14 million worth of compensation Mayer forfeited when she left Google. The following chart shows Mayer’s annualized potential or realizable pay for her first year as CEO of Yahoo.



Mayer’s realizable pay for the year, based on the above information, was $59 million, a figure that was often used in news reports on Mayer’s appointment to Yahoo’s CEO position. This figure though, was dependent on Mayer working a full year, and on Yahoo’s performance under her leadership. Looking forward to Yahoo’s disclosures after the end of fiscal 2012, we can see what Mayer actually earned.

Realized Pay Mayer became CEO at Yahoo in mid-July of 2012, and was therefore eligible for a prorated portion of her $1 million base salary, 200% NEIP bonus target, and 2012 annual equity award based on the amount of time she served. She served 46% of a year, and as reported in Yahoo’s Summary Compensation table and CD&A, her actual 2012 salary and target NEIP bonus were as follows:


2012 Salary

Marissa A. Mayer


Target NEIP Bonus as a Percentage of Base Salary


Target NEIP Bonus


Yahoo exceeded target performance levels in 2012, and Mayer received an above-target NEIP bonus payout of $1,120,000. This is above her actual target for the year, but still well below the $2 million bonus potential that was widely reported a year ago. Mayer’s $35 million equity total disclosed in Yahoo’s Summary Compensation for 2012 does not include $15 million in performance options (half of her one-time retention grant), and includes only a prorated portion of her 2012 annual equity grant, which also affected her realized pay for the year. Parts of the total equity award to Mayer are dependent on Yahoo’s long-term performance, and all equity awards included time-vesting requirements, and will therefore be realized over a number of years if at all. The following chart compares Mayer’s total compensation as reported in Yahoo’s Summary Compensation and Realized Pay tables for 2012.


Conclusions There is wide variation in the ostensible value of compensation depending upon the methods used for breaking down and reporting executive pay packages, as illustrated by the case of Yahoo’s new CEO Marissa Mayer in 2012. Mayer’s Summary Compensation total and 2012 realized pay both proved to be lower than the values initially reported by media outlets a year ago. Her realized pay of $5,886,296 in 2012 was less than 10% of the annualized amount that was commonly reported, but as her equity awards are earned and vested over the next few years, the realized value her pay may reach or exceed levels estimated in 2012. By nature, the value of long-term executive compensation changes from year to year, and Mayer’s example serves as a reminder that SEC-required disclosures alone often fall short of delivering a clear picture of the value of executive pay. Main Data Group’s Snapshot Data™ offers compensation professionals a powerful tool for a deeper level of pay analysis, to supplement and enhance understanding of complexities like realized pay, which are becoming more important each year. © Main Data Group, Inc. 2013. (408) 776 – 1000.

About the Research This article is based on information gathered from Yahoo! Inc.’s FY2012 proxy statement, and on news articles published in July 2012 on the topic of Marissa Mayer’s pay as recently-hired Yahoo CEO.




Thinking Mechanisms that Support Change & Innovation Innovation does not exist in a vacuum. It works better when there are tasks, ownership, process, resources and guidelines that create constructive interaction. When innovations happen in concert with a number of operational activities sustainable results can follow.

A colleague, who runs a CEO Peer group for small to medium size companies, says that in most cases operational success pays for innovation efforts. Innovation must happen while maintaining and in some cases growing the current business. This 2-sided paradoxical situation when dealt with can insure the funding for innovation. It takes awareness and intellectual, emotional, and physical fitness to manage the operational and innovation worlds. In order to be effective in both operations and innovation, you must possess characteristics, behaviors, and thinking mechanisms that address the needs of both (or have skilled co-workers who can address the requirements for that area where you may be less capable). Let’s look first at the operational world. The operational world requires thinking that is practical and tried and true. It is valued because it is usually predictable, measurable, high quality, and evidenced based. Characteristics of the operational world are:       

oriented toward relevance and conformity centered around thoughts that others will approve of factual, logical, analytical, and precise Marvin Smith closely follows existing rules not absurd Deliberate Synergy often judgmental in the name of staying focused governed by previous conditioning and beliefs



In the 60’s at my first job with the Westinghouse Lamp Division, the work orientation was to get things done. This manufacturing environment also put a high premium on speed and quality. Knowing how to do the job allowed assembly employees to work hard and quickly without much waste. Manufacturing was bustling, and markets were deep and uncomplicated. Product life was longer so exploitive marketing strategies were applied. The same product was on the market until it expired after a long life. Success came by implementing the standards. It was a straightforward situation. We had full control of our success with few exceptions. Sometimes vendor quality or late deliveries of sub assemblies slowed us down but largely we were in control. The operations world was predictable and surprises were infrequent, especially if we paid attention to the plan. We spent a lot of time planning and carefully followed that plan and rode it to the finish line! Success was abundant. The routine thinking mechanisms used in this operations world were:



Comparing: the act of checking what you have against a standard or a set of expectations or with someone else in some cases competition or upper management criteria

Retrieving: The act of recalling what is stored, experts and experienced individuals can be resources that use this thinking mechanism

In the 50’s and 60’s, the innovation world was a unique place, usually inhabited by long-serving specialists or multi-patent holders who were given free passes. Many of these individuals were prickly, anti-social, and solitary. Inventors wanted to be left alone and given resources -money and sometimes staff-and rarely did they want to work as part of a team. I remember being told by an esteemed engineer at GE’s Jet Engine Group that the reason he got his Master’s in mechanical engineering was that he wasn’t fond of people and certainly didn’t want to work in any group.

In the 70’s things started to change. For example, at Polaroid when the SX-70 camera was due to come out, it was described as a technology driven project that could be launched as soon as it was technically sound. The assumption was that as soon as the marketplace saw this elegant product they would buy it. This tactic was built on the premise that when consumers have a high level of disposable income healthy impulse buying habits will emerge. The obstacles at that time were internal, as in getting engineering and manufacturing to cooperate so we could be at the company deadlines for launch. Things still were very good!


Storing: Collecting information through research, interviewing, trial and error and putting things in a logical sequence


Routine Thinking Mechanisms


In the 80’s and 90’s more changes emerged.  

  

People didn’t want to just put money in savings, they wanted to grow it faster People thought the insurance companies were not giving them a good deal and demanded their life insurance policy money before they died, so they could be present when beneficiaries received their inheritances Telephone land lines were declining and becoming backups to cell phones The cell phone and the computer began to merge Innovation was driving paradigm shifts in how people lived and what they expected. Individuals and businesses wanted and expected continuous innovation in living, transportation, entertainment, medicine, and health care. Competition from Asia was taking away jobs and driving prices down and in certain cases caused some industries to decline

Innovation in the 21st Century: During a recent visit to the Google campus, I got a first-hand experience of their culture. The internal and external workspaces are appointed with food, café stations, and white boards. The stage is set for an idea generation and interaction at anytime in any place. Employees are free to explore their thoughts. This freedom is leading co-workers to invent new products and new ways to socialize with each other. Play is an energizing force. In a year’s time at Google, my daughter Laurin has reframed her outlook and expanded the contribution she intends to make at Google and in her new career.



     

Experimental rather than well thought out Surprising and risky Unafraid to violate conventions or principles Absurd, child-like, and nonsensical Use metaphor, analogies, and images rather than factual and analytical data Generate thoughts that lead to intriguing invention

The Creative Thinking Mechanisms frequently used in the innovation world are:

Wishing is using approximate thinking to articulate a desired future. This language communicates in advance that you are hopeful but may not have an idea on how to accomplish what you want

Imaging is using your minds-eye to construct an image of something that you have never seen or a vision of past things or experiences. This thinking mechanism can carry a lot of detail and provide a vicarious experience for the adventurous mind.

Transforming is using your ability to change a vision when more information is available. Modifications, problem solving, and experimental adjustments are constant in the innovation world, thereby making this thinking mechanism an essential method to help incomplete ideas become closer to practicality.


Characteristics of the innovation world operate more easily without others around. However, if those who are around are supportive and display some of the characteristics below, creative and innovation thinking can thrive in groups as well. In the innovation world people are:


There is evidence that the pace of innovation is increasing and innovators need ways to operate at a faster pace, but without rushing. Although we who facilitate the creative process believe that everyone has creative thinking and breakthrough potential, there are mechanisms that can significantly increase the probability of success. Making these mechanisms conscious will help when tension, short deadlines and insufficient resources threaten the journey to creative thinking for innovative results. It has been illuminating to look more closely at what triggers creative thinking; the following behaviors emerge as consistently showing up:


Process note: These two thinking mechanisms significantly increase the probability of success. This whole brain thinking allows IQ and EQ to co-exist. Combining these two entities significantly increases the probability getting extraordinary value. Both sets of thinking mechanisms below can operate side by side in a ‘Mindspring’ fashion and create a flow in a group that can make extraordinary things happen.◘◘◘ - Marvin Smith



Frequently used in the Operational world:

Frequently used in the innovation world:

Storing: The act of collecting information through research, interviewing, trial and error and putting things in a logical sequence.

Wishing is using approximate thinking to articulate a desired future. This language communicates in advance that you are hopeful but may not have an idea on how to accomplish what you want.

Comparing the act of checking what you have against a standard or a set of expectations or with someone else Imaging is using your minds-eye to in some cases competition or upper construct an image of something that management criteria. you have never seen or a vision of past things or experiences. This Retrieving: The act of recalling what thinking mechanism can carry a lot of detail and provide a vicarious is stored, experts and experienced individuals can be resources that use experience for the adventurous mind. this thinking mechanism.

Transforming is using your ability to change a vision when more information is available. Modifications, problem solving, and experimental adjustments are constant in the innovation world, thereby making this thinking mechanism an essential method to help incomplete ideas become closer to practicality



WELCOME TO PAIDFAIRLY.COM Are you being paid fairly? Search our FREE Online Salary Survey to learn what you should be getting paid. Compensation touches our lives in more ways than we imagine. It determines what house we live in, car we drive, college our kids attend, vacations we take, our ability to retire on time and how we live our lives. Therefore, it is very important to know if you are being paid fairly. Paidfairly interpolates and then extrapolates real employer-reported salary data points based on revenue, industry and location. In turn, helping anyone gauge their current salary or a potential salary offer, and know if they are being paid fairly.






Company Research     CONTACT US



Chuck Coyne, ASA – Empire Valuation Consultants, LLC

Tabitha Croscut, Esq. – Steiker, Fischer, Edwards & Greenapple, P.C.


A Business Succession Planning Tool Worth Considering




An ESOP is a powerful business succession plan. It provides a means for a business owner to transfer transfer ownership of a company to his or her employees while still retaining some some control and value in the business.


ESOPs offer significant significant financial and tax advantages to all involved parties, and are governed by the the Employee Retirement Income Security Act of 1974 1974 (ERISA) and the funds and compliance Internal Revenue Revenue Code to ensure the protection of retirement funds participants. nts. of all participa

It provides a powerful, flexible mechanism for planning a company’s future.

Departing owners can sell their shares in the company to the ESOP.

ESOPs offer special tax benefits to selling shareholders, employees, and the company as a whole.

When key employees seek to buy the company but lack sufficient financial resources, ESOPs enable them to attain shared ownership.

All eligible employees become beneficial owners of the company’s stock, which is highly motivating. The business often thrives under the ESOP because the company’s profitability directly affects the employees.

ESOPs provide a reasonable strategy for passing on a family business when the family is no longer involved.








1. The company sets up an ESOP trust to hold annual contributions. This trust must be qualified under the Internal Revenue Code.

2. The company contributes new shares of its own stock or cash to buy existing shares into the trust. These contributions are tax-deductible. 3. The shares held or purchased by the ESOP trust must be valued by an independent appraiser to determine their fair market value. 4. Shares are allocated to individual employee accounts annually based on earnings, seniority, or other measurements. 5. Employees become beneficial owners of the company stock and must be fully vested in three to six years. (See Below, “HOW DOES THE EMPLOYEE ALLOCATION WORK?�) 6. ESOPs must be operated for the exclusive benefit of the plan participants. 7. Annual updated share valuations are required for plan administration purposes.



from an outside lender.

HOW DOES THE EMPLOYEE ALLOCATION WORK? Allocations in the ESOP are generally allocated to participant accounts based on a ratio of their individual salary to the total of all eligible plan participants’ salaries.

There are limits on the amount of contributions that can be made to the ESOP.


As the ESOP’s internal loan is repaid, the shares are released from the ESOP’s Trust-held suspense account and allocated to individual participant accounts.


LEVERAGED ESOPs One way companies can finance an ESOP is to borrow


WHAT ABOUT VESTING? As employee-participants continue to work at the company they vest in the shares that are allocated to their individual ESOP accounts. “Vesting” refers to the period during which employees must work before they achieve full, irrevocable entitlement to their benefits. Employees must be 100% vested within three to six years using one of the following methods:


Cliff Vesting provides for 100% vesting after three years.

Gradual Vesting affords 20% vesting per year beginning in year two.

TAX DEDUCTIBILITY OF LOAN PAYMENTS One of the most beneficial and unique aspects of using an ESOP for the purchase of company stock is the pre-tax payment of the financing. That is, both the principal and interest paid by the sponsoring company are tax-deductible. In general, companies can deduct up to 25% of eligible payroll contributed to their defined contribution plans, which include: ESOPs; 401(k) plans; profit sharing plans; and stock bonus plans. This is a combined limit that aggregates all these plans.



Leveraged ESOPs in a C corporation are allowed a separate 25% contribution level to repay the principal on an ESOP loan.

As with any corporate loan, interest expense is fully deductible and does not count towards this 25% contribution limit.

Reasonable levels of cash dividends paid on ESOP stock used to repay the loan or passed-through to participants are also fully tax-deductible.


There are different annual tax-deductible contribution limits depending on a company’s tax status, namely whether it is an S or C Corporation.




S Corporation Policies 

S corporations pay no federal income taxes on the earnings that flow through to the ESOP (and most State income taxes mirror this). This explains why there are far more ESOP-owned S Corporations around today!

There is a 25% limit on tax-deductible company contributions which applies to


the combination of principal and interest paid on the ESOP loan (whether the ESOP is leveraged or not). 

Aggregate contributions to 401(k)s and other defined contribution plans will count towards this limit as will the interest paid on the ESOP loan.

Distributions on shares in the S corporation paid to the ESOP can be used to repay an ESOP loan without limit. This is the case for both allocated and unallocated shares in the ESOP Trust, and results in significant tax savings.

For example,, applying a 35% combined federal and state tax rate to an ESOP purchase of $2 million of shares, the company realizes a tax savings of $700,000, or 35% of $2 million. As they are benefit plan expenses, these costs are all tax deductible.

C CORPORATIONS CAN DEFER TAXATION USING THE SECTION 1042 “ROLLOVER” Under Section 1042 of the Internal Revenue Code, the owner of closely held C corporation stock can defer the capital gains tax on stock sold to an ESOP. This capital gains tax deferral benefit has become particularly advantageous this year. Starting in 2013, various changes in our tax laws could increase the maximum federal income tax for long-term capital gains by as much as 66.6%.



In terms of tax savings, this means that if the shareholder(s) of the company sold $2 million worth of stock to a newly formed or existing ESOP in 2013, they could defer $500,000 of capital gains tax under the Section 1042 Rollover clause. In addition,


many States that that impose their own capital gains tax will be eligible for additional deferment under under Code Section 1042.

Another significant significant advantage of the 1042 Rollover involves estate planning. It is qualified replacement replacement property acquired in the 1042 Rollover until until death. In such cases, the qualified replacement property is passed to the decedent’s estate on a stepped-up tax basis. This can effectively eliminate the original deferred capital

WHAT ABOUT S CORPORATIONS AND DEFERRED TAXATION? The Section 1042 Rollover is not available for S corporation ESOPs, but there’s an easy fix. The company can revoke its S corporation status to become a C corporation without delay. There is no required length of time during which a company must be a C corporation to receive the tax deferred benefits, so seller(s) of newly minted C corporation stock can avail themselves of the Section 1042 rollover benefits right away.


gains tax on the company stock sold to the ESOP.


avoid the recognition of capital gains forever if a seller holds possible to avoid holds the


CONCLUSION There are many advantages that a leveraged ESOP can provide to a closely held company and its owners. Here are our top four: 1. PRE-TAX DOLLARS: The company is able to finance the acquisition of its shareholders’ stock using pretax dollars as a result of ESOP loan payments.


2. DEFERRAL OF CAPITAL GAINS TAX: The seller can defer capital gains tax (potentially forever) on the sale of C corporation stock to the ESOP. 3. RETENTION OF INCOME TAX PAYMENTS: S corporations allow the company to retain income tax payments as a result of the ESOP’s stock ownership. 4. EMPLOYEE MOTIVATION: The employees gain a motivating retirement benefit that can potentially increase the value of the company by leveraging an ownership mentality. As with any complex corporate finance structure involving the Internal Revenue Code and ERISA, it is important to get qualified and experienced professional advice and assistance before considering an ESOP as your company’s perpetuation solution. Penalties for violating Code and ERISA requirements can be serious but are easily avoided with the proper planning and advice.◘◘◘ - Tabitha Croscut and Chuck Coyne




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BENCHMARKING STRATEGY Critical Executive Retirement Data

An I N T E R V I E W with BRUCE BROWNELL Fulcrum Partners, LLC There is a hole in your compensation benchmarking strategy. If your situation is like that of most companies, the hole is gaping, awkward and large enough to permit the retirement incomes of top executives to slip through unnoticed. If you don’t know the chasm exists, you’re not alone. Executive Compensation Committees, Human Resources executives, and C-Suite and other upper management personnel who have the most to lose down the hole, often don’t realize it’s there either.


This shortcoming in benchmarking strategies occurs when benefits are left out of the Total Rewards conversation, perhaps because providers of executive benefits services, and the consultants who help companies sort through their plans, historically haven’t offered analytics for measuring benefits and their outcomes as part of retirement income. Yet this oversight begs the question: “If benefits aren’t compensation, what are they?” While companies disclose benefit plans and inputs, they rarely consider following through to look at benefit outcomes. Compensation tables do not show what the value of company retirement contributions will be by the time an executive retires. This means that neither the executives themselves, nor the companies they work for, really know the true value of their Total Rewards packages.

In trying to better understand the real issue, we turned to Bruce Brownell, Managing Director and one of the founders of Fulcrum Partners LLC, asking him to share critical insights on executive benefits benchmarking practices. In addition to his 25-plus years in financial consulting, including the past 15 years exclusively focused on executive benefits, Bruce pioneered Fulcrum Partner’s Executive Benefits Benchmarking strategy. We asked Bruce to drill down, explaining how executive benefits fit into benchmarking criteria, and how their inclusion in compensation benchmarking strategies could reduce the pressure companies experience in competing to retain top talent.


A. Bruce Brownell: “Retirement contributions are not being considered as part of Total Rewards. To a Compensation Committee, Total Rewards almost always means cash and stock. From an executive’s perspective, this can even feel like an over-allocation of company stock with an under-allocation to the financial objective that causes that executive the most concern—retirement security. So here’s the question--when an executive is accumulating an asset through company contribution that is going to pay him or her salary for life, how do we not consider that part of Total Pay? Q. How do you help companies get a handle on this challenge—the gaping hole in their benchmarking strategy? A. Bruce Brownell: “Total Rewards can’t be measured without data. So we say, first, let’s benchmark retirement outcomes against those of your peers or best practices so you know whether or not your Retirement Income Replacement Ratio indicates that retirement contributions are a significant piece of Total Rewards. Typically, we see that within a peer group the results are all over the board. We are responsible to address questions such as: What are your benefits relative to those of your peers? What is the Retirement Income Replacement Ratio for the NEOs (Named Executive Officers; the top five highest paid executives in your company) and the core executive population? And what should it be? In other words, what is your Retirement Strategy within Total Rewards, recognizing that not having a strategy, IS a strategy by default. Companies have a Statement of Investment Policy for a 401(k) plan; why wouldn’t they also commit to a Statement of Retirement Strategy as its corollary?


Q. What do you typically find is missing in traditional benchmarking practices?


Measuring Total Rewards; Filling the Gaping Hole


“The two charts shown here help quantify what I mean when I say that results are ‘all over the board.’

CHART 1 is Retirement Compensation in Summary: CEO. This chart shows real data regarding a  sampling of twelve companies, all within the same industry. Chart 1 indicates company  contributions, as a percentage of the CEO’s salary, to all qualified and nonqualified retirement  plans. You see that six companies appear to have incorporated retirement into Total Rewards  and that six companies appear to offer only a 401(k) match or a 409(A) match or restoration.  



replacement, as a percentage of Total Cash Compensation (salary plus bonus), created by  company contributions to all retirement plans, assuming the company meets target  performance. Retirement Income Replacement Ratio is based on current plan design, age and  year of service. It is a life annuity expressed as a percentage of total cash compensation  projected at age 65. 


“CHART 2 is Career Retirement Benefit (RIRR): CEO. This chart shows the annual lifetime income 


A. Bruce Brownell: “Peer benchmarking for retirement contributions and retirement income replacement ratios reveals a disruptive and insightful story about Total Rewards, exposing imbalances and revealing opportunities. When Compensation Committees and Human Resources know their retirement data, are aware of their key executive’s Retirement Income Replacement Ratio, know where that executive is positioned within the peer group, how the executive feels about retirement cash flow and what he or she is willing to trade for it, then the committee is equipped to develop a more compelling Total Rewards strategy. Knowing that retirement security is a primary objective of key executives, then why aren’t we incorporating a retirement strategy into Total Rewards? “HR professionals, Compensation Committees and plan participants are empowered when they measure benefits and their outcomes. They can literally change the trajectory of their company. Without it, everyone is working in the dark; they lack a rational, consistent, approach to executive retirement. They are operating by trying to work around the gaping hole.” ◘◘◘



design, wrapped around retirement?


Q. Whose story is this really; who benefits most by developing a strategic, intentional


Can it be BIG DATA? Transforming Data into Insight -

M i c h a e l D e n n i s G r a h a m , G r a h a l l m i c h a e l . g r a h a m @ g r a h a l l . c o m


The data you have or could better collect can be refined to convert “crude data” into the “jet fuel” your organization needs to perform better.

Data, big data, and even bigger data. Data is the tool of progress, but it’s not simply more of it (just ask the NSA). Big data refers not just to the quantity (although quantities are significant) but to the way that data can be used to identify competitive advantage and obtain organizational excellence. In this article and a companion article to appear in next month’s issue of PSX, we will look at how organizations can better utilize information that is already available both relating to employees (or those inside the organizational membrane) and stakeholders (those people outside the organizational membrane). The information exists and little data mining needs to occur; rather it is the “refining” or even “redefining” of this data that makes it valuable. Of course, we are not going to - nor are we in any way promoting - invasion of privacy, data piracy, or felonious behaviors. What we are saying is that the data you have or could better collect can be refined to convert “crude data” into the “jet fuel” your organization needs to perform better. We say, “Data doesn’t help make good decisions. But when data is transformed into insight, it provides tools valuable for decision making.”

Where does most of this untapped resource of “crude data” on the organization, positions, and employees reside? With HR of course (we are talking about data related to the organization and people after all). Now I can already hear the HR folks: “We use this organization/position/employee data every day! We


know what we have and we use it effectively!” Well let’s pose this question (and this one may primarily relate to the largest employers): Did you know that you can likely predict a flu outbreak in a local area before the CDC? Google is doing this by following searches that its users apply on things like flu remedies and cough medicines. But employers of all sorts have information on who’s too sick to come to work. Hey CVS! If your store workers in South Carolina are calling in sick, it’s time to refill those SC store shelves with cold remedies because your customers are going to be getting sick as well. Another important consideration with regard to employees who call in sick is that as the flu season ramps up and as employers begin to see trends in certain geographical areas, it is time to get in touch with your temp agencies. If 5% of your workforce is out with the flu, it is going to be difficult to make production, sales, delivery, or whatever numbers you need for that quarter without extra arms and legs. Now of course there are HIPPA privacy requirements and we are not suggesting that any individual employee information is disclosed, we are talking “trends in BIG DATA”. Most typically the first person an employee calls when he will be out sick is his supervisor. In most companies, this data point isn’t captured until a time sheet or pay statement is prepared, perhaps a week or two after the fact. But if that “crude data” were collected and refined earlier, the resulting trends could be used for advance planning, rather than Monday morning quarterbacking. Let’s take another example, 401(k) Plan data. There might not be another type of data in an organization that is more analyzed: for discrimination testing, for financial considerations of contribution cost and tax deductibility (for the organization), etc. But there is more to 401(k) data than meets the eye. Employees who don’t contribute to 401(k) plans are most typically those who can’t afford to, unless of course your communications program is lousy and turns people off… I’ve seen that too. For the time being, let’s said that it is an affordability issue. Are any of those folks who are not contributing to the 401(k) your key employees? If so, you may not be paying enough in compensation for them to stay. Can you afford for them to leave for a better offer? This is a question that should be keeping the HR professional up at night. Another example is: how are your employees using technology, including the internet and your knowledge management data base or tools? Are you monitoring highly accessed and poorly accessed information? Are you able to share the best thinking in your organization or are there pockets of excellence in a broader landscape of mediocrity. Are things getting done faster, cheaper, or more accurately by employees in one location than in another, and if so why? Sure those most efficient workers might be your key employees but you need to know why they are exceptional and provide those tools or learning to your entire organization.

When data is transformed into insight, it provides tools valuable for decision making.



Let’s move up from employee information and take a quick look at the information you have on positions. Most organizations have descriptions and key requirements (often called competencies) for each position. These position descriptions have historically been used for recruiting and for clarifying duties and accountabilities between subordinates and supervisors within departments. Few organizations use those same competencies for assessment, performance management, training and development, career pathing, and succession planning. This critical information on positions within an organization should be (but isn’t) effectively recycled. Let’s move up again from position information to organization information, but still on the people side of the equation. Most organizations have job evaluation systems that slot positions into pay grades for purposes of allocating pay efficiently within an organization. Few organizations use that information in part or in whole to better understand things about the organization. For example, where within the organization is the largest number of “knowledge point values” from the scores on the position evaluation system. When multiplied by the number of employees within each organizational area we effectively have a score for knowledge deployment within the organization. When divided by the dollars within each of those same departments we have a cost or investment for each knowledge unit of measure. Let’s again move up to information on the movement of employees within the organization. Most Human Resource Information Systems (HRIS) capture the promotions, demotions, hires, and terminations. Very little of this is ever displayed in a way that shows over time how the organization is utilizing its people asset (or for that matter how its organization is “bleeding” its people asset.) A final perspective is utilizing information about organizational issues such as those found in culture or employee climate studies. These broadly used sensing instruments are often looked upon as the organization’s “annual physical”. Rarely is the information correlated to organizational performance, supervisor training and development needs, or even used as an indicator for organizational and stakeholder engagement.

We challenge people strategists to go over to the CFOs office and ask them to share the concepts for their reporting system. Income statements, balance sheets, and cash flow may be somewhat foreign ideas to most HR people; however using these well accepted formats for people measurement would be a creative exercise in transforming HR data into insight if employee information was displayed in the same way as financial data. The first step in “financializing" people data might be the equivalent of the income statement. It would assess how many people came into the organization and the sources of that “people income”. What were the outflows or “people expenses”? What


was the net income or loss? We are not just speaking about the easy things such as headcounts. We are speaking about the more important things like competencies, knowledge, customer engagement, and management skills. A second step might be to construct the balance sheet for the people side of the organization. This could be in units of knowledge, experience, or seniority with the organization. If LinkedIn information was a proxy for the engagement of stakeholders, how many LinkedIn contacts does a certain tier of sales personnel have? What is the average pay of the organization? Profit, loss, and return on people could potentially be calculated. A final step might be to construct a cash flow statement for the people component of the organization, but instead of counting bodies we suggest counting knowledge units in the form of cost per person for knowledge gained with arrivals and cost with departures.

At a former employer we did just that. We developed a monthly people strategy report that was similar to the financial department’s monthly statements. Within six months the leadership team and board of directors spent an equal of time on the people report as on the financial report. These are just a very few examples of how information used or looked at in a different way might enhance organizational sustainability and success. Yes your vision might waver a little when you consider counting more than heads and salary cost, but it is a new and exceptional world of BIG DATA and HR should be on board. We encourage you to look at things differently, more deeply, and more often. Use (don’t misuse and certainly don’t disregard) the information you have at hand. It could mean the difference between good and great.

Next month we will look at how publically available information on people (no Edward Snowden surprises here) can be mined and refined. ◘◘◘ - Michael Dennis Graham, Grahall LLC



Is the CEO Paid Too Much A Customer Perspective


n last month’s article we examined the CEO compensation from the employee’s perspective and concluded that while employees might question the effort required to perform CEO tasks, the amount the CEO is paid at the average Fortune 500 company was not excessive. In fact, the CEO’s pay could well be less than what an employee might give as homage. It is not hard to imagine that an employee earning $1,000 dollars might routinely give $5 to the boss for the privilege of having that $1000 job. Further, we discovered that the average CEO compensation would be larger if that were the case.

It could be argued that it is the customer who pays for the CEO compensation package when they purchase a product or service. Let’s examine this premise using the average CEO at the Fortune 500 company.

Charles Patton, Grahall LLC

According to the Forbes 500 report (based upon 2012 data) the average CEO at a Fortune 500 company has a compensation package worth $10.5 million. This includes salary, bonuses, stock equivalents, perks, and benefits. The median revenue number for this same group of companies is $10.9 billion.


What we don’t know is how many customers this revenue represents. So from an individual customer perspective we don’t know how many dollars each is “paying” the CEO. What we do know is that as a percentage of the price the customer is paying for products or services (measured by revenue) the CEO compensation package is costing the customer approximately 1% of the purchase price (assuming that the sale is made directly with the company). If the item purchased is a manufactured item, then the transportation costs and distribution channel contribute significantly to the purchase price that the consumer pays and as a result the CEO compensation as a percent of the purchase price is considerably less. Consider a $1.00 can of Coca-Cola which has a relatively direct distribution channel. You can observe Coca-Cola identified trucks making direct deliveries from the bottling plant to the corner grocery store where the product is marked up 30-50% in order for the store to make a profit. Add on a modest sales tax of 5% and you can quickly determine that for Coke’s CEO (Muhtar Kent), the purchaser is paying just a fraction of a penny toward his compensation. On the other hand if you are purchasing a $30,000 dollar automobile and someone told you that $150 of the cost was going to pay the CEO of the organization you might get upset even though this only represents one-half of one percent of the purchase price. A direct examination of automobile company CEO compensation will show that the CEO is not receiving this much on a “per new car sold” basis. However, both of these theoretical examples do illustrate another trend: the larger the

company (in terms of revenue) the more the CEO is likely to be paid but the smaller the CEO compensation package is as a percent of company revenue. The bottom line for the customer – the larger the company the less you are paying for CEO compensation as a percent of the purchase price. While customers often complain about the price of the product or service they purchase, the customer is simply not likely to single out CEO compensation as a target for changing the cost. It is the shareholder through the Board of Directors who has the most control on CEO compensation. The natural question is, why don’t shareholders cut back on multi-million dollar CEO compensation packages? We will examine this issue from the perspective of the shareholder next month… ◘◘◘ - Charles Patton





by: Michael Dennis Graham



Click anywhere on the screen to preview this edition…

ISBN: 978-1-304-81498-2 $49.95

March2014 People Strategy, THE EXCHANGE  

The eMagazine for cutting edge people strategy. What You Will Find Inside... We invite you to peruse the March issue of our magazine, PSX....

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