executive incentive compensation in the private, small ... · executive incentive compensation in...
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The world leader in serving science Proprietary & Confidential
Martin Van Walsum, CPA, MBA, CCP
Vice President, Executive Compensation
Executive Incentive Compensation in the Private, Small, and Midsized Marketplace
CBIA 2016 Compensation & Benefits Conference June 22, 2016
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• Revenues of $17 billion and 50,000+ employees in 50 countries
• We help our customers accelerate life sciences research, solve complex
analytical challenges, improve patient diagnostics and increase laboratory
productivity
• Formed by the 2006 merger of Thermo Electron (f. 1956) and Fisher Scientific
(f. 1902)
About Thermo Fisher Scientific
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Our Mission
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About Thermo Fisher Scientific (NYSE: TMO)
• High performing culture built around “making our numbers”
• Have closed 120+ deals in the past 10 years totaling $50+ B, including: Year Company Revenue Purchase Price
2011 Dionex $500 M $2.2 B
2011 Phadia $600 M $3.5 B
2012 One Lambda $200 M $0.9 B
2014 Life Technologies $4.0 B $16 B
2016 Affymetrix $350 M $1.3 B
2017P FEI Corporation $1.0 B $4.3 B
• Rewarded by investors with quadrupled stock price from January 1, 2009 to
December 31, 2016, and 97% favorable vote in 2016 “Say on Pay” referendum
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About Barnes Group (NYSE: B)
• Founded in 1857 in Bristol, Connecticut making springs for clocks and hoop skirts
• Today, $1.2 B global manufacturer of industrial and aerospace components with
approximately 4,700 employees at more than 60 locations on four continents
• Stock price quadrupled from January 1, 2000 to December 31, 2007
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Similarities
• B2B companies large and small suffer from “identity crises”
• Thermo Fisher Scientific – #267 on Forbes’ 2016 list of The
World’s Biggest Public Companies, # 97 in U.S.
• Forbes Inc. – Private Company, $400 M in revenue, 750 employees
• “Cash is King” – remains the most important element
of pay, even among executives making > $1M
• Employees seek differentiated recognition for their
contributions
• Affordability of driving incentives deep in organizations
• Scarcity of resources, especially good people
Differences
• Top talent is easier to accumulate in large caps
(challenge, not a barrier)
• Change isn’t easy, but it’s easier in smaller companies and in
private companies
Small / Private Companies vs. Large Caps
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• Salary
• Merit and Market Adjustments
• Promotional Salary Increases
• Short-Term Incentives
• Quarterly or Semi-Annual in
specific circumstances
• Stock Options
• Non-Qualified
• Incentive Stock Options (ISOs)
• Stock Appreciation Rights (SARs)
• Restricted Stock / Units
• Performance Shares
• Performance Units
• Phantom Stock/ Faux Equity Plans
• Book Value Plans
Incentive Choices for Executives
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Do Don’t
DO differentiate in at least three of the
components of Total Compensation
• Merit Increases, Salary Adjustments,
S/T Incentives, L/T Incentives
DON’T over-reward the same organization
level
• S/T incentives: the business
• L/T incentives: the company
DO use stock, to the extent available.
• The accounting for stock is still better than
cash (value fixed on grant date vs. variable
accounting)
• Options still tend to be less expensive
• If you are successful in creating stock price
appreciation, the linkage can become very
powerful for retention, motivation and
attraction – great story to tell
• Be mindful of overhang and burn rate
DON’T over-interpret “trend data”
• Example: “While the trend of giving bonuses
has steadily increased since 2013 (69%) for
all companies, top performers were more
likely to give bonuses in 2015. The 2016
CBPR found that 74% of average companies
gave bonuses in 2015, while 81% of top
performers gave bonuses in 2015.” 1
DO use metrics for any cash component
that incorporate the drivers of stock price
(or enterprise value for private companies)
DON’T let the finance and legal teams
over-influence incentive design
• Find a way that satisfies all needs
Do’s and Don’t of Incentives for Executives
1 PayScale Human Capital, 2016 Compensation Best Practices Report
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• Any company, regardless of size, can utilize pay as an incentive to reinforce a
performance culture
• Pay cannot create behaviors
• The behaviors have to be innate in the assembled workforce
• Hire to the culture you want to create
• Pay for performance can reinforce those behaviors that already exist
• Focus attention on desired behaviors
• Promote acceptable risk taking
• Opportunities are more powerful than pay
• “The true reward for superior performance is increased responsibility. The money will
follow in the natural course”
• Some behaviors can be expected and don’t need to be reinforced through added
incentives
• Example: procurement executive negotiating steel prices
• Significant barrier to creating an effective linkage between pay and performance
is to be too slow to exit poor performers - especially executives
Creating a High Performing Culture
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• Long-standing commitment by senior leadership to differentiate pay based on
company, business and individual performance
• Prior to 2009, belief was that “Pay for Performance” was already deeply ingrained in
the organization
• Misconception fueled by a lack of consistent analytics
• Actual differentiation was far less than was perceived
• Significant multi-year shift in two areas, beginning in 2009
• Repositioned annual Total Compensation cycle (salary, annual incentive payouts, long-
term incentive awards) from an HR process to a Role Model Leadership process
• Supported by messaging from CEO, through senior leadership, to all 5,000
people managers
• Defined specific metrics and issued guidelines to managers
• Differentiation requires a strong linkage to performance management process
Reinforcing a High Performing Culture at Thermo Fisher
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Key Communication Messages to Managers
• Differentiate in reward decisions across all four pay decisions
• Merit increase, salary adjustments, annual incentives, stock grants
• Insulate your strongest performers from competitive “poaching” by fully
recognizing and rewarding their contributions first
• The market for top talent is strong in any economy
• No guarantees, but compensation decisions are one of the few controllable factors in
the employee engagement equation
• Stay within pools, without compromising rewards to our strongest performers
• Past behavior was to scale back rewards for high performing employees to stay within
budget
• Focus on career / skill development for all employees, provide opportunities to
“make the grade”
• Perform at a high level and make a decided difference on key business initiatives
• Managers should be able to articulate what “Clear Strength performance” is
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• Expectation: 10% to 15% of employees will receive a Clear Strength (CS) rating
Metric: Performance Distribution
CS
15.0%
AS
79.5%
RI
5.5%
2008 PMDs
CS
12.8%
AS
82.2%
2010 PMDs
RI
5.0%
CS
13.2%
AS
83.3%
2014 PMDs
RI
3.5% CS
11.2%
AS
84.9%
2012 PMDs
RI
3.9% CS
11.3%
AS
85.5%
2016 PMDs
RI
3.3%
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• Expectation: 80% of CS performers will receive at least a 5% merit salary increase CS Employees Receiving Differentiated Increase
(within country-specific CS guideline range)
Percent of
CS Performers
Receiving a
Differentiated
Increase by
Business
Goal 80%
Metric: Differentiated Merit Salary Increases
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0% 5% 10% 15% 20% 25% 30%
CPD
LCD
APAC
MBD
CCG
CDD
HMD
LED
EPD
RSD
SDG
CNO
AIG
CMD
CAD
BSD
LPG
Corp
APD
BID
Goal 15% to 20%
• Expectation: 15% to 20% of employees will not receive a salary increase
Metric: Percent of Employees Not Receiving an Increase
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• Goal: Average increase for CS performers of 3 times that of AS performers
CS Increases as a Multiple of AS Increases
Average Salary Increase By Performance Rating
Metric: Multiple of Average Merit Salary Increase
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• Goal: Average increase for CS performers of 3 times that of AS performers
CS Increases as a Multiple of AS Increases
Average Salary Increase By Performance Rating
2.65x 1.84x
“If I’m a strong
performer I want to be
in other parts of the
company. If I’m an
average performer I
want to be in Newco.
That’s not the right
message.”
Metric: Multiple of Average Merit Salary Increase
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0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0% 0.1% to 1.4% 1.5% to 2.4% 2.5% to 4.9% 5% +
Goal: Trimodal Distribution of Merit Increases
Demonstrating Differentiated Pay for Performance
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• “What gets measured, gets managed.”
~ Peter Drucker
• Take a business approach
• For Thermo Fisher, salary + bonus + stock
is a $500 Million annual incremental investment
• As with any investment, we are looking to
achieve the highest ROI, which is achieved by
investing in higher performing employees
• Work the channels
• Managers are paid to manage
“We’re not saying it’s easy, but it’s not unreasonable
to expect managers to exhibit role model leadership
and make tough decisions.”
• Managers are employees, too
• Assess the effectiveness of the communications to serve both masters
• Assume managers are sharing information with other employees – utilize that leverage
• Keep the manager front and center to maintain accountability – no “HR wouldn’t let me”
• Acknowledge the “small sample” impact on the ability to achieve the metrics
• But remember, any small sample is generally part of a large group that can!
Lessons Learned