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Schrodingers Cat and Compensation.pptx

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Presentation Slides & Transcript

Presentation Slides & Transcript

Trends in Compensation:Schrödinger’s Cat is Alive (and Dead)14th Annual Venture Capital Financing Conference26-April-2013Compensation Venture Group,

About the SpeakerFred Whittlesey is the founder and Principal Consultant of Compensation Venture Group (CVG), a West Coast consulting firm specializing in compensation strategy, director and executive compensation, equity-based compensation, and incentive design with a primary focus on entrepreneurial growth companies. Fred’s consulting experience includes positions with Mercer, KPMG, Buck Consultants, and Hay Group. His corporate compensation experience includes the role of Director of Global Compensation for and Broadcom, and Chief Compensation Officer of Fred is co-founder and past Board member of the not-for-profit Global Equity Organization (GEO), a Founding Member of the National Association of Stock Plan Professionals (NASPP), past President of the NASPP Orange County chapter, past member of the NASPP Advisory Board, and a current member of the Advisory Board of He also is past Chair of the Advisory Board for the Certified Equity Professional (CEP) Institute at Santa Clara University.Fred was a top-rated faculty member and certification course developer for 13 years for WorldatWork's "Accounting and Finance for HR Professionals" as well as the basic and advanced executive compensation courses, delivering instruction both in the classroom and online. He has authored dozens of articles in major compensation periodicals and has presented his ideas at compensation conferences around the world. His published works include “Say on Pay’s Impact on Equity Plan Design: Horse or Camel?” in GEOnomics 2012; “The Governance Ups and Downs of Performance Plans” in GEOnomics 2011; “Understanding Executive Pay Equity and Fairness: Ratios and Rationality” in WorldatWork Journal; “Behavioral Economics and Equity Compensation” in GEOnomics2009; and “Measuring the ROI of Compensation Expenditures” in The Compensation Handbook. Fred received his MBA with Distinction from UCLA and a BA in industrial/organizational psychology from San Diego State University where he graduated Magna Cum Laude and Phi Beta Kappa. He has earned the Certified Equity Professional (CEP), Certified Executive Compensation Professional (CECP) and Certified Compensation Professional (CCP) designations.

Compensation Venture GroupEquity Interests andAdvisory RolesProfessional RolesOnline ContentPay and Performance: The Compensation BlogConscious Compensation: The Impact Compensation BlogEffective Equity: The Equity Compensation BlogCompensationConsulting 3Expert Witness

Presentation OutlineWhat you need to know as an…EntrepreneurInvestorBoard Member (Compensation Committee)Trends in Long-Term Incentive CompensationAcceleration for Founders and EmployeesTrends in Cash CompensationBase SalaryCash BonusesSchrödinger’s Cat and Compensation4

The Observer Effect in CompensationObservationDisclosureComplexity5

What You Need to Know About Compensation Influences6

Founding7InvestorsFoundersBoard Members


Preparation for Exit9FoundersInvestorsBoardMembersBoards of Private CompaniesBoards of PublicCompaniesBoards of Venture CompaniesBoards of Other Companies

Life as a Public Company10FoundersVentureInvestorsBoardMembersProxyAdvisersInstitutional InvestorsSECMediaPeer Companies

Life as a Public Company11FoundersVentureInvestorsBoardMembersProxyAdvisersInstitutional InvestorsSECMediaPeer Companies

What You Need to Know About CompensationConverging forces are affecting, and will continue to affect, the compensation culture and compensation design at emerging companies as they grow and mature – public company spilloverExternal forces are increasingly influencing companies’ compensation design, sometimes overweighted vs. strategyChanges outside the US are quickly influencing US compensation in public companiesAlso driven by external governance organizations with sociopolitical views influencing corporate governance ideas (e.g., excessive CEO pay, caps on banker bonuses)Compliance and conformance are occupying the majority of compensation design discussions at the Board level12

What You Need to Know as an EntrepreneurExit is more likely as M&A than IPOAcqui-hire prevalenceS-1s filed as “for sale” signsNeed to re-forecast compensation potential“No exit” is more likely than an exitImplications for equity compensation designEmployee exits are most likely of allLiquidity event is likely much further in the future than vesting schedules’ durationConsider status of equity upon terminationMust decide on sharing with former employees vs. retention focus13

What You Need to Know as an InvestorMarket norms are diverging from long-term patterns of compensation for emerging companiesChanges in the form of equity: options-only to RSUsNot exit-contingent – employee liquidity in later roundsNot value-increase contingentChanges in the permanence of equityVest-and-leave to termination-buybacksPerformance-based option cancellationsShareholder/proxy adviser influence continuing to change executive pay and employee payDilution a bigger issue than executive payAnti-stock option attitudeInstitutional shareholder/proxy adviser view: 1/3/5-year TSR14

What You Need to Know as a Board (CC) MemberPressure exists to make activist-compliant compensation decisions that may contradict business strategy, finance strategy, and business judgmentSay-on-pay and related litigation is personally targeting Committee members over:Say-on-pay outcomesProxy statement disclosuresSection 162(m) (“million dollar cap”) policy and practiceChange-in-control arrangementsLitigation risk is driving risk-avoidance decision-making in plan design:Proxy adviser good/bad listsPeer group norms“Best practice” mentality15

Trends in Long-Term Incentive CompensationContinued backlash on dilution from employee stock plansESPPs still excluded from scrutiny - opportunityStock options not considered “performance-based pay” by ISSCompanies being “encouraged” to add performance conditions to both full-value awards and stock options for executivesPre-transaction companies increasing use of RSUs due to Market volatilitySection 409A concernsEmployee perceptions of valueIncreased interim liquidity offered by alternative investorsThe most creative LTI programs are “under the radar” and never reported in surveys or proxy statements16

Trends in Long-Term Incentive CompensationPerformance conditions on full-value shares (RSUPRSU)Primarily for executives though being extended lowerPerformance conditions on stock optionsStock ownership guidelines and holding periodsOften quietly coupled with a “special” RSU grant“Portfolio approach” to long-term incentivesOptions + RSUs + PRSUs + Cash LTIYear-to-year changes in mix and performance measures17

Trends in Long-Term Incentive Compensation: Example18

Trends in Long-Term Incentive Compensation: Example19

Trends in Long-Term Incentive Compensation: Example20

Life as a Public Company: Redux21FoundersVentureInvestorsBoardMembersProxyAdvisersInstitutional InvestorsSECMediaPeer Companies

Acceleration for Founders and EmployeesSingle trigger CIC provision has long been a potential deterrent for M&AOne school of thought highlights the fairness of this vs. accelerating vesting for those firedNow a “bad list” item for proxy advisersFull acceleration – even double trigger – increasingly being questionedOne year of additional vesting increasing in prevalenceWith M&A and acqui-hire transactions, some outstanding awards are converted and vesting time added: deceleration22

Trends in Cash CompensationBase salary levels continue to grow faster than represented by surveys of “merit increases”One-off adjustments unreported“Promotions” not includedHigh turnover rates with increases not capturedStaying competitive on base salary requires more competitive intelligence than offered by surveysAnnual cash incentives/bonuses continue to evolveBacklash from financial crisis about “risk incentives”Proxy adviser/investor pressure against discretionNon-GAAP measuresMandatory deferralPayment in restricted stock/units23

Schrödinger’s Cat and CompensationCompensation practices have more observers than ever beforeObservers have increased influence due to both technology ( and the shareholder democracy movementCorporate governance is disproportionately focused on executive and equity compensation and observers have become de facto plan designersRecent research indicates that purported “good governance” practices of executive compensation observers are associated with shareholder value destruction, not creationCurrent corporate governance concepts are in conflict with fundamental venture financing principles but creative design opportunities exist – no observers yet!24

Contact InformationFred Whittlesey, CEP, CCP, CECPfred@compensationventuregroup.comwww.compensationventuregroup.comCompensation Blog: payandperformance.blogspot.comImpact Compensation Blog: consciouscompensation.blogspot.comEquity Compensation Blog: effectiveequity.blogspot.comTwitter: @FredWhittlesey25