Why Now is the Best Time to Have a Phantom Stock Plan
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The document discusses why now is the best time for companies to implement a phantom stock plan. It provides an overview of phantom stock plans, how they work, and their benefits compared to traditional equity plans. Specifically, phantom stock plans reward employees now for their contributions but pay out later, lowering current cash flow impacts. They also make the plans self-financing by tying payouts to productivity profits. The document aims to help businesses survive and thrive during uncertain economic times by balancing cash flow needs with employee incentives.
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Why Now is the Best Time to Have a Phantom Stock Plan
- 1. Why Now is the BestTime to Have a Phantom Stock Plan
- 2. 22 Today’s Presenter: Ken Gibson SeniorVice President (949) 265-5703 [email protected] 23201 Lake Center Drive, Suite 207 ⬧ Lake Forest, CA 92630 ⬧ 949-852-2288 www.VLadvisors.com ⬧ www.PhantomStock.com
- 3. Why Now is the BestTime to Have a Phantom Stock Plan
- 4. 44 We’re happy to provide a copy of today’s slides. To open or close the control panel: Click the red arrow For questions during today’s presentation: Use the question area on your control panel Webinar Q: Are the slides available? A: Yes, more info will be provided at the end
- 5. 55 Take advantage of a one-half hour consulting call with a VisionLink principal at no charge. Indicate interest on final survey. Consultation Offer & Survey Request a copy of our slides and complimentary consultation. We value your input.
- 6. 66 We Need Your Help Research Question Your feedback is important and appreciated
- 7. 77 Post Webinar Intro 5 Minutes: Who We Are What We Do How We Do It
- 8. 88 23201 Lake Center Drive, Suite 207 Lake Forest, CA 92630 (888) 703 0080 www.vladvisors.com www.phantomstock.com www.bonusright.com Headquartered in Lake Forest, CA Founded in 1996 Over 600 clients throughout North America
- 9. 99 Business Leader Questions “How can I lower expenses but still reward performance? “What kind of pay strategy encourages value creation—but won’t kill my cash flow?” “What kind of employee performance should I be rewarding and how?” “How do I make sure my pay approach is agile but also stable?” “What is the least ‘expensive’ but fair way to compensate my people in this economy?”
- 10. 1010 Key Employee Questions “What’s the company’s commitment to me right now?” “What’s the company’s viability right now?” “What’s going to happen to the incentive plan I participate in?” “Will the company be able to compensate me for the value I create?” “What’s my future here at this point?”
- 11. 1111 Overriding Aim Survive to Thrive
- 12. 1212 Ideals Encourage Value Creation Guard Cash Flow Respect the P&L Create Growth Partners Protect Shareholders
- 13. 1313 Solution Reward Now, Pay Later Make it “Self-Financing”
- 14. 1414 The Pre-COVID Picture Sample Position Salary Short- TermValue Sharing Total Cash Flow Impact Plan A $110,000 $11,000 $121,000 $121,000 Plan B $100,000 $30,000 $130,000 $130,000
- 15. 1515 The Ideal Picture Sample Position Salary Short-Term Value Sharing Long-Term Value Sharing Total Cash Flow Impact Plan A $100,000 $5,000 $20,000 $125,000 $105,000 Plan B $100,000 $0 $30,000 $130,000 $100,000 Plan C $80,000 $10,000 $40,000 $150,000 $90,000
- 16. 1616 What Kind of Long-Term Plan is Suitable? Stock Option Performance Shares Restricted Stock Phantom Stock Option Performance Phantom Stock Phantom Stock Profit Pool Performance Unit Strategic Deferred Compensation
- 17. 1717 Grant Equity or Not Equity? Full Value or Appreciation Only? Yes Appreciation Stock Option Full Value Performance Based? Yes Performance Shares No Restricted Stock No Reward for Value Increase or Financial Performance? Value Increase Full Value or Appreciation? Appreciation Phantom Stock Option Full Value Performance Based? Yes Performance Phantom Stock No Phantom Stock Financial Performance Appreciation- Performance Based or Employee Directed? Performance Based Reward for Profit/Cash Flow or Other Metrics? Profits Allocation or Objectives Based? Allocation Profit Pool ObjectivesOther Metrics Performance Unit Employee Directed Strategic Deferred Compensation
- 18. 1818 Phantom Stock: Most Common Phantom Stock Option Performance Phantom Stock Phantom Stock
- 19. 1919 No Stock ● Reward For Value Increase Full Value Phantom Stock
- 20. 2020 Phantom Stock Company establishes a phantom share value (formula or valuation) Employees given an award that has current value essentially equivalent to company stock value (subject to vesting schedule) No rights of ownership Rewards for past contributions and future growth Payments will be made in cash (or stock) at pre- determined dates Full value awards create a direct link to ownership
- 21. 2121 No Stock ● Reward For Value Increase Full Value Performance Phantom Stock
- 22. 2222 Performance Phantom Stock Employees given the promise to receive phantom shares upon fulfillment of pre-determined (often annual) financial goals Shares can be full value or appreciation only “Double” pay-for-performance concept ▪ You earn shares based on performance ▪ Share values go up based on performance
- 23. 2323 No Stock ● Reward For Value Increase Future Value Only Phantom Stock Option
- 24. 2424 Phantom Stock Options Employees given a promise of cash payment at a future date The value will be based on the appreciation in stock price from the date of award to the date of redemption (like stock appreciation rights) Like stock options but without the need to pay for shares Rewards employees for contributing to the increase in enterprise value Can be part of the employee’s annual pay package
- 25. 2525 $100 mm BaseValue Today Future Date (5 – 15 yrs) Increase in EnterpriseValue EmployeeValue $30 mm $85 mm $15 mm
- 26. 2626 *Employee Taxation (General Rules) At Grant No Compensation Earned No Income Taxation Assumes plans retains “substantial risk of forfeiture” At Distribution Payments taxed as ordinary income when received Same true of installment payments *Disclaimer:VisionLink does not practice accounting; therefore, this information should not be construed as tax advice. Webinar attendees should consult with their CPA firms regarding the tax implications of a phantom stock plan for their companies.
- 27. 2727 *Employer Taxation (General Rules) At Grant No Compensation Paid No Income Tax Deduction At Distribution Distributions tax deductible as paid Same true of installment payments *Disclaimer:VisionLink does not practice accounting; therefore, this information should not be construed as tax advice. Webinar attendees should consult with their CPA firms regarding the tax implications of a phantom stock plan for their companies.
- 28. 2828 What Direction Should You Take? Value Tied To Total Value or Appreciation Only? Awarded or Earned? When Redeemed (Typically)? Executives or Broad (Typically)? Phantom Stock Options Share Price Appreciation Awarded 3-7 years Executives Full Value Phantom Stock Share Price Total Awarded 6-10 years Executives Performance Phantom Stock Share Price Either Earned 3-10 years Executives Profit Pool % of Profits Either Earned 3 years Broad PUP 2-3 Key Metrics Either Awarded 3 years Broad Strategic DCP 1-2 Annual Financial Metrics Either Earned Retirement Executives
- 29. 2929 How Do You Build a Plan?
- 30. 3030 Select the Right Plan Type Phantom Stock Option Performance Phantom Stock Phantom Stock
- 31. 3131 Create a Financial Model & Dashboard Detailed operation projection Award guidelines by participant Vesting, redemption, payment schedules Performance standards Over/under performance assessment (Base, Target, Superior) Cost controls Cash flow and earnings assessment Funding analysis
- 32. 3232 Getting it “Right” Good Plan Simple Valuation Method Annual Awards In-Service Payouts (Fixed Date Redemptions) Budgeted Grants Drafting Precision Not So Good Plan Appraisal or Over-Engineered Formula One Time “Block” Awards No Redemption Until Major Event Random Grants Casual Documentation
- 33. 3333 Dual Focus Peter Drucker once wrote that the manager’s job is to keep his nose to the grindstone while lifting his eyes to the hills. He meant that every business has to operate in two modes at the same time: producing results today and preparing for tomorrow. (Ken Favaro, Strategy+Business)
- 34. 3434 1 Philosophy, 2 Rewards Periods Wealth Multiplier Pay Philosophy 1. Short-Term Performance (12 months or less) 2. Long-Term Performance (over 12 months)
- 35. 3535 1. Short-Term Performance (12 months or less) Focus: Reward Profits or Profitability 2. Long-Term Performance (over 12 months) Focus: Reward Business Growth 1 Philosophy, 2 Rewards Periods Wealth Multiplier Pay Philosophy
- 36. 3636 Case Study in Value Creation Philosophy 36
- 37. 3737 Core Changes Shift from “Incentives” to “Value Sharing” Took away local measurements driving management incentive plans—all paid on same metrics ▪ “We live together and we die together” Aligned everyone behind company success ▪ “I call it ‘pay the company first.’ ” 37
- 38. 3838 Pay the Company First “Basically, up to the company’s operating profit target, all of the profits go to the company; and only after that target is met, do we start funding the incentive pool.” Example: If UL’s target is $80 million-- 100% of first $80 in profit goes to company The next $20 million goes to the incentive pool From there on, 50/50 between company & incentive pool
- 39. 3939 Pay the Company First Once value creation is defined, compensation can follow a formula for sharing value in a way that aligns key producers with the company’s business plan and priorities. 39
- 40. 4040 To Make the Plan “Self-Financing”… Focus on Productivity Profit
- 41. 4141 Calculating Productivity Profit Item Amount Capital Account $20,000,000 Cost of Capital 12% Capital Charge $2,400,000 Operating Income $10,000,000 Productivity Profit $7,600,000 Total Rewards Investment $25,000,000 ROTRI™ Return on Total Rewards Investment 30.4% (ROTRI™ = Productivity Profit/Total Rewards Investment) 41
- 42. 4242 Example: Item Figure Capital Account $20,000,000 Cost of Capital 12% Capital Charge $2,400,000 Operating Income $10,000,000 *Productivity Profit $7,600,000 Total Rewards Investment $25,000,000 ROTRI™ 30.4% (ROTRI™ = Productivity Profit/Total Rewards Investment) *Variable Pay Plans (Value Sharing) are financed from Productivity Profit 42
- 43. 4343 Result: Unlimited Earnings Potential Item Figure Capital Account $20,000,000 Cost of Capital 12% Capital Charge $2,400,000 Operating Income $10,000,000 *Productivity Profit $7,600,000 Total Rewards Investment $25,000,000 ROTRI™ 30.4% (ROTRI™ = Productivity Profit/Total Rewards Investment) *Variable Pay Plans (Value Sharing) are financed from Productivity Profit 43
- 44. 4444 Create a Balanced Pay “Portfolio” The role of each pay component in relation to others within the comprehensive compensation strategy is coordinated and clear.
- 45. 4545 Eight Components of Pay (Asset Classes) Benefits Core benefits Executive benefits Qualified retirement plans Supplemental retirement plans Compensation Salary Performance incentives Sales incentives Growth incentives Incentives should be in the form of value sharing.
- 46. 4646 Salary Performance Incentives Sales Incentives Growth Incentives Core Health & Welfare Plans Executive Benefit Plans Qualified Retirement Plans Nonqualified Retirement Plans Salaries Competitive with market standards? Tied to strong performance management process (merit)? Managed within a flexible but effective structure? Performance Incentives Tied to productivity gains? Clear, achievable and meaningful? Self-financing? Sales Incentives Challenging yet achievable? Reinforcing the right behaviors? Differentiating your offering? Growth Incentives Linked to a compelling future? Supporting an ownership mentality? Securing premier talent? Core Benefits Responsive to today’s employee marketplace? Allocating resources where most needed? Evaluated to eliminate unnecessary expense? Executive Benefits Flexible enough to address varying circumstances? Communicating a unique relationship? Reducing employee tax expense? Qualified Retirement Plans Giving employees an opportunity to optimize retirement values? Operated with comprehensive fiduciary accountability? Avoiding conflicts and minimizing expenses? Nonqualified Retirement Plans Optimizing tax-deferral opportunities? Aligning long-term interests of employees with shareholders? Structured to receive best possible P&L impact? A Balanced Compensation Strategy
- 47. 4747 Build a Total Compensation Structure A total compensation structure gives you a comprehensive view of all compensation and benefit plans and ensures both maximum flexibility and stability.
- 48. 4848 The Total Compensation Structure Min Mid Max 1 203,531 271,375 339,219 50.0% 100% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 15,000 20,000 2 150,078 200,103 250,129 35.0% 75% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 10,000 12,500 3 119,497 159,329 199,161 25.0% 50% 100% 0% 5% Yes 5% $11,141 25 5 5,000 8,000 4 102,632 136,843 171,054 20.0% 25% 100% 0% 5% $6,127 25 5 5,000 5 81,293 101,616 121,940 15.0% 5% $6,127 25 5 5,000 6 69,720 87,150 104,580 15.0% 5% $6,127 15 5 7 58,564 73,205 87,846 10.0% 5% $6,127 15 5 8 50,176 62,720 75,264 10.0% 5% $6,127 15 5 9 44,038 51,809 59,580 5.0% 5% $6,127 15 5 10 37,211 43,777 50,344 5.0% 5% $6,127 10 5 11 30,784 36,217 41,649 5.0% 5% $6,127 10 5 12 23,562 27,720 31,878 5.0% 5% $6,127 10 5 13 19,529 22,975 26,421 0.0% 5% $6,127 10 5 14 17,354 20,417 23,479 0.0% 5% $6,127 10 5 Annual Car Allow Grade/ Band Sick Days Salary Range Bonus Target LTIP Target Financial Planning Perk Deferred Comp Elegible Deferred Comp Max Match 401k Match Max % Vacation Days % Phantom Stock FV % Phantom Stock AO Health, Dental, Life
- 49. 4949 Creating a Balance Total Compensation Structure Name Title/Position Tier Salary Short-term Incentive Target Long-term Incentive Target Total Direct Comp H&W Annual Value QRP Annual Value Security Plans Annual Value Total Indirect Comp TRI Jason Smith CEO 1 $ 300,000 $ 120,000 $ - $ 420,000 $ 18,200 $ 8,000 $ - $ 26,200 $ 446,200 Lucy Jones VP Marketing 2 $ 210,000 $ 45,000 $ - $ 255,000 $ 16,200 $ 7,000 $ - $ 23,200 $ 278,200 Rick Miller VP Sales 2 $ 160,000 $ 85,000 $ - $ 245,000 $ 9,200 $ 6,000 $ - $ 15,200 $ 260,200 Janice Johnson CFO 2 $ 195,000 $ 40,000 $ - $ 235,000 $ 10,200 $ 5,000 $ - $ 15,200 $ 250,200 Maria York Director 3 $ 160,000 $ 10,000 $ - $ 170,000 $ 12,200 $ 4,000 $ - $ 16,200 $ 186,200 Frank North Director 3 $ 150,000 $ 10,000 $ - $ 160,000 $ 11,200 $ 3,000 $ - $ 14,200 $ 174,200 Ricardo South Director 3 $ 140,000 $ 10,000 $ - $ 150,000 $ 7,700 $ 2,000 $ - $ 9,700 $ 59,700 Simon Lewis Director 3 $ 130,000 $ 10,000 $ - $ 140,000 $ 8,700 $ 2,500 $ - $ 11,200 $ 151,200 $ 1,445,000 $ 330,000 $ - $ 1,775,000 $ 93,600 $ 37,500 $ - $ 131,100 $ 1,906,100 How are these values determined? Why no LTI to balance the STI? Should we be addressing these needs?
- 50. 5050 What Does It Tell You? Total Rewards Investment (TRI) Allocation TRI looks at each component of pay as a percentage of the total Name Tier Salary STI% LTI% H&W% QRP% SP% TRI Jason Smith 1 67.2% 26.9% 0.0% 4.1% 1.8% 0.0% $ 446,200 Lucy Jones 2 75.5% 21.4% 0.0% 7.7% 3.3% 0.0% $ 278,200 Rick Miller 2 61.5% 53.1% 0.0% 5.8% 3.8% 0.0% $ 260,200 Janice Johnson 2 77.9% 20.5% 0.0% 5.2% 2.6% 0.0% $ 250,200 Maria York 3 85.9% 6.3% 0.0% 7.6% 2.5% 0.0% $ 186,200 Frank North 3 86.1% 6.7% 0.0% 7.5% 2.0% 0.0% $ 174,200 Ricardo South 3 87.7% 7.1% 0.0% 5.5% 1.4% 0.0% $ 159,700 Simon Lewis 3 86.0% 7.7% 0.0% 6.7% 1.9% 0.0% $ 151,200 Salary STI% LTI% H&W% QRP% SI%
- 51. 5151 Balanced Structure Total Compensation Structure Name Title/Position Tier Salary Short-term Incentive Target Long-term Incentive Target Total Direct Comp H&W Annual Value QRP Annual Value Security Plans Annual Value Total Indirect Comp TRI Jason Smith CEO 1 $ 300,000 $ 75,000 $ 75,000 $ 450,000 $ 18,200 $ 8,000 $ 15,000 $ 41,200 $ 491,200 Lucy Jones VP Marketing 2 $ 210,000 $ 36,750 $ 36,750 $ 283,500 $ 16,200 $ 7,000 $ 10,500 $ 33,700 $ 317,200 Rick Miller VP Sales 2 $ 160,000 $ 60,000 $ 40,000 $ 260,000 $ 9,200 $ 6,000 $ 8,000 $ 23,200 $ 83,200 Janice Johnson CFO 2 $ 95,000 $ 34,125 $ 34,125 $ 263,250 $ 10,200 $ 5,000 $ 9,750 $ 24,950 $ 288,200 Maria York Director 3 $ 160,000 $ 16,000 $ 16,000 $ 192,000 $ 12,200 $ 4,000 $ 8,000 $ 24,200 $ 216,200 Frank North Director 3 $ 50,000 $ 15,000 $ 15,000 $ 180,000 $ 1,200 $ 3,000 $ 7,500 $ 21,700 $ 201,700 Ricardo South Director 3 $ 140,000 $ 14,000 $ 14,000 $ 168,000 $ 7,700 $ 2,000 $ 7,000 $ 16,700 $ 184,700 Simon Lewis Director 3 $ 30,000 $ 13,000 $ 13,000 $ 156,000 $ 8,700 $ 2,500 $ 6,500 $ 17,700 $ 173,700 $ 1,445,000 $ 263,875 $ 243,875 $ 1,952,750 $ 93,600 $ 37,500 $ 72,250 $ 203,350 $ 2,156,100 We’ve reduced the STI targets. But we’ve balanced with a LTIP (wealth creation). This can strengthen partnership and improve retention.
- 52. 5252 Survive to Thrive Total Rewards Investment (TRI) Allocation TRI looks at each component of pay as a percentage of the total Name Tier Salary STI% LTI% H&W% QRP% SP% TRI Jason Smith 1 61.1% 15.3% 15.3% 3.7% 1.6% 3.1% $ 491,200 Lucy Jones 2 66.2% 17.5% 17.5% 7.7% 3.3% 5.0% $ 317,200 Rick Miller 2 56.5% 37.5% 25.0% 5.8% 3.8% 5.0% $ 283,200 Janice Johnson 2 67.7% 17.5% 17.5% 5.2% 2.6% 5.0% $ 288,200 Maria York 3 74.0% 10.0% 10.0% 7.6% 2.5% 5.0% $ 216,200 Frank North 3 74.4% 10.0% 10.0% 7.5% 2.0% 5.0% $ 201,700 Ricardo South 3 75.8% 10.0% 10.0% 5.5% 1.4% 5.0% $ 184,700 Simon Lewis 3 74.8% 10.0% 10.0% 6.7% 1.9% 5.0% $ 173,700 Salary STI% LTI% H&W% QRP% SI%
- 53. 5353 The Current Picture Sample Position Salary Short- TermValue Sharing Total Cash Flow Impact Plan A $110,000 $11,000 $121,000 $121,000 Plan B $100,000 $30,000 $130,000 $130,000
- 54. 5454 The Ideal Picture Sample Position Salary Short-Term Value Sharing Long-Term Value Sharing Total Cash Flow Impact Plan A $100,000 $5,000 $20,000 $125,000 $105,000 Plan B $100,000 $0 $30,000 $130,000 $100,000 Plan C $80,000 $10,000 $40,000 $150,000 $90,000
- 55. 5555 Ideals Encourage Value Creation Guard Cash Flow Respect the P&L Create Growth Partners Protect Shareholders
- 56. 5656 Solution Reward Now, Pay Later Make it “Self-Financing”
- 57. 5757
- 58. 5858 Digital platform for building short and long-term value sharing plans Efficient plan design process Affordable plan design cost Effective plan launch material Superior ongoing plan management
- 59. 5959 Would you favor a digital subscription option that allows you to build your own plans on BonusRight, with VisionLink’s help?
- 60. 6060 Introducing: The Total Rewards Assessment Tool
- 61. 6161 BonusRight Demo Additional Special Offer for Webinar participants Free Total Rewards Assessment Select “YES” on survey—or contact Melissa at [email protected]
- 64. Special Offer 5 Secrets to a Successful Post-Lockdown Pay Strategy Request your copy on the final survey.
- 65. 6565 Take advantage of a one-half hour consulting call with a VisionLink principal at no charge. Indicate interest on final survey. Consultation Offer & Survey Request a copy of our slides and complimentary consultation. We value your input.
- 66. 6666 Post Webinar Intro 5 Minutes: Who We Are What We Do How We Do It
- 67. 6767 Q&A
- 68. 6868 Today’s Presenter: Ken Gibson SeniorVice President (949) 265-5703 [email protected] 23201 Lake Center Drive, Suite 207 ⬧ Lake Forest, CA 92630 ⬧ 949-852-2288 www.VLadvisors.com ⬧ www.PhantomStock.com ThankYou!
- 69. 6969 Post Webinar Intro 5 Minutes: Who We Are What We Do How We Do It
- 70. 7070
- 71. 7171
- 72. 7272 VisionLink’s Focus: Help Business Leaders Build and Sustain a High Performance Culture Accelerate performance through pay strategies that transform employees into growth partners.
- 73. 7373 If you do that… • Quality of talent will improve. • Employee engagement will expand. • Performance will be magnified. • Business growth will be accelerated. • Shareholder value will increase.
- 74. 7474 Today’s Presenter: Ken Gibson SeniorVice President (949) 265-5703 [email protected] 23201 Lake Center Drive, Suite 207 ⬧ Lake Forest, CA 92630 ⬧ 949-852-2288 www.VLadvisors.com ⬧ www.PhantomStock.com ThankYou!