How to successfully implement LTIPs? - Comp&Ben Talks #7

We are back with a new episode of Comp&Ben Talks! The three of us, Magda - Comp & Ben practitioner, Aneta Samkoff - Comp & Ben researcher, and I, Bartek - who has experience in implementing Comp & Ben, discussing Long Term Incentive Plans

In this episode, we would like to touch: ➡️ Challenges related to LTIPs ➡️ How to match LTIP to an organization’s maturity ➡️ How to achieve success in LTIPS?

If you wish to educate yourself on these topics, see other people's experiences and perspectives, this podcast is for you. Here you can find our e-book about LTIPs.

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Transcription

Bartek Podolski: Hi, this is Bartek Podolski and…

Aneta Samkoff: …Aneta Samkoff…

Magdalena Tur: …and Magda Tur.

Bartek Podolski: Welcome to episode seven of the Comp & Ben Talks in which we are going to talk more about LTIPs, meaning long-term incentive plans. In the last episode, we already explained the basics of LTIPs. Then we decided to record another podcast about it as the topic is too broad to be covered in only one episode. So today we will talk about long-term incentive plans again. As a reminder, in the last episode we explained the concept of LTIPs in general, we talked about why LTIPs exist. We also divided LTIPs into three main categories: cash-based, stock-based, and phantom LTIPs (which is a combination of cash-based and stock-based plans). Then we discussed a bit about the psychology of LTIPs and why companies introduce those plans in the first place. We mentioned the main reasons such as the retention of key people, and the possibility to align the interest of managers with the company owners. Magda also underlined that LTIPs are good tools for the short-term control of long-term goals. I personally liked this motivation, didn't you? In the last episode, we also tried to explain what happens when employees receive incentive plans. We also said that there is a nonlinear correlation between the amount of the award, motivation, and outcomes of everyday work. We also talked about the buy-in and buy-out of LTIPs, which indicated that the LTIPs related to the retention of employees may have less impact when you offer the same plan to people who just joined the company in comparison to the long-term employees. In such cases, the retention function of LTIPs may not be as effective and obvious as it was before.

Aneta Samkoff: Yeah, last time we spoke a lot about the psychological aspect of LTIPs.

Bartek Podolski: And then we jumped into the technical part of LTIPs but we only mentioned this topic very briefly as the podcast was already too long to talk more about it. And this is the reason why today we have the technical part of LTIPs on the table. In this podcast, we will talk about the challenges of introducing LTIPs. In the beginning, we prepared a graph that describes how to match LTIPs with the organization. Depending on the organization's maturity stage, different types of LTIPs should be introduced and attached to the company.

Aneta Samkoff: There are different reasons for generating various types of LTIPs but all of them depend on the stage of the company's development.

Bartek Podolski: Yes, we will talk about it in detail later in this podcast. In the second part, we are planning to cover the topic of achieving success in granting the right LTIPs to the right people.

Aneta Samkoff: We will also tell you how to decide to whom LTIPs should be granted in the first place.

Bartek Podolski: Yes, these are the topics of today’s episode. Sorry for such a long introduction, but I hope I covered everything. Magda, Aneta, would you like to add something here?

Aneta Samkoff: I think it was a good preview. Let’s jump into the slide now.

Magdalena Tur: Everything looks good. Let’s move to the main part of this podcast.

Bartek Podolski: The first point of today’s talk is about analyzing the graph. For those who are only listening to us, we will describe the graph as best as possible. Please note that this graph is available on our recording on YouTube so you can easily access it later.

Magda, you are the author of this graph. May I ask you to describe what is presented on this graphic and how LTIPs should be matched with the organization?

Magdalena Tur: Of course, I can do it. Matching LTIPs is very individual for every organization. It always has to be carefully combined with the current situation of the company. In this podcast, we can give you some recommendations which align with the organization's life cycle. As Bartek already mentioned, we can only draft some plans which may work better for certain maternity stages of a company. First of all, there is a moment when a company steps into the market intending to gain certain market shares. This is the time when companies focus on doing investments, acquisitions, or research and development activities to grab a decent market share. It is the time when we want managers to actively develop the business and to make a bit riskier decisions. To make it happen, we can motivate managers with an appreciation plan which works on some kind of spread. The starting point here is the value of the grant at the grant date. Then we have the end of the vesting period with prices valued at the end of this period. Managers’ goal is to expand this spread because the difference in prices is the reward given to them.

Bartek Podolski: So the difference between the prices at the beginning and the end of the vesting period is the actual award, right?

Magdalena Tur: Yes, you are right.

Aneta Samkoff: May I ask you for a more specific example? Which companies could use such a tactic? Is it good for startups?

Magdalena Tur: Exactly. A startup is a very good example of a company that could introduce such a plan. In their case, an option plan, where you offer the difference between the option and the actual value of shares at the end of the vesting period, would suit well as an appreciation plan for managers.

Bartek Podolski: Indeed, it all makes sense to me. And to summarize this point for our audience, if you were asked to advise a fast-growing company, you would suggest basing LTIPs on appreciation plans which are about getting the difference in stock value at the beginning of the plan and, let’s say, three years later. If the company is in a good shape and the financial indicators are actually better after some time than at the beginning then the difference is paid to the employees as a reward.

Aneta Samkoff: Indeed, it is not about the actual stock price but the difference between the beginning and the end of the vesting period.

Magdalena Tur: Yes, it is exactly how it works. And when the spread is negative, everything is worthless to everyone.

Bartek Podolski: I believe no one wants to have such a situation.

Aneta Samkoff: It means that people did not do a good job and they do not receive any awards.

Bartek Podolski: What about the stable company? How do LTIPs work at this stage of organizational development?

Magdalena Tur: Indeed, this is the next phase of the company life cycle. When we have a stable position in the company, we will not work as intensively as at the very beginning. At this stage, we are more focused on cost reduction and productivity increase. We also want to reinforce the loyalty of our managers and keep them within the organization. This is a good moment to use shares as instruments of LTIPs. It is a valuable choice because shares may align very well with the company owners’ and managers' points of view. The share price reflects the value of the company and it is basically understandable to everyone. To sum up, in stable times a company should offer shares and during uncertain times we have another instrument called long-term cash. It is one of the simplest plans that may be introduced even in times when a company struggles with some storms or organizational transformation connected with the company’s main mission redefinition or the search for optimization, or methods for capital accumulation. At this point, we want our managers to go through this storm and sometimes make unpopular decisions. Somehow, we want to assure them that at the end of uncertainty, they will be rewarded regardless of changes in the business environment. The share price may reflect uncertain times which will not be beneficial for managers. Long-term cash may motivate us to work hard and become an assurance that in the end people will be rewarded fairly.

Aneta Samkoff: I have a question regarding the meaning of transformation within the company. Would you also include there also times when a company decides to merge or acquire another organization? Or do you have other types of transformation in mind here?

Magdalena Tur: It is about all situations when the market does not feel sure about the company and its share price does not grow in line with the real value.

Aneta Samkoff: Is it also about tough times in general, like COVID-19 pandemia?

Bartek Podolski: If I may interrupt, I think that we are talking here about the situation when executives of the company need to make decisions that may impact the share price. It is about risky decisions. In such situations, it is better to base an incentive plan on cash as the share price just does not reflect the real value of the company. Such an approach will also eliminate the incentive of not deciding at all.

Aneta Samkoff: It is also a good tool to protect a company from external conditions which are out of the manager’s and owners’ control. like pandemia, right?

Magdalena Tur: In the case of pandemia, it is a little bit more complex as it has influenced the entire market. All companies had similar problems to deal with. The market was disturbed in general at that time.

Bartek Podolski: Indeed, we should not talk about pandemia as it influenced everyone, but the final results are different in each sector and organization.

For those who are listening to us as a podcast and reading this transcription, I encourage you to take a look at the YouTube video where you can see the graph we have been talking about. Now we will jump to the second part of our conversation today unless Magda or Aneta would like to add something to our conversation.

Magdalena Tur: I just want to underline that choosing LTIPs is always an individual decision. There is no perfect recipe for that. To choose it correctly, you need to analyze the situation within your company and think about your goals and expectations. Here we give you only a hint.

Bartek Podolski: Noted. And moving on to the technical challenges related to LTIPs, do you see any? Last time we touched a little bit on this topic but then we dropped it as it seemed to be too complicated. Now I would like to start with a question: when do you think it makes sense to use specific software for LTIPs? Magda, I am asking you this question, because you in particular have experience in this field. In your opinion, when does it make sense to introduce a dedicated tool? I would say that people who work with LTIPs are managing Excel pretty well. When you start organizing your LTIPS, you use Excel. But then, after some time, spreadsheets might not be sufficient. What is your opinion about it?

Magdalena Tur: Yeah, you described a typical situation: let’s start with Excel, and later we will see if we can handle it. I do not think that this is a good approach because if we think seriously about the implementation of LTIPs in the organization, we should also consider a good tool to support it. Trust me, there will be many unusual cases within LTIPs, and every, even small mistake, costs a lot. We are talking about C-suite awards, so the numbers are high. For this reason, a good software that will support LTIPs is just a small cost of the entire program. I would say that if you think seriously about LTIPs implementation, you should also take into consideration an introduction of software.

Bartek Podolski: The challenge that I see with Excel is that at the beginning it may seem pretty easy to manage. When you start with LTIPs, you have only one tranche and one plan, and a few people participating. But when you want to scale with your plans, give them to more people and create different types of plans, it becomes more complicated. And then each plan compounds from year to year and numbers increase - it is a moment when some problems or other issues start to appear. Being sure that you have everything under control becomes a challenge.

Aneta Samkoff: There are a lot of issues related to LTIPs…

Bartek Podolski: …and one single change in Excel may become a costly mistake. It could also put you in a difficult place where you do not have money to pay someone out.

Aneta Samkoff: We should remember that LTIPs are not about money, but about prestige and the way how the company is perceived by others.

Bartek Podolski: Moving with the topic further, what are the other issues related to using Excel for LTIPs. We already talked about difficulties in adding different plans each year, we mentioned trackability…

Aneta Samkoff: Indeed, it is very important to keep track of all changes regarding LTIPs. It is crucial not only for internal but also for external purposes.

Bartek Podolski: From my experience of implementing the Comp & Ben software, I can say that the lowest number of people, who participated in LTIPs, was around 400 employees. I am talking here about enterprise software. On the other hand, if you have fewer people in the organization, but you still want to introduce LTIPs, the software might also be useful. It will make your life easier especially when you have many users and different plans that start compounding from year to year. What is more important, merging data after a few years of using Excel might just be a nightmare. While introducing LTIPs, you have to think of the future and figure out how the LTIPs management will look in a few years after its introduction when more than just one plan will be active.

Aneta Samkoff: There is something that you do not get from the Excel file. What I mean by that is security and hierarchical access to data introduced in the tool. Security is very important regardless of the company size and we have to remember it all the time.

Bartek Podolski: Magda, I think you have some experience with Excel-based LTIPs. How was it? What do you think about it now?

Magdalena Tur: Of course, it is difficult to manage Excel files and it requires some special attention from Comp & Ben people. As I already mentioned, this is an expensive plan with many unexpected situations such as the departing of old employees, hiring newcomers, giving special grants, and so on. Sometimes also communication is an issue. Let’s imagine a situation where you receive different information about LTIPs from the company. How do you feel about that? It is better to have them in one place maintained by the local Comp & Ben department. It would be much easier and more secure.

Aneta Samkoff: Regarding the long-term incentive plans software, there is an important feature of monitoring automatically all the accruals and the cots.

Bartek Podolski: In my experience, this is also the most challenging part of LTIPs. From what I have seen over the years, there are some costs of LTIPs and you need to know their source. Usually, people move around the company, change positions, shift between legal entities… It means that many different things can happen along the way and you need to track the cost of those changes. Later, you are asked to assign the cost to the proper legal entity or cost center or organization - it all depends on the company structure and methods of tracking. But in general, you need to know who was where and for how long, and what types of plans were already assigned to the employee. The company’s bookkeepers need to know such information because they have to accrue money. Most probably, someone from the financial department would come to you and ask you to put aside your bookkeeping. They would also ask you about the cost of the previous plan as they need to accrue it. And in the end, you have to pay the difference. It is good to know what was the cost and who spent the money. I think it is quite a big technical challenge for the Comp & Ben crew. They need to track so many plans assigned to a lot of people which are already accrued for many years. What is more, they have to deal with a vast amount of unexpected situations here.

Magdalena Tur: Exactly! There is a lot of planning overlap due to the change of positions or entitlements.

Bartek Podolski: And people can also leave the company and sometimes they resign from the job in a good atmosphere or a bad atmosphere…

Magdalena Tur: In the case of leaving people from the company, we have to think also about the share price. A good practice is to have a standardized price of shares when an employee resigns from work. It should be the same for everyone in the organization regardless of the time when he or she leaves the company.

Aneta Samkoff: Sometimes, when people get to a certain point of short-term incentives they have to move to the long-term ones. They no longer qualify for STIPs, therefore they need to start receiving LTIPs.

Bartek Podolski: From my experience, I can tell that in such situations a defer matrix can be helpful. You just need to defer your short-term incentives from the long-term incentives due to some regulations in situations when the bonus is too large. To defer them, you also need to comply with a set of rules. And then you need to update your Excel or software with some kind of algorithm that will implement changes automatically. Such a tool should tell you how much needs to be paid out right now and how much you can transfer to the long-term incentive. It should give you the answer regarding the amount that should be deferred and the amount of the award that should be granted. It should also give you a hint about the method of tracking an incentive again. In the end, it seems like a quite complex process with a technical challenge. I personally like it!

Aneta Samkoff: I think that professional software may create an advantage here. It may make everything easier. It may give you accessibility to a tool that will solve your problems. Just logging into the software and easily checking the status of your award may just be a piece of cake. In comparison, while a company is using spreadsheets, each employee has to contact the HR manager to learn about his or her rewards.

Bartek Podolski: Magda, didn’t you have such situations many times? How often were you contacted by employees that asked you about the LTIPs results? How does it work in a company that does not have a centralized system for incentive plans?

Magdalena Tur: At the end, everyone asks the Comp & Ben people about such things. Business partners are usually not very much aware of long-term inventive plans because of their complexity. If there is a question about LTIPs, someone from Comp & Ben receives this query and needs to clarify why the final reward looks as it is. As we are talking here about incentives that were introduced for three and many years, it may be complicated as many changes could have happened during that time. Figuring out all discrepancies is time-consuming. Keeping a good record of data also takes a lot of time…

Bartek Podolski: And all that is being done only by one person.

Aneta Samkoff: Indeed, imagine that the process must be done for 400 people…

Magdalena Tur: For hundreds of people it could be a real challenge. Even for 20-40 people, it might be challenging. It could be done for them, however, the risk of making a mistake is pretty high in such a situation.

Bartek Podolski: If someone wants to calculate everything for 20-40 people, it requires one full-time job position.

Magdalena Tur: And it is not the best way of spending a company’s money to create a position that has only one responsibility, meaning taking care of Excel spreadsheets and administering those plans. It would be better for a company to put money somewhere else, for example, they can be invested in professional software.

Aneta Samkoff: I believe that software may not only look more professional, but it will also improve tremendously the quality of work and satisfaction of users. Having software will give a completely different level of comfort for employees. It will give people the possibility to log in and check every plan that they have.

Bartek Podolski: When you have some kind of self-service portal, you are in a good position. We have an example of a company where people were very much satisfied with the software because their managers were able to see all plans in graphic forms. Such a form of showing data helped them to understand what is happening daily. Everyone stopped asking questions and started valuing people’s time. Employees do not go to executives or Comp & Ben employees to receive information about their LTIPs anymore.

Aneta Samkoff: As I said, it looks more professional.

Bartek Podolski: We spoke about the technical challenges of LTIPs, focusing on audits and ways of tracking the LTIPs life cycle and recording changes. We spoke a bit about the defer matrix and about the advantages of having self-service portals. Do you see any other technical challenges related to LTIPs?

Magdalena Tur: I just want to add that having all information in one system may help in managing taxes. Probably taxes are not in the Comp & Ben scope, but their responsibility is to be sure that all taxes are issued in the right way. Most of the time, the Comp & Ben department has to pass the correct data to the financials. Therefore, it is good to have systems that take care of all exceptions, like calculating LTIPs for expatriates or other employees. It definitely helps a lot in managing incentive plans in different markets where there are different regulations. We need to remember that sometimes it is not possible to pass shares to employees. Sometimes we have to give them something instead of shares and sometimes it requires additional calculations. In such cases, the software can also be pretty helpful. And dealing with everything related to taxes is easier when you keep data in one place.

Aneta Samkoff: You are right. Taxes and legal requirements must be met. It may be hard in situations when a company operates in different countries. Then you have to deal with all legal requirements which vary from country to country. Keeping track of everything may be pretty messy.

Magdalena Tur: I believe that such software also offers some reporting tools which are standardized for all markets. Using Excel means additional work to prepare reports.

Bartek Podolski: My experience says that in the software you can put any row data that will be adjusted properly. Although the software is very well programmed for adjusting pay raises and paying out short-term incentives, they also can be adjusted for LTIPs.

As the time is running, we should now jump to our last point and ask a question: how to achieve success in LTIPs? Do you have a piece of advice for those who already have LTIPs and want to improve their experience with them? What should be done in a situation when there are no LTIPs in a company but you want to introduce them? What are the best actions that should be taken?

Magdalena Tur: First of all, I would choose the right plan for the company’s overall goals and strategy. What is more, I would suggest not to be scared of introducing different plans every year. In the long term, everything should be flexible and adjusted to the needs. Actually, every element of the remuneration package should have the same goal: it needs to support the goals of an organization. This is the first advice I would give.

Bartek Podolski: It means that the main action should be about showing how LTIPs fit into the organization’s big picture.

Magdalena Tur: Yes, there are many different types of LTIPs and everyone can decide which one to choose, how deep they should go into the managerial structure, and who will be entitled to benefit from them. While creating our long-term incentive plans, we should remember all dimensions which will make LTIPs another tool that will support the overall performance of the company.

Bartek Podolski: I also think that verification is important. It is good to check how well an employee performed over the year. It is good to know if an LTIP given last year worked well for the employee. It is good to know if an employee wants to continue with such a plan the next year.

Magdalena Tur: Indeed, KPIs need to be set up, easy to track, and well-measured. I hope that after seven episodes of our podcast it is already obvious. As we already mentioned in this episode, the cost of having the wrong plan is really high. At the very beginning, you just have to think about how you will measure the completion of goals. You have to know what goals you have and how you want to achieve them.

Aneta Samkoff: Regarding goals, I would add that people should not be afraid to make changes. If something does not work as you predicted, you should not hesitate to make adjustments in the future.

Magdalena Tur: And as always, communication is also the key. People need to understand what is expected from them and what is the price of delivering tasks. I just want to underline that we are talking about senior managers here and they should know everything. But trust me, even people in top positions do not understand those plans. If I keep everything in my Excel and I cannot visualize data, people may have difficulties understanding them. You may have policies regarding LTIPs in place, but most probably no one will read them. Another advantage of the software is the possibility to present mechanisms of LTIPs. You can easily explain how something is growing and how KPIs impact the final amount of the reward. Software may just ease the communication about LTIPs.

Bartek Podolski: It is just a great point. To understand complex processes you need to dive into them. But most of the time you do not have time to read all policies and regulations. Therefore, there is a matter of trust. Actually, the whole world works on trust, so employees are convinced that the plan they received is the best one. If they receive such an assurance without reading small text in rules and regulations, they will bring some benefits to the company. If they can receive some visuals that support their thinking, it just generates a bigger value for everyone. From my observation, I can also tell you that companies enlarge the number of LTIPs participants.

Aneta Samkoff: The recent trends show that LTIPs have become more and more popular. A couple of weeks ago I wrote an article about recent trends in HR which is available on our website. I encourage you to check it in the blog section. In a summary of this article, I can say that recently companies tend to enlarge the pool of LTIPs participants. It is quite relevant today as we have a very competitive market. Nowadays it is not only about the issue of keeping your C-suite and key executives in the company. The hardest case is about keeping people with rare skills. Top talents, who have uncommon skills which are crucial to your company's development, are valuable as they may bring success to your company. If you can describe the set of crucial for your organization skills, you are able to draft an incentive plan for people who have those skills and include them in LTIPs.

Are there any other questions that should be considered while speaking about LTIPs' challenges?

Bartek Podolski: Your point is a pretty good one. For people with the most important skills, you should also have a long-term incentive plan as it will enable you to keep them in a company. I think that middle management can be included in such a group. Having said that, I think that pretty soon LTIPs will not only be available to top executives. It might be a good practice to give LTIPs to the middle management as well.

Magdalena Tur: Experts can also be included in this group.

Bartek Podolski: As a result, we will probably observe bonuses also for them.

Aneta Samkoff: I think that LTIPs may be a good reward tool for people who are dedicated to the company. It may be good for those who are truly engaged. It may be a good drive for better success.

Magdalena Tur: Again I would mention another function of LTIPs. It is all about supporting the long-term goals of the company.

Bartek Podolski: To sum up our conversation I would repeat one sentence: LTIPs is a short-term control of long-term goals. It is just the perfect definition created by Magda.

All right, I think that we are done with the time today. We have already spent a while together. Is there anything else that you want to share in the end?

Aneta Samkoff: I think it was a good discussion. We again covered a lot of topics.

Magdalena Tur: If you have any additional questions, you can always get in touch with us.

Bartek Podolski: We are available on LinkedIn. We are available via GGT IS website.

Aneta Samkoff: We recommend you our blog posts related to HR and we recommend you our e-book about LTIPs. Everything is available on our GGS IT website.

Bartek Podolski: We also recommend you our next Comp & Ben Talks. Thank you for today!

Aneta Samkoff: Thank you and see you next time.

Magdalena Tur: Thank you! Bye!