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The Over-Compensation Trap

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  1. The Over-Compensation Trap Dave Swinford Dan Lynch Pearl Meyer & Partners Pulte Homes, Inc. New York, NY Bloomfield Hills, MI 212-644-2300 248-593-5775

  2. The Over-Compensation Trap • How We Fall Into The Trap • How To Avoid The Trap • If You’re In It, How You Get Out

  3. The Over-Compensation Trap How We Fall Into The Trap (or, Worst Practices in Executive Compensation • Assuming pay equals or will cause performance • Peer group bias • Percentiling • Piece-mealing • Incrementalizing • Special arrangements • Not validating degree of difficulty

  4. The Over-Compensation Trap How We Fall Into The Trap • Truncating risk, or forgiving failure to perform • Ignoring retirement benefits • Minimizing value of non-monetary rewards

  5. The Over-Compensation Trap Percentiling • 75th percentile target position • 75th percentile total compensation does not equal 75th salary + 75th bonus + 75 LTI

  6. The Over-Compensation Trap Piece-mealing • “One piece at a time,” “gradually” • Looking at the trees, ignoring the forest • De-emphasizing one year; “fixing it” the next

  7. The Over-Compensation Trap Incrementalizing • Improving specific compensation elements a bit at a time • Raising target bonuses to increase pay for performance

  8. The Over-Compensation Trap Special Arrangements • Guarantees • “One-time” incentives for “extraordinary” results • Take care to validate goals

  9. The Over-Compensation Trap Truncating Risk

  10. The Over-Compensation Trap Truncating Risk

  11. The Over-Compensation Trap Truncating Risk

  12. The Over-Compensation Trap How to Avoid the Trap • Focus on total value of package • Test all changes for impact on value and risk profile • Never piece-meal • Need to think about timing as well as value • Measure relative performance • Performance-justify departures from median philosophies

  13. The Over-Compensation Trap How to Avoid the Trap • Follow the performance “contract” • Keep executive careers in perspective • Don’t dis-respect non-monetary rewards

  14. The Over-Compensation Trap Focus on Total Value of Package

  15. The Over-Compensation Trap Measure Relative Performance • Aggregate cost of management compared to income (net or operating) • Our company, over time • Compared to peers (Top 5 only) • Beware of funny numbers (FAS123R; DB accruals)

  16. The Over-Compensation Trap Measure Relative Performance • Other measures that may be useful to compare • Revenue growth • Gross margin • Returns (ROE, ROIC) • TSR (over longer term only)

  17. The Over-Compensation Trap Measure Relative Performance

  18. The Over-Compensation Trap Measure Relative Performance

  19. The Over-Compensation Trap Don’t Disrespect Non-monetary Rewards • Company’s reputation and stability • Development track record • Culture and climate

  20. The Over-Compensation Trap How to Get Out of the Trap • Rigorously define nature and extent of problem • Must get all parties to acknowledge the problem • Identify areas of acceptable program modification • Some cows are more sacred than others • Develop desired outcome • Develop and implement transition plan • Communicate, communicate, communicate