How to establish a Remuneration - long term incentive plan

Hello,

You have two challenges here:

• How do you convince  “the Bank's” managers that they need an equity plan (the rationale)
• How do you implement equity incentive plans and what are some industry standards 

THE RATIONALE

I suggest that before presenting “the Bank” any industry standards in terms of remuneration linked to the Bank’s performance, you should first take a step back with them and analyse the needs of their management.

In order to do that, I would use a KANO Model. This is usually a framework used for increasing customer satisfaction, but it can be used to increase employee satisfaction as well.

There are 3 steps that you need to follow:

First step is to find the needs of your employees (they come down to 3 different areas):

1. Expected basic needs - what are the expected benefits so that you’re on par with what your employees expect. These could be basic things like salary, annual bonus, pension plan, etc. Their presence won’t add to the satisfaction of your employees, but their absence will add to their disatisfaction.
2. Expressed needs - maybe from your annual employee survey you can see what are the challenges your top management faces, how can you solve them, etc.
3. Excitement needs (or DELIGHTERS)- what are the things that can excite your employees to really fall in love with your company. These are the innovations that differentiate you from what the competition might offer to their employees. Some people call these the “WOW factor”. They will delight your employees when delivered, but don’t cause any dissatisfaction when missing.

Second Step - once you nail the expected needs of your employees, you have 2 choices:

• Improve - take what you have and enhance it. This applies usually for the Expected and Expressed needs. For example, build a better pension plan, increase salary, bonuses, etc.

• Innovate - find those “WOW factors” that will differentiate “the BANK” from any other bank on the market. 

Third step should be to track down progress and keep updating your needs.

• Tracking down the progress can be done by looking at the employee survey results evolution or by analysing the attrition rate of your management. If survey results are improving and your attrition rate is going down, then you’re doing good.
• Keep updating your needs - Excitement needs will become with time Expected basic needs (people will get used to them). It will just be a matter of time till your unique benefits will be copied by your competition, so you need to constantly re-analyse and find new ways delight your employees.

EQUITY INCENTIVE PLANS

Once you present this framework to the top management of “the Bank”, you can then start speaking about long term equity incentive plans and see where they stand. Are they a delighter (no other bank has them) or are they an Expected need? How can they implement it? 

While I’m not an expert on the topic, I know you have different plan types, such as stock options, restricted stock unit (RSU), stock appreciation rights (SARS), tandem SARs, RRSPs, savings plans, share purchase plans or stock-settled SARs.

For more senior management executives, Restricted Stock Units (RSU) are the most common incentive. They have a vesting period where the employee must satisfy certain conditions before the stock or its value is transferred. These conditions are usually tied to a period of time or based on work performance. Unlike stock options, there’s no purchase involved. Instead, a certain number of units are granted to the employee, but there’s no value until after the employee has met the vesting requirements.

After vesting, the employee may transfer the RSUs. Thus, RSUs always retain a value, in contrast to options that can decline in value by the time of vesting. The value of RSUs is the closing market value of the stock price on the vesting date. That’s also the point at which your tax liability is triggered, requiring you to pay withholding and income tax on the amount received. 

There are a lot of materials out there to describe every option, but probably it’s worth it to speak to an accountant and see what are the tax implications for each option. This will vary a lot on the country where “the Bank” is based.

OTHER DELIGHTERS

If during your discussion the executives of “the Bank” would want some other delighters examples, here are some innovative employee benefits that some companies have:

• Netflix and Virgin - unlimited time off for their employees. This works because instead of micromanaging how people get their jobs done, the leadership of these companies focuses only on what it’s important - delivery and results.
• Michelin North America wanted to keep their employees “as healthy as genetically possible” - so they recruited a Chief Medical Officer. They do all sorts of stuff like biometric screenings and employees can earn up to $2000 a year as a health reimbursement for a biometrics scan.
• A lot of the companies are focusing now on improving Work-life balance by having an onsite nursery, a fitness and health studio, an onsite medical centre (including dentist). Also working from home is a big thing now in most companies. While this is still a delighter, it will turn fast into an expected need
• Some companies give the employees a day off for their birthday, while others pay for an executive coach for their top management.
• Some companies offer a really generous executive exit package in case they need to let go a top manager. For example, they guarantee 6-12 salaries if the employee is let go and his performance was good or they provide specialized help from outplacement companies that will help the executives to find a new job

Good luck with your engagement!