Wilkening & Company Corner Office E-Notes September 2009

As you might recall, September 5^th 2009 was the 20th anniversary of the founding of Wilkening & Company. To mark that anniversary, we are periodically looking at changes in our practice areas over the last two decades. Let's talk about sales force process and management today:

Sales has become a much more professional discipline during the last two decades as sales processes have become more complex, requiring a more sophisticated seller and complicated interchange with the buyer. The days of making six calls a year on the purchasing agent and leaving a new catalog (to just wave the flag) are generally a thing of the past. A seller must now demonstrate value added every time they see or "touch" the buyer. But, they are still expected to see their customers as much as possible.
There are fewer actual buyers to see today as low-potential accounts and commodity buying have permanently shifted to more cost-effective channels like internet or call-center contact.
Today's sales manager must be concerned, not only with the number of calls a seller is making, but also with the quality of that sales call. The sales-manager's job is more than managing a bunch of short-term oriented numbers today (like calls per day or order size). It is also about (and more often about) building long-term relationships.
But in the end in 2009 (as in 1989) people still buy from people. Don't forget that simple truth.

Have these type of changes also impacted your sales force and sales process?

WHAT WE HEAR ON THE STREET
MORE INFORMATION IS BECOMING AVAILABLE ON PROJECTED SALARY TRENDS FOR 2010.

In our June E-Notes we provided preliminary information from national sources regarding 2009 actual and 2010 projected salary increases. This was combined with some original proxy analysis we conducted in May. Additional information and forecasts for 2010 are now coming available.

Culpepper^tm is a well-established US consulting firm that conducted a survey this summer of salary practices for 835 organizations across 73 countries. Roughly 50% of the participants in the survey were technology companies and the rest were from a broad group of industries. The median-sized company was in the range of 500 to 2,500 employees. Twelve percent (12%) of participants were over 10,000 employees in size. Public and private companies each represented roughly 45% of participants. The remainder were non-profit or government. Results are reported for several worldwide markets. Positions represented were both executive and non-executive. Incentive or bonus practices were not included in the survey.

The following table shows salary findings from the Culpepper^tm survey. Also, we have compared these data with that reported in our June E-Notes.

There appears to be a developing consensus for companies to budget salary increases at or around 3.0% for 2010 or slightly higher. That is an interesting result considering bleak forecasts being made only six months ago. Looking forward, the real question may be: will companies use their budgets in a customary across-the-board 3% manner—everybody gets 2.5 to 3.5%? Or, will they grant real 5-6% raises to the high-performance and high potential employees? Winning companies will.

As you may also recall, we suggested in earlier E-Notes that companies must face the reality that they will need to continue to pay key (and surviving) employees competitively. While we never described pay freezes and cuts as "suicidal," it may not be a bad description for the practice. It also seems that that David Leonhardt of The New York Times believes that is why pay trends during the last year have not dropped like "many" had predicted. Read his comments on salaries practices and other pay and reward matters in his article of September 15^th, 2009. [Wages Grow for Those with Jobs, New Figures Show]

Sharing "Ownership" With Your Executive Team & Others: What are you talking about, Bob?

In our experience, one of the most asked about and misunderstood subjects in the broad area of executive pay is the use of equity or equity-like pay vehicles to share "ownership." In fact, the quickest way to get a rise from a group of private-business owners is to suggest they give some ownership in their company to executives or employees. That is generally a good time to duck.

With this in mind, we plan to discuss equity and equity-type compensation vehicles over the coming few months to define what it means, provide examples of when it works and also when it does not. We will begin this month.

For a generation Boards of Directors and business owners have used equity-based and equity–like compensation vehicles to help retain and reward key executives and employees.

Typically, equity-based or equity-like vehicles have been used to meet two strategic end objectives—

Joining the interests of the executives team and company owners in the common cause of value creation; and
Retaining key and valuable executives in company employment for long periods of time into the future. We used to like to use 10-year plans for private company arrangements prior to recent deferred-compensation legislation by the IRS somewhat limiting plan flexibility and perceived value to both parties.

What tools are currently available to Boards of Directors and business owners?

There are generally two common types of equity or equity-like vehicles that are used today—in either a public- or private-company setting.

Stock grants—a company grants an executive (or perhaps a Board member) actual shares of stock in the company. Hence, they have the right to the underlying value of the stock (at issue) and any future appreciation of these shares. This may or may not be in lieu of cash compensation. Often such grants are restricted to only allow the grantee to actually own the share after a set amount of time has passed. Clearly, there are tax consequences for an executive being awarded shares of valuable stock.
Participation rights—a company grants an executive (or perhaps a Board member) the right to the future appreciation on a specified number of shares of stock. In the case of a public company, these are stock options and the employee can purchase the (underlying) stock for its value at the time of grant (called exercise). Any appreciation on the stock options is income to the executive. In a private company, the employee can earn future appreciation on the synthetic "option" in cash. These private-company vehicles are often called phantom stock or stock-appreciation rights. However, stock appreciation rights can also be granted in a public-company setting. Formerly, participation-rights plans had significant short-term tax and accounting advantages to both grantor and grantee. But in the past couple of years, these advantages have diminished as the result of new SEC and IRS regulation.

Recent economic and market events have brought the effectiveness and value of this type of compensation into question. We strongly believe that ignoring or rejecting these type of compensation tools can be both a short-sighted and risky perspective. In short, this stuff can really work—if done correctly.

So if I am on a Board of Directors, when and where should I consider equity or equity-like compensation?

NEXT TIME

Let's talk about cold calling.

During the next few months, we will give you some real-world examples of the application and uses of these types of compensation tools generally applied in a private-company setting. And, we might even throw in a few of tricks and traps in the process.