Compensation in Growth Environments: Avoiding Compensation Pitfalls While Scaling Your Privately Owned Business

This transcript was generated using AI and reviewed by an editor. Welcome everyone, and thank you for attending today's webinar. I'm David Shaw, the publishing director for Family Business Magazine, and I'm very glad that you're able to join us. I hope that you and your family members are all well and getting ready for the upcoming holiday season. Today's webinar focuses on executive compensation in private and family owned companies. This session will look at the specific compensation challenges facing private companies, the key drivers and pitfalls to avoid for both executive compensation as well as overall compensation, and then outline a specific example or two in a case study. This will all be considered within the context of being able to scale compensation strategies in a growth environment. I think it's going to be a great discussion. Before we get started, some quick housekeeping details. We welcome your questions and especially your thoughts and comments throughout the session. Use the question box to the bottom of your screen under where you see the slide, and, we'll get to as many of those questions as we can during our sixty minutes today. There are also two polling questions, during this webinar, which we will use to gauge some of your opinions. Joining me for this discussion are BDO's compensation advisory professionals, and they include Judy Canavan, who is global enter employer services managing director in compensation consulting, Jason Brooks, who's global employer services managing director in compensation consulting practice leader, and Catherine Radel Moores, global employer services manager for compensation consulting, all from BDO. So I'd, like to welcome all of you today. Thank you for being part of this. I'm looking forward to, the presentation and the discussions, and I will turn this over to you, Judy. Thank you. I was being a good citizen here and turning my mute button on on and off here. But, today, we will share our experience regarding common challenges that private companies face in managing compensation. Then we will cover specifics regarding executive compensation, then broad based compensation, and also what everybody's always looking for is sources of guidance. So just to kick off, some of the challenges, that we find many of the our private company clients experience include items such as lack of quality data. This is actually gonna tie into the number five below because it ties into time trying to find the data. And, also, data often comes from good quality surveys, and it takes time to fill those out. It also is a unique ownership structures. So private companies, can be founder owned, family owned, employee owned, investor owned, all have distinct needs and distinct different compensation structures. The governance structure can also impact, how you go about, getting approvals and who you're talking to. If your board member is board members or family members that, for instance, is a whole different set of challenges than different types of governance structures. And, also, just stakeholder savvy, we call it, is being having that experience, maybe being in a large company where the compensation plans are all very structured and and communicated and transparent, and it is a great learning experience. If you have people on your board that have that experience, that can be really helpful. So what we're gonna do is help you navigate these challenges today. So what I wanted to do to sort of level set today a bit is talk about the different just sorry. Get the different elements of pay structured here, described here. So we're gonna be talking about a lot of different components, and those include salary. Everybody pretty much knows what salary is, and it's usually for attracting and retaining employees. And then you have salary increases that can help motivate and reward if you vary them based on performance. Then we're also gonna talk about short term incentives. Just forgive us if we also refer to those as bonuses or annual incentives. Those are really all mean the same thing for us, and they're usually a motivational factor, with the exception of maybe those that are just given at the end of the year as sort of a thank you. That might be the only type that are not really a motivational factor. Long term incentives, in this, sometimes people just default to thinking it's a cash plan, but it could be equity. It could be tracking stock. It can be a variety of different, forms, and those often are used for motivation, reward, and retention. Then we've got your benefits. That's a broad category that can mean, you know, everything from medical to, for yourself to your pets, paid time off, etcetera. And then there's can be other compensation arrangements, that, could be capital accumulation plans, ESOP plans, etcetera. Thanks. And then what I'm gonna do here is sort of talk a little bit about, getting your data. And this is gonna apply both to the sections both sections coming up, both to what Jason's gonna be talking about and what Catherine's gonna be talking about. So one of the big issues is where do I get pay data? And, usually, it comes from surveys. That's ideal. I mean, you can certainly call your colleagues at other organizations, but that's gonna be limited, in terms of the number of data points. And so you wanna think about the quality. We don't recommend googling pay data. I've actually done specific studies to show the problems with that in terms of leveling and in terms of ranges and just all the different issues that can come up there. But once you get a good quality source, then you have to think about, well, how I'm gonna interpret this? And we publish our, private company survey. It hits very data intense. There's thousands of lines of data, and that's after it's been compiled. So then you have to think about what am I gonna do with this. So you have to think about well, we need to think about, well, what industry am I in? How big are we? What's our ownership structure? And that can narrow down at least due to getting some data that's relevant to your organization. Finally, we don't recommend, just looking at the data and saying, well, we're gonna mimic the market. What you really have to do is customize it. So the compensation package needs to align with your company goals, your culture, your compensation philosophy. You wanna think about things like, well, we have base salary. We could have annual incentives. We could have a long term incentive, and we can have benefits. What what do each what do we want each of those elements to play? Like, what role do we want them to play in our management of our people? So you can think about, well, how much pay will be at risk? And what you'll see is some organizations, by and large, have more pay at risk than others. So those are all the different complicated questions that need to be asked to make a compensation package that really works for you. And with that, I'm going to pass this on, to Jason, who's gonna take some of those concepts and apply that to executive comp. Thanks, Judy. Great to forever to meet everyone. I appreciate everyone taking the time to learn about compensation issues. I'm gonna focus on executive compensation considerations first and then turn it over to Catherine to focus on some broader compensation issues. But before that, I've been diving in. We have our first polling question. I am sending that, survey out to the audience right now. You can see what the question is. What's your primary executive compensation concern? You have those five options. So if you could, complete that, I will come back in about a minute when this is, filled out. Thanks. Appreciate everyone taking this quick time. Just wanted to get a quick pulse on where key considerations are. There's a lot that goes into attracting and retaining talent, and it could be an element of pay like the short term or long term incentive. It could be benefits packages. It could be the broader employee value proposition and culture of the company. So just kinda interested to see what the key issues are before we dive into a few of the topics we have teed up for today. Okay. It takes about thirty more seconds before we get a full, array of, of responses. But, Jason and also Judy, a question that came in on the shareholder the stakeholder savvy. You know, it noted that it's more complex in family businesses in some ways because there's oftentimes a distinction between those who work in the business and those who don't work in the business, but our shareholders Yep. Perceptions of salary and what's fair. Yeah. I know that that's a great point, David. And and let's table that for a second because we do have some data on how compensation evolves as you go to the second, third, fourth generation, kind of leadership ownership because that's exactly right. We do see an evolution in compensation and philosophy, particularly as you may evolve and the family members become more of the shareholders and you have a professional outside management team, running the day to day. Okay. Great. I am ending the survey. And just to give you a feel for the response, eighteen point four percent, I'm gonna send the results out to the audience, are interested in attracting executive talent as their primary concern. Thirty four point four percent thirty percent are about retaining executive talent. Nine percent are interested in their primary concern, short term incentive design. Twenty nine percent long term incentive design, and the remaining ten percent are other. And one comment came in just to give you a context on other. Mark, other on the survey, I'm interested in the fairness of executive family executive pay as the company grows. So we'll come back to that area. Okay. Perfect. No. And I appreciate everyone weighing in. And it's interesting that retaining talent and long term incentives both ended up around thirty percent each and the predominant because as we find working with clients, those are often go hand in hand because one of the best ways to motivate and incentivize and retain talent over time is the long term incentive design. So so not surprised that those two came up as the top issues. So when talking about executive compensation, there are quite a few factors that come into the conversation. There's all the internal stuff. So that's the business strategy, the talent strategy, it's the compensation philosophy. It could be the potential location of where your people are located, whether they have to be, you know, work hourly workers at a plant or whether they can telecommute in an IT background. All of this factors into compensation and thinking through it. There's also external factors. It's the government, it's interest rates, it's foreign exchange rates. You know? Right now, it's a very dynamic market. You know? Who would have thought forty eight hours ago that the turmoil in the world would be South Korea? And what everything that happened there yesterday with martial law. There's just a lot going on. And then here in the United States, obviously, with the change in tran, administrations, there's a lot of discussion of what's gonna come, whether it's tax reform, whether it's tariffs, whether it's regulation. All of this is gonna impact how businesses operate. It could make things easier for you. It can make things harder for you. It can change the way businesses are thinking about acquisitions, about divestitures, about going into new markets, new locations. And while all these may seem distinct, at the end of the day, all of this should be focused and be a driver of how compensation decisions are being made because any sort of incentive program, whether it's an annual incentive program, whether it's a long term incentive program, should take into these factors to make sure that management is appropriately focused, they're going after the right things, but they're also not disincentivized to do the right thing. So there's a lot of things that need to be balanced in this over time. If we go to the next slide, Catherine, you know, one of the things Judy mentioned is that, you know, sometimes you hear people talk, well, there's public companies and there's private companies. But private companies mean a lot of different things and unfortunately there's not always great survey data for that that's one of the reasons why BDO a couple years ago started our own private company survey where we could ask the questions that we thought were important and start to drive and categorize data into these different buckets. You know, it it's hard to drill down into every bucket to to make it work for every company, but as we know, salary so we've broken this into three buckets. So there's the ending the salary, again, the short term incentive or annual bonus, and then long term incentive. And that could be equity. It could be a cash based program. And and for the purposes of this chart, we're looking at data solely for companies with revenue of a hundred to five hundred million in revenue. So you figure by company by the time companies get to that size, they start to have more of a formal comp philosophy and structure to it. And this probably doesn't surprise you. You know, if you look at private equity backed companies, those are the companies with the highest use of l t I. If any of you have worked with or are currently owned by private equity, you'll know that they tend to keep fixed costs very low. So salary is the lowest, percentage of all the different types of ownership structures, and they want to align all the pay to the exit. That's why there's so much tied in long term incentives because they they're willing to share the value, but only if the private equity company is able to realize a return, you know, five to seven years or so, after they make the investment. For other types of businesses, there's just a lot of different structures and business strategies. There may be companies that are never gonna be for sale. There's gonna be companies that are being grown to potentially go public one day. There's companies that I'm sure you're working for where it's it's uncertain what the future is gonna hold, whether you're gonna do some acquisitions, whether you're gonna continue to grow, because there there's just not a set strategy in that. And that's why and part of that then is a discussion about whether or not equity is going to be used or not. You know, for family owned companies, we tend to see more of use of cash based programs because the family does not want to dilute their ownership over time. You know, an ESOP structure in and of itself, it provides ownership for the employees through a beneficial retirement plan. We do not again typically see real equity being used in a long term incentive plan for an ESOP structure. But I will say I'm working with a very large family owned business right now that's going through an ESOP that has a very unique structure as part of the ESOP being in place where we are actually going to include profits interest as part of the management incentive plan going forward. And then I I hate having a catch all bucket, but sometimes you just have to do it. They're on the far right, just kind of all other private companies, that don't fall into one of those other three buckets. But, you know, this probably this hopefully does not surprise anyone on this webinar today that you're gonna have different profiles based on the ownership of the company. Just a a quick question for you, Jason. That truck that you just showed, that was just for the hundred to five hundred million dollar companies, or is that the whole database? Not exactly right. This is just the companies that participated in our survey with annual revenues between one hundred and five hundred million. Got it. Thank you. And another thing, as we also know, pay is also heavily dependent on industry. Industries have different dynamics on business, on talent, they have different margins and profiles. And so we just kinda highlighted two different, industries here. So at a hundred percent, that's kind of the the average across all companies that participated in the survey. Manufacturing comes out at a bit of a haircut, just about three percent below average of of companies or the professional services is about ten percent higher, on both salary and TCC. Again, that's total cash compensation so that would be salary and bonus compensation. So, again, probably does not surprise a lot of people on the call. Manufacturing tends to have a little bit more challenges sometimes on margin than a professional services company. Therefore, you know, salary and bonuses will be a little bit lower than a professional services company, which is it just have higher margins out there. And now we're talking about some other things that we're we're thinking about, how to how to avoid compensation design pitfalls. One is complexity. And there there could be such thing as not enough complexity or there could be such thing as too much complexity. You know, you wanna be careful about just offering salary or or maybe a percent of profits. This can be very simple to administer and we see a lot of companies, particularly family owned companies that tend to start that way because it's simple and it doesn't require a lot of administrative complexity over time. But over time, you just need to make sure that it still makes sense. You know? Are you driving too much compensation? This really depends on your ownership structure. It depends on what you're trying to do, but you can start to run into reasonable compensation issues with the IRS At certain levels. Also you just want to think about shareholders over time share as the business becomes more complex has become more substantial size. We do tend to see company, you know, shareholders that want more structure, they want more concrete goals, want more of a pay and performance discussion and alignment. That way that they everyone feels like people are are getting paid for the right levels of performance. And I'll answer a question that came in real quick. Do we have data on smaller companies, you know, say below a hundred thousand dollars I mean, a hundred million dollars. That is true. It's part of our survey. Unfortunately, in order to get the full data in our survey, you do have to participate, But there is an infographic on the website that provides some high level statistics and, you know, we're happy to answer any questions offline if people are interested in learning more about our survey for next year. Second one, and this is a big issue, is the especially with family business is the proactive transition planning, really understanding who the the next generation of leaders are gonna be. And, you know, I hate to have a broad brush because we know there's a lot of different companies out there and they operate different ways. You know, some companies, just that it's naturally understood that the the next generation of family is going to take over the business and they're going to step in, they grow up in the business, they have roles in the business and they it's just natural that they're going to take over when the time is right. Sometimes the next generation does not want to be involved in the business or doesn't have the right skill sets as the company continues to mature, evolve, diversify things like that. So having the right education in place, the right conversation and be proactive planning can help make sure that the changes in continuity are in place. Also there's regulatory compliance. Again, you know, regulatory rules change, the tax law does change and so you wanna make sure that a program that you put in place twenty years ago that worked really well at the time still is actually compliant with what is going on. This is particularly important if you do have any sort of long term incentive plan, deferred compensation plan, retirement plan because any compensation program that spans more than twelve years, I mean twelve twelve months, excuse me, does have more complexity in terms of the rules and how it's being applied. So you just want to make sure that it is, everything is being done correctly and that's important to have both the tax and your your legal counsel working with you on that. Strategic decision making, making sure that especially over time that there's data and goals that are running the business. A lot of times founders, you know, we work with a lot of entrepreneurs. They kind of go with their gut and it works really well and they're very successful with that and but over time especially as more leaders are coming in as more of a true leadership team is being formed, sometimes having data, having a thought process is a lot easier to replicate over time particularly when you're then tying compensation to it, thinking through your strategic plan, your transition plan, things like that because it can be very hard for a broader leadership team to replicate the decision making that the the founder had. We're also thinking through the strategic objectives because it's very easy to focus on financial objectives. So one thing we see particularly in in family owned businesses, you know, looking at return on capital, right? Should the family continue to invest in the business versus investing in some other sort of asset class? That that works very well and it could be one metric to look at. But if you overly focus on something like a return metric the company may be disincentivized to look at diversifying the business. It may look at not doing an acquisition, not going into new business because as you know oftentimes you have to spend a little bit money to get into these new offerings and it may be very good for long term value creation, but short term management incentives may be hit, employee incentives may not look as great and so there may be a lot of discontent with the employees if these sort of decisions are being made that hurt their financial, outlook even though it might be good for the shareholders over time. And with that, I will turn it over to Judy to go over a case study that she and I worked on recently. Yes. Thank you very much, Jason. I appreciate that. And I do think this is a great example of a conundrum. We have a dedicated CEO with great management team. They're growing the company and increasing its value. The company owner is very pleased with the team and very much wants to retain them. The CEO's vision included sharing the returns generated with the senior management team. So his first instinct is to use equity. However, it's not clear that this is the best approach. We'll talk about that in a second, and the owner really wants to keep retain his stake. This is not at all an unusual scenario. So while the CEO's first instincts are to use, you know, actual company equity, and it's very appealing, there are downsides for private companies, including the fundamental issue for the recipients of how to monetize the payment. So given this issue, coupled with the owner's hesitancy to dilute his ownership, we developed several alternatives for consideration, and they were pretty broad in terms of what we offered up to think about. And those included, you know, things like tracking stock, performance units, long term bonuses, etcetera. We actually sat down and laid out the pros and cons of all these and conducted a working session with the team to go through the how this might look at their organization. And based on the nature of their business and their goals, two plan options were identified. So one of them was a deferred cash plan. The nice part about this is it was funded upfront, so you knew you had the money for it. But the recipient needed to stay with the company for a predefined number of years to receive the payout, so it offered short term performance metrics, self funded, coupled with long term retention. So that really checked off a lot of boxes for them. The other plan they really liked was a performance unit plan that was focused on multiyear performance. The length and time horizons aligned, lengthened performance time horizons aligned with the goals of the shareholder, and it provided that retention feature. However, at the end of the day, it may not be self funding, depending upon how you dealt with the metrics, but they felt that this feature could be managed. So they really ended up with two great alternatives that they could either use one, both, or both, giving some people one, some people a different one depending upon the needs, and the area that they were managing. So really had a great solution for them. So with that, I think we are now passing this on to Catherine, so who is gonna talk about broad based compensation, which in this case soon means all those nonexecutive employees. Exactly. Exactly. Thanks again, everyone, for being here. I have a poll I think we can jump into, and then I'll introduce myself a little further while we're getting the results to that poll. I have sent the poll out. Great. So similar to the poll Jason shared about executive compensation, we wanna understand what's your primary broad based compensation concern. And, again, this would be thinking about those not on your executive team. So there's paying competitively, defining market. That's always a big question. Developing a pay structure. So thinking about salary bands or setting a bonus target, aligning pay and performance or other. So while those results trickle in, I'll give a little bit of my background. So I've spent time both as an executive compensation consultant and in house helping to administer broad based compensation plans at both a high growth tech company and a more traditional, asset manager. So I've seen a couple of different environments as well as those I've seen, as a consultant. So, my section is kinda gonna talk about some of the themes that I've seen from being on both sides. Excellent. They're still, coming in. Maybe a quick question, for Jason here while we're letting this come in, which is what what argument might or Judy, or you, what argument might you offer to an owner founder who doesn't wanna commit to a bonus formula? Just trust me. Is is is is that a common thing, and how do you kind of combat it? And, unfortunately, it is a very common thing. And sometimes it it really depends on how how much management wants to push back on that. We have seen that work really well. We know that you could have a report. You can work with someone really well for a long time. And as long as the payout seem to be relatively fair, you know, it it works well. I will say, though, I am working with a client right now that had that relationship except for there was something more it was focused on the long term. There was no formal long term program, but the founder kept telling the executive team, I will take care of you. Don't worry about it. Well, unfortunately, that person passed away suddenly. And now the next generation is stepping into the ownership chair and and leading, And the management team does not have the same rapport and trust built with the next generation. And it's not that there's mistrust. It's just different people, different histories, things like that. And and it's very hard to then suddenly create structure and talk about, okay. Well, what about the last ten, fifteen, twenty years I worked with your father, and he promised me all of this. Mhmm. So there is some benefit of having at least something more than pure discretion to protect both sides over time. Indeed. Thank you. So the answer is Catherine. I'm sending these to the audience. It it's paying competitively and determining marketer at twenty three and twenty two percent of the responses. Developing a pay structure is the other than others, the least concern at thirteen point eight percent. The biggest concern by far, thirty six point seven percent is aligning pay and performance, and the remaining four, three point seven percent is other. Great. I'll I'll focus on aligning pay and performance and maybe highlight why some of the other areas kind of feed into that. You'll notice the theme with a lot of compensation is it's all connected, and each kind of is in a loop with one another. So I'll jump into first, I think, setting why is management of broad based compensation so important. And I use this term management on purpose rather than setting your broad based compensation levels. Management because it's an ongoing process, that includes a lot of moving pieces and is something that needs to be considered regularly rather than one time setting pay levels. And it's important because you're spending a good amount of money on compensation, and you wanna spend them as productively as possible. Probably a no brainer, but something to highlight there from the broad based piece where I think an executive comp piece can often get a lot of attention and energy from all of your stakeholders. The broad based piece as well is also very important. Broad based comp can also be a great management and performance management tool if you have the right programs in place or the right communication structure, with your employees. And, again, similarly to the executive comp piece, you can really galvanize a team towards shared goals. So, yeah, I think sometimes this is a piece that you can see clearly with executives, but among the rest of the company, it can also be very galvanizing and important to understand what your company's goals are and how your role fits into that bigger picture. Also, it helps you really minimize time and money spent on avoidable compliance issues. So nobody wants to spend, you know, hours, days, weeks on resolving compliance issues related to compensation, so making sure you're kind of in a good spot from your broad based comp management program is very helpful on helping you focus on other aspects of running the business and compensation programs. And finally, this kind of comes back to the performance management or performance recognition, is you wanna minimize preventable and regrettable turnover. So compensation is often one of the top reasons people will leave companies, and it is very expensive and time consuming often to replace certain key employees. So focusing on managing that broad based compensation can really help prevent those issues further down the road. You don't wanna wait until you know there's an issue to start looking at broad based compensation. A proactive approach can really, really help nip those in the bud. There we go. So I have this graphic here that kind of highlights what a road map for compensation considerations or growth might be. So this might occur in a different order at your company. You might be in a different spot than you, wanna be, or you might be further along than you were last year. There's a lot of variation, I'm sure, in what this looks like, but the main concept here is thinking about developing your company's compensation muscle. So this is something that I think varies about what it looks like at a lot of companies. So whether you have a full human resources department, whether you have finance managing compensation, or you've outsourced a lot of the compensation, there's some aspect of your company that has kind of this compensation muscle that can be built. And so often when you start a company, you're paying what you can to get the people you need in the door now, and that is something that can kind of come back along later in your road map. But you're just paying what you can and focusing probably on other aspects of running the company. Then you kind of come into this medium compliance minimum. So this is this little blue graphic is where kind of the the presentation will start from and focus. So you're meeting your compliance minimums, and then you probably have some foundational HR comp systems and processes. And this can be as simple as when I need a role filled, I email this person, and they post it on LinkedIn. That is still a compensation or recruiting process that we're gonna talk about a little bit later. So you probably have some of these established. Then you get into this piece where, that paying what you can at the beginning, you can kind of, start aligning those unique plans, later when you're at a more stable point. So you may have very different pay structures for similar roles or see a need to reevaluate someone's compensation. And then finally, towards towards the end of developing your compensation muscle, you'll probably undergo a market comp study, a full understanding of what is the market, how are we paying, how do we want to pay, and some of those comp philosophy questions. And then kind of at the maintenance phase next. So maintain your structures, reviewing regularly. And structures could even just be as much as saying your bonus is x percent of salary. It doesn't have to be, a big blown out salary structure with bands, etcetera. This can look like a lot of different things at a lot of different companies, but these are kind of our general steps. There we go. So think about this in two ways, is laying some groundwork you need to have success with compensation. Compensation is kind of one of those things that, you probably think about when you hire someone, and then it can be on the back burner a bit. But even in that phase, I think there's a lot of groundwork that can be laid so that you have success. So that's being compliant, aligning and normalizing those, employee specific plans, and then making some upfront investments in an HR team or systems as needed. But then there's also this element of setting your plans up for success for the future. So being purposeful with studies that you undergo, and we'll talk about that more in a second, having the strategic mindset when developing pay structures and processes, and considering efficiencies with current compensation or HR work. That's something I saw a lot at companies that I worked in. There are often a lot of those processes for recruiting or finance that you can kind of dovetail compensation into and get a little bit more in the mix rather than just at hiring and year end. Alright. Diving a little bit deeper into meeting the compliance minimums, it's very, it's a it's a very good consideration to outsource some of your HR functions to reduce your risk. So if you're making an HR hire or outsourcing, you wanna really focus on getting these things off of your plate. So that's payroll, hiring practices, benefits and leave, health and safety, workplace policy creation, complying with state and federal laws. Sometimes even city jurisdictions have different, laws or regulations about, like, paid transparency, for example. So you really wanna be sure that you have someone or, an outsourced group that can stay apprised of all these changes and be ready to make sure you're compliant on all of these issues so that you don't end up spending time, addressing issues that could have just been prevented. A couple of key issues too that I think trip people up often is employee classification, payroll taxes, overtime pay, and record keeping requirements. These are just really good things to keep in mind or ask about if you're looking at an HR hire or outsourcing. Alright. My favorite, I think, topic is leveraging these existing systems or processes for compensation. So one area you might already have kind of with more established processes, which I've mentioned before, is this recruiting process. So whenever this recruiting process starts, how does the job pricing come into it? How does the role classification come into it? And how can you leverage this existing process to monitor or develop compensation? So if you have a recruiter or someone on your team recruiting for their team going to market, they have a a price for the role, but they're getting feedback from the market that, you know, this price might be low. How are you incorporating that into your process and into your considerations for the next year, or the next hire, rather. So that is just a really helpful place to keep your finger on the pulse of compensation and make sure you're involved in those conversations. It can be be very difficult if you start the recruiting process or have a hiring manager say we need to hire, you know, this level at this salary for the year, and you don't have a compensation overview or kind of a whole, discussion about it before they go to market, then you can wind up with a lot of things you'll have to rectify later. So trying to get your foot in on these discussions from a compensation perspective early is very helpful. Then looking at performance. So this was a topic I think a lot of people were interested in. If you have a performance management system, this is a really system process, year end review process. This is a really good place to think about messaging to employees, how their compensation is related to their performance. So we've seen it any which way at different companies, but a very common way is, you know, your performance this year was, excellent, so your bonus is going to be x percent of target. So you could set communicate numerically, for example, something like, you know, if you were at expectations, your bonus would have been ten thousand dollars, but because you're above, it's gonna be fifteen thousand dollars. Salary increases are also a place that you can consider communicating performance through. So you probably have a cost of living adjustment, but there can also be some communication with you know, this portion of your salary increase is due exclusively to your over performance or, you know, have the tougher conversation about your bonuses trending below where we expected because of these performance challenges. So I think the baseline for that is a lot of communication. And those performance cycles, if you don't have a formal performance cycle, year end or whenever you're resetting compensation is a really good time to just, start planning for those conversations between managers and employees. Alright. Aligning the unique compensation plans. So this is kinda referring to legacy pay that's out of line for one reason or another. So maybe underpaid, maybe overpaid, maybe just a completely different structure than the rest of the employees. And this is for typically, where we'd see this is for senior hires that aren't quite on the executive team, but maybe are important to the business technically or are just an early employee. And so for more senior roles where you have kind of these funky different compensation plans, there's a lot of questions to consider. But I think the main one that helps get to the heart of why this plan was different is have the goals of the initial compensation design been met. So if yes, that's a really great opportunity to bring the employee to the standard plan. And if not, you can still consider a new plan or a more standard aligned plan and how you're gonna communicate that to the employee. I will say maybe the goals of the initial compensation design weren't clear. And so maybe you're kind of operating from a place of this is just how it's always been, and this is a really good opportunity to start, discussions with the leadership team, those those kind of related to this unique comp plan and advisers, and so understand what a good course of action is and how to communicate it to the employee. A couple other questions here is, do the pay levels match responsibilities? That's something you wanna be really careful of as you grow perhaps and bring more people into the business. Having one or two people at a level that are very misaligned with the rest of employees can be very demotivating to employees earning less. So that's a good one to keep an eye on. And then, again, how has the messaging been to the employee about their comp plan? It's often more important to understand what the employee's expectations are than the the actual value of the plan. Alright. Lastly, we have this piece of benchmarking compensation to market. And one of the key pieces to consider is what are you gonna do with the data? So before you do a market compensation study, what are you gonna do with the data? I know that sounds very basic, but consider that it's possible you're going to find some roles or under market. What's your budget for that? Have you already determined, you know, what departments, roles, people are most important to retain, that you're most concerned about so that if they come under market, they're the priority to top up, to market. And, also, what is your goal for, positioning? So, typically or often, it's a fiftieth percentile of market, but maybe you wanna consider a different pay philosophy. And so really sitting down and thinking through these things before you get a ton of data back, as Judy mentioned, you can get a ton of data. That is a really important level setting discussion to have. And then also thinking about the best source of data. What's market? And that can be determined by where are you losing talent to, sourcing talent from. And these can also be broader than just your industry. So maybe there's a very, prominent local employer that you get a lot of employees from, but also lose employees to. And maybe understanding their pay levels can help kind of triage some of those issues. And, it's also very helpful, obviously in these discussions to have an advisor to help you understand what your market is, and guide on implementation, because that's kind of another piece with thinking about a market study. What are you gonna do with it? But, also, how are you gonna communicate any changes that occur to employees? Alright. Great. I'll pass it back to Judy for another case study, kind of looking at a broad based group. Thank you very much, Catherine. And I'm gonna add something. I wanna tie what you just said in your last slide to a question that came earlier about family owned companies. And getting hard data and sometimes getting a third party to interpret that really can diffuse family concerns, because they feel like it's a trusted adviser and then it's data driven decisions. So that's just something I wanted to add in there. So, actually, we have this is a really nice example of how compensation, can be used to solve a management issue. This case is based on a family owned company started by immigrants. Right? Father, son, you know, being handed down through the generations. Very caring culture, very dedicated to its employees. They really wanted to be the employer for life. And still, it was hard to recruit from the outside. And there were certain jobs, like quality control, that actually needed to be filled from internal talent, and they tended to be a little bit hard to fill because they were harder than the other jobs. So what kind of resulted was that by default, you know, this wasn't really intentional, but pay levels were based on longevity. This isn't an unusual situation, but the people who've been there for the longest definitely were paid, in some cases, in an extremely larger amount than anybody, like, in the mid or or newer range of, tenure. So the flip side of this is that the best performing employees were not necessarily the best paid. And then as you said, this isn't unusual situation for smaller companies. So we were brought in, actually. Initially, they wanted a skill based pay system, which we sat down with them and went through this and determined it wasn't the optimal solution given their current situation. So instead, we actually solved many of their issues with a new organizational design. So we put everybody into job, functions. There were a lot of blur it was a lot of blur in the job functions. We also put in job levels and career levels. Then we properly aligned compensation with the market for those job functions and levels. And we, finally, our last part was this is where we sort of bridge the gap between this, a pure market system, and not you know, because we didn't do the skill based pay. But what we did do is align the certifications and skill expectations with the different functions and levels. So sort of a hybrid approach there. And the result actually was quite positive. They've been working with this client for a number of years, and what they found was that the employees were more apt to go ahead and get their certifications because before, it didn't really mean anything. You were supposed to get certified, but didn't mean, like, a bump in pay. They also, were more motivated to up their skill set so they could get promoted to that next level, make more money. The other piece was filling those QC roles, which I mentioned before needed to be filled by internal candidates. And because QC roles paid more than a lot of other roles because they were more technical, employees started applying for those roles. So they were able to fill those with qualified employees. And then finally, the external hires, you know, this is always hard. You know, how do you explain to them how wonderful your company is? But when you could show them the career progression opportunities, it was viewed as a positive, and they were they management did feel they were more apt to accept offers. So all in all, we felt like you have, you know, peep people with the right skills in the right jobs, performing the way you want them to perform, which is sort of the optimal situation. So it was a nice, nice end result, and it has, maintained over time too. So with that, the big question is where do you get guidance? And I'm gonna hand this back to Jason to talk about that. Perfect, Judy. And one source, you selfishly, is is someone like us. And I did find out that and I confirmed that everyone that's participating today is going to get, that infographic I referenced earlier is gonna be emailed out to you, so you don't have to go searching for it. You know, there are a number of different ways that the company can turn for guidance. One is the CEO. You know, the founder CEO has a lot of grit, has a lot of perseverance, built the business up to success, and there's a lot of good knowledge there in terms of how how the business works, why the business works. But over time, you know, you can look towards an external CEO that can bring a broader experience experience outside the company, or sometimes we see, you know, the second generation of family leadership. Sometimes they take jobs outside the company to come back in and bring that broader knowledge to to help as the company continues to evolve and expand. Second is the is the executive team. You know, as the company again, as the company evolves, new skill sets are gonna be needed. So I'm working with a company right now that's been very successful to date all through organic growth, but they realized the next phase is gonna be roll up and with private equity support. And they went to go do their very first deal, talk with the banks and realized that the c the the founder realized that the CFO in place just did not have the technical skills to negotiate complex financing arrangements and ownership structures to realize they needed to to completely change the finance organization because the strategy of the business changed. There's external support, there's consultants like us, there's law firms, you know, a lot of it, particularly the founder ceos that we're seeing it broaden out. But there's a lot of networking mastermind type groups that people are involved in to learn from other ceos, learn from other founders, entrepreneurs and hear what's going on and get an outside perspective next, especially as the kid company matures, starting to have fiduciary or advisory boards and this will talk to you in a second. You know, we see it become more and more prominent as the generation changes for family owned businesses. And to the question earlier, sometimes you get to the third, fourth, fifth generation, there's there's members of the on the board that have never worked in the business. You know, we we've I've heard multiple times, you know, executives comment. This person has never worked in the business. They have no idea how much I should get paid. And and but having a broader board perspective, bringing in data that we've talked about, all of this can help fill some of those gaps. So it's it's not, you know, personal personality clashes, but things are driven by data and industry experts. And then, you know, there could be other sources of guidance that really vary based on company needs. What about a board? So, again, going back to our survey, about seventy percent of companies had some kind of board, whether it's a fiduciary board or just more of an advisory board. Fiduciary are significantly more common. Part of that just maybe they tend to be more structured where people may not realize they just have an informal network of people that they go to for an advisory, but they're they're not as structured as a fiduciary board. We did see a break that companies over fifty million dollars in revenue are more likely to have a board than those with revenues below fifty million, roughly sixty percent to fifty percent. And for the the family business, you know, by the fourth generation, seventy percent of companies have a board where earlier generations are at or below forty percent. And there could be a number of reasons why we see that, you know, part of it is, again, needing that broader industry expertise, whether it's on the investment side, whether there you know, there's a family office. Sometimes we see more of investment professionals on the board. Sometimes we see, you know, former CEOs, people that can help as the business expands. Other times, you need it just because the ownership becomes so distributed over time. It's very easy for first or second generation family businesses because there's only a handful of shareholders and they can sit in a room and have discussions depending on the exactly, you know, family dynamics, how things are passed along. You know, we see a hundred plus shareholders sometimes as you start to get later in generations, and it becomes much more difficult to get the family together to make decisions. And as we all know, sometimes families have different dynamics and so having a external fiduciary board can help with some of that have have the have those set of trusted advisers that are making decisions, for the interest of everyone and there's no perception of being self interested. Also, some data for private equity of VC firms, They are highly likely to have a board at about sixty seven percent and again not surprising a lot of time, you know, the private equity firm itself are the board members. They bring in some operating partners. They're heavily involved in the business. Any one of you that have worked for a private equity owned company with a board probably knows that that board is a lot more active than any other form. And then ESOPs have a board as well, but that's generally due to the again, because of the the qualified retirement plan nature of it, and the the trustees gonna require a board to be involved, to make decisions and make sure the proper data is getting up to them. So with that, I'll pause. That covers our information, David. Wondering if any other questions came in that we should address in the last couple minutes. Quite a few. Some of them you've appointed to some answers on already, but I'll start with one. Catherine, this came up during your, presentation where you talked about percentiles. So, you know, you're paying at the fiftieth percentile, which means fifty percent pay more and fifty percent pay less. Is there a reason to pay more or less than the average? So it can depend on your strategy. So coming from, like, a high growth tech environment, there were some rules specifically that we would target higher percentiles for. It's kind of a chase to keep up with market, but it really can depend on what your talent strategy is. And I'd say it's unusual or rare to see someone with a a blanket target of below or above fiftieth percentile. So it can really be in specific talent areas as well as if you're comparing yourself to a market where the size is maybe aspirational to where you are now, maybe considering a lower percentile. There's a little bit of nuance there with who the market is, but I'd say generally, it depends on the talent strategy, and it's kind of for a piece of the company. Okay. And then, this comes back to something, Jason, you you were talking about. And I think you've addressed some of the ways in which you can do this, but this is a question from a family company where they're in transition from a family member who is CEO to a non family member, CEO. And they wonder ways to eliminate the gap and what the family member CEO felt comfortable with, with his or her pay versus, you know, being what candidates will be requiring in the recruiting process. That is one of the most challenging topics that comes up, and and part of it is transparency in in the data that's being used in the philosophy. So particularly for large family companies, we hear a lot of the CEO saying I should be paid like a public company CEO and the family saying you know what, we're a private company, we should only be looking at private companies. You know, the truth is it's probably somewhere in the middle. So having a conversation about what the philosophy is for cash compensation, you know, what what are the key metrics? How is the the CEO gonna be incentivized? And then also, is there gonna be a long term incentive element? And and on an absolute dollar, this is where we see a lot of, particularly as the generations get lower down on the tree, you know, sometimes, you know, we should not be paying our CEO a million dollars in long term incentives. But if you step back and have a conversation about, well, the CEOs only get a bit made a million dollars If the value to the family grows by a hundred million dollars, then you start to put things into perspective and realize, okay, maybe it is okay to start sharing some larger numbers with the CEO that doesn't benefit in the value creation or distributions or things like that. But it is a big hurdle to get over and often requires a lot of just transparent conversation back and forth. Yeah. Can I just jump in? I I think, Jason said this, but I'm just gonna call it out. It's just you've got a really different situation if your previous your current CEO, your family member CEO just has a huge stake in the company, and then you've gotta bring in somebody who doesn't. And I think that's kind of I'm kind of underscoring what you're saying. So it's the pay package just has to look completely different. Yeah. Interesting. So, what what do you think this one just came in. It's really a good one. But what is the average percentage of profit that a private company should set aside for total incentive pay, both long and short term? Did did you derive any of that from the survey? I'm gonna give the answer that everyone hates, and it it depends. There are so many factors that go into something like that, whether it's, you know, a capital intensive business, whether it's, you know, things that need to be grow, whether there's a lot of debt that needs to get paid down, whether there's distributions that are being required to the family, what what the profit margins of the business are. Again, you know, if you have an EBITDA percent of fifty percent, you're gonna be thinking a lot different than that if your EBITDA margin is five percent. So there there's just a lot of business dynamics that go into that. Excellent. Well, we are at the top of the hour. There are questions that we weren't able to get to. We will provide those, to Jason, Judy, and Catherine. And in fact, one of those questions asked for some follow-up on a prefunding and LTI plan, wondering how that works. So, anyway, a lot of good questions here. I wanna thank all three of you for a really terrific session. I thought this was really great. Just to reemphasize what Jason and Judy and Catherine said, they're going to send that infographic to all of you, as a follow-up to this. There will also be big ways in which you can, volunteer to participate in the next studies to get even more results from that. And, with that, I'd just like to say thank you very much for spending your valuable time with all of us today for, what was a terrific webinar, and we'll look forward to seeing you, for our next one. So thank you all. Thank you, everyone. Thank you. Thank you.