Compensation Consultants Help Increase Shareholder Value

Situation:

A large midwest utility was positioning itself to capitalize on the dramatic changes taking place in its industry due to deregulation. Its plans included reorganizing the entire company along business lines, increasing market share through acquisitions, and diversifying into complementary businesses through strategic acquisitions. However, to accomplish these ambitious plans, dramatic changes were needed to the parent company's corporate culture. The company wanted to address the compensation and benefits design components of its plans. The company wanted to change the entitlement mentality of a utility into an entrepreneurial one. Rewards would be based upon increasing shareholder value as measured by EBITDA.

Process

D.G. McDermott Associates consultants partnered with a prominent benefits consulting firm to embark on a complete redesign of the total remuneration package that affected every nonunion employee in the company. After conducting top management interviews to identify key concerns about the compensation and benefits programs, DGM began a comprehensive redesign of the pay program covering base, incentive, and merit pay for all levels. The redesign was done to complement the shift in emphasis from annual base pay increases to more pay-at-risk based on individual and company performance. It also dovetailed with the comprehensive changes that were planned to the entire benefit package, which affected health, life, and disability coverages and the pension and savings plans.

Solution

D.G. McDermott Associates recommended the following compensation program:

  • Executive pay would be more equity based through larger awards of options contingent on reaching financial goals. The targeted total pay package would be compared to similar size companies in general industry based on market cap.
  • Division and subsidiary executives would have a larger portion of their variable pay contingent upon unit results.
  • The exempt job structure was consolidated into fewer bands.
  • Merit increases for exempt employees were abolished. Base salary adjustments were limited to market adjustments.
  • All exempt employees were placed on incentive pay programs which were contingent upon individual and unit performance and targeted to provide total cash compensation, i.e., base salary plus incentive, which would exceed market levels.
  • All exempt and nonexempt employees were party to an additional incentive, a "profit distribution" plan. The "profit" was based on a targeted share of retained earnings. In that way, "shareholders" were paid before employees.

Outcome

The recommended compensation and benefits programs represented a radical change from the past and would require a gradual implementation for the culture to absorb and adopt the change in values. Based on the D.G. McDermott Associates' recommendations, the changes have been phased in over a multi-year period.


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