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Increasing 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 a total reorganization
of the company along lines of business, increasing market share through
acquisitions, and diversifying into complementary businesses through
strategic acquisitions. However, in order to successfully accomplish
these ambitious plans, dramatic changes were needed to the parent
company corporate culture. The company wanted to address the compensation
and benefits design components of its plans. The company wished 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 partnered with
a prominent benefits consulting firm to embark on a complete redesign
of the total remuneration package that effected every (non union)
employee in the company from the CEO down to the lowest-level employee.
After conducting top management interviews to identify key concerns
regarding both the compensation and benefits programs, D.G. McDermott
Associates began a comprehensive redesign of the pay program that
encompassed all aspects of base, incentive and merit pay at all levels.
The redesign was done in such a way as 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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