THE EXCHANGE for People Strategy April 2014 by Team PSX

THE MAGAZINE FOR CUTTING EDGE PEOPLE STRATEGY

THE EXCHANGE April, 2014

T H E W A G E G A P Are Women Paid Less than Men? Women Get 77 cents for their $1.00 worth of work…

P O W E R

The G O O D Boss and the B a d Boss

C O A C H I N G

M a n a g i n g THE M O S T OVERLOOKED

in Venture Capital, Hedge Funds and Private Equity Firms

A D V A N T A G E S

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PRE-TAX DEFERRAL OF INCOME in an U N C E R T A I N Tax Environment www.theexchangeforpeoplestrategy.com

C r e a t i n g a R o s t e r JUST LIKE THE PROS

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REWARDS

THE WAGE GAP: Are Women Paid Less than Men? Women Get 77 cent for their $1 worth of workâ&#x20AC;Ś Submitted by Michael Dennis Graham, Grahall, LLC

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REWARDS

Managing the Most Overlooked RISK in Venture Capital, Hedge Fund and Private Equity Firms Submitted by Robert D. Birdsell, Grahall/EBS with contributions from Michael Engelhart, Exceptional Risk Advisors, LLC

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REWARDS

CEO Pay from the Perspective of the Shareholders Submitted by Charles Patton, Grahall, LLC

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LIGHTING THE FUSE: IGNITING THE POWER OF PEOPLE

The GOOD Boss and the BAD Boss

Insights for a Healthy & Productive Workplace in Challenging & Changing Economic Times

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Submitted by Jim Finklestein and Matt Finkelstein, a father-son team from FutureSense, Inc. TALENT MANAGEMENT

POWER COACHING Submitted by Jay Wolf, Principal, JCRIS Consulting Group

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TALENT MANAGEMENT

Creating a Roster Just Like the Pros

Similarities between building a team roster for a sports franchise and building businessâ&#x20AC;&#x2122; talent bench strength Submitted by Christian Liakos, Bullseye Engagement

REWARDS

ADVANTAGES to Pre-Tax Deferral of Income In An Uncertain Tax Environment Submitted by Steve Broadbent and Chris Nyland, Fulcrum Partners, LLC

BLINDING GLIMPSES

INTO THE

OBVIOUS:

FROM THE PEOPLE SIDE OF INNOVATION & PARADIGM SHIFTS

Relationships that Matter

For Those Seeking Relationship Advantages

Submitted by Marvin L. Smith, Deliberate Synergy

HUMAN RESOURCE INFORMATION SYSTEMS

Bigger Data

Creating a Central People Intelligence Utility Submitted by Michael Dennis Graham, Grahall, LLC

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Letter from the Editor

Contributors

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10 Bookstop: Effective Executive Compensation, by Michael Dennis Graham, Grahall, LLC 12 April’s Shape of the Month: Board Governance Engagement

We hope you enjoy our April issue of The People Strategy Exchange.

Missed last month’s issue? Find it here at JANUARY ISSUE

FEBRUARY ISSUE

MARCH ISSUE

WHATS AHEAD FOR OUR NEXT ISSUE…

As we continue our investigation of People Strategy we ask for your direct feedback about our endeavor. Please share your

thoughts and ideas for stories, contribute to the discussion through our feedback options, most importantly SPEAK UP about what you want to read and better understand about how people strategy can drive your organizational performance and success.

Letter from our Editor…

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April is the cruelest month according to TS Elliot and likely to anybody who has to pay US taxes. Yes, April has its challenges. But as you will read in Michael Dennis Graham’s article about the gender gap in compensation there is more to April than tax day. This year April 8th marked the day on which women working (throughout 2013 and into 2014) made as much money as men did in the year 2013. Also in our April issue we hear from Jim Finkelstein and his son Matt (the Boomer and the Millenial) as they find some common language to describe “good” and “bad” bosses. Interestingly enough, many of us may find some perspective (and even a little bit of ourselves) in both characterizations. Also on the topic of relationships, Marvin Smith shares a low key way to be a powerful player in his article Relationships That Matter. And should risk management be high on your priority list this time of year? Read Bob Birdsell’s article on Managing the Most Overlooked Risk in Venture Capital, Hedge Funds and Private Equity Firms, that of key employee disability insurance. For those interested in the pay for CEOs in public companies (and with the proxy season upon us, who isn’t?) Charles Patton looks at CEO pay from a shareholders perspective. This and much, much more are available in our April issue. Please read on! We hope to provoke some dialogue with these and our other articles, columns, and topics. Join the conversation and become part of the robust exchange of information. To leave us your feedback, critiques, and suggestions click here. Let me leave you with some lines from TS Elliot, and don’t worry, May is just around the corner!

link to our archive issues of PSX… April is the cruelest month, breeding Lilacs out of the dead land, mixing Memory and desire, stirring Dull roots with spring rain.

INAUGURAL January Issue February

March

from Waste Land, Burial of the Dead All the best,

Edie Kingston EDITOR IN CHIEF

Elizabeth B. Hall CREATIVE DIRECTOR

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FOR PEOPLE STRATEGY

Bob Birdsell, is Managing Director for Grahall/EBS. For our April issue, Bob Bird-

sell has penned the article Managing the Most Overlooked Risk in Venture Capital, Hedge Funds and Private Equity Firms. Grahall/EBS is a firm specializing in the discovery of new and innovative executive benefit programs designed to replace existing plans which have become obsolete in the current regulatory and tax environment. Bob has invested the last 25 years of his career in assisting organizations in creating, implementing, and administering state of the art benefit programs for organizations in numerous industries.

Bob can be reached at Robert.Birdsell@Grahall.com T

Michael Engelhart

from Exceptional Risk Advisors, LLC, contributed to the article Managing the Most Overlooked Risk in Venture Capital, Hedge Funds and Private Equity Firms, with Bob Birdsell. Michael is an expert on high-limit specialty life, accident and disability products for clients with extraordinary insurance needs, including celebrities, athletes, entertainers, highly compensated executives and professionals. By partnering with Lloyd’s of London syndicates, his firm has the largest binding authority available in the U.S. for its products. Michael Engelhart, Vice President, Business Development, Direct: 201.252.4719 | Mobile: 201.788.8688

Steve Broadbent is a Managing Director with Fulcrum Partners LLC located in Atlanta, GA.

For our April issue, Steve co-authored Advantages to Pre-Tax Deferral of Income in an Uncertain Tax Environment, with Chris Nyland. Steve specializes in the design, funding and security of nonqualified benefit programs for publicly traded and large, privately held corporations. Steve has 14 years financial industry experience, including eleven years as an Executive Benefits Consultant for Clark Consulting, and is the Former Deputy Assistant Secretary in the U.S. Department of the Treasury. Steve can be reached at Steve.Broadbent@fulcrumpartnersllc.com

Chris Nyland is a Managing Director with Fulcrum Partners LLC located in Charleston SC. For our April issue, Chris co-authored Advantages to Pre-Tax Deferral of Income in an Uncertain Tax Environment, with Steve Broadbent. Chris has 30 years of experience in the executive benefits industry and has been instrumental in successfully developing nonqualified benefit plans for many Fortune 1000 companies, including diverse business areas such as financial services, healthcare, engineering, high-tech, manufacturing and utilities. Chris can be reached at Chris.Nyland@fulcrumpartnersllc.com

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Michael Graham

Michael leads Grahall Paid Fairly and Grahall HR Access. Grahall is an intellectual capital firm whose comprehensive services help organizations maximize the value exchange between organizations and individuals.. Michael Graham has over 38 years of experience in the compensation and benefits field advising organizations in all industries. This month, Michael penned the articles on The Wage Gap: Women Get 77cents for Their $1.00 Worth of Work, and Bigger Data (a sequel to last month’s Big Data). Michael can be reached at Michael.graham@grahall.com or through www.grahall.com.

Christian Liakos is VP Alliances & Business Development at BullseyeEngagement.

For our April issue, Christian wrote Creating a Roster Just Like the Pros. Christian has twenty years of experience in strategic alliances and direct sales in the hardware, software and technology space. Currently, he is responsible for building a partner ecosystem that will leverage and provide additional value to BullseyeEngagement’s employee and operation performance solutions. Christian’s prior work encompasses various industries and buyers including VARs, eProcurement/supply chain, to telecommunications, and Human Resources cliakos@bepms.com

Marvin Smith

of Deliberate Synergy offers the fourth in his series of

“ Blinding Glimpses into the Obvious ” with a discussion of Relationships

that Matter. Deliberate Synergy puts innovation into practice with people, strategic initiatives and incentives that foster sustainability. Marvin has 30+ years of experience in facilitative consulting that covers all aspects of innovation. Including those who have direct responsibility, leadership and the culture and skills needed to cope with 21st century complexities. Marvin can be reached at marvin_smith@comcast.net

Jay Wolf is President of the JCris Consulting Group in New York. For the April issue, Jay

submitted his article on Power Coaching, to complementing the power coaching WEBINARS www.powercoachingalliance.org that are open this month for additional participants. Jay is a former Peak Performance Coach at the Center for Enhanced Performance at the United States Military Academy at West Point, New York. He can be reached at Jay@jcrisconsultinggroup.com

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Tim McConnell,

contributor to our January and February issues of THE EXCHANGE for People Strategy, is an HR Strategist and Organizational Architect with McConnell HR Consulting Inc. of Ottawa and New York. Tim can be reached at Tim@McConnellHRC.com.

Charles Patton

submitted the fourth article in his series: Is the CEO paid too much? This month, he examines the query from the Shareholder’s perspective. . Charles leads Grahall’s Online Solutions business. He specializes in all aspects of reward strategy, executive compensation, including equity-based compensation, short-term and long-term cash incentive/retention compensation, executive employment arrangements, benefits and development rewards. Charles can be reached at Charles.Patton@grahall.com

Jim Finkelstein

pens the monthly column for PSX titled “Lighting the Fuse ” . For this April issue Jim writes with his son, Matt Finkelstein The Good Boss and the Bad Boss. Jim, President & CEO, FutureSense, Inc., has over 37 years of consulting and corporate experience, and has specialized in business and people strategy, motivation and reward, and organizational assessment, development, communications, and transformation. Jim’s experience has included being a Partner in a Big Five firm; a CEO of a professional services firm; a corporate executive for Fortune 500 companies; and an entrepreneur with his current company, FutureSense, Inc. Jim can be reached at jim@futuresense.com

Matt Finkelstein

rejoined the FutureSense team in December 2013 as an independent contractor assisting with wellness initiatives. Matt co-authored The Good Boss and the Bad Boss, with Jim Finkelstein, a father-son co-generational perspective. Matt lends his expertise from several years in the organic farming and natural health field after spending several years as a full-time consultant with FutureSense. Matt currently owns and operates his own business, MateoSol Garden & Wellness Empowerment, where he works with home gardeners, businesses, and organizations teaching and educating about the role of food and well-being. As an alliance partner with FutureSense, he seeks to bring his knowledge and expertise back into the realm of organization and people, striving to develop whole programs that truly inspire and empower wellness, productivity, and vitality. matt@futuresense.com

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Find out what its all about: press anywhere on the image below for a brief YOUTUBE summary of the solutions offered in our Online Solutions workbookâ&#x20AC;Ś

PRESS To reach our FREE online solutions workbook

www.THEEXCHANGEforpeoplestrategy.com APRIL 2014

Releases that deserve a

place

The Grahall Executive Total Reward Strategy Solution emagazine identifies all of the necessary steps and associated tools required to create a people strategy for an organization. Executive Total Reward Strategies bring together important and critical elements of alignment to an organization in it’s pursuit of its mission, vision, values and beliefs. Developing an Executive Total Reward Strategy brings together specifically how an organization’s competitive level (money), it’s choice of balance in different reward components (mix), the key messages (messages) and how the program is managed (management) all support and drive organizational success through the support of the organization’s business and people strategies.

the book stop

on your bookshelf A Fascinating and Informative Read, Effective Executive Compensation

(Michael Dennis

Graham, Thomas Roth and Dawn Dugan) “Kudos to the authors for penning a very readable book dealing with a

topic that’s traditionally been drier than a cheap box of cabernet

sauvignon. Virtually no area of executive compensation is left

untouched. Case studies are included – and more interestingly – they detail a number of executive compensation practices that increasingly are being frowned upon, or sure to invite

This review is on: Effective Executive Compensation: Creating a Total Rewards Strategy for Executives (Hardcover) The recent economic failures and issues were caused in part by poor economic decisions. More specifically, the poor management and lack of judgment concerning executive reward programs played a major role. The book "Effective Executive Compensation: Creating a Total Reward Strategy for Executives" gives an exciting and informative description about how businesses truly should be run. It allows the reader to understand and gain knowledge on the proper way to deal with executive performance and manage executive compensation rewards. I recommend this book to anyone who is interested in business aspects or the recent economy. More specifically those looking for success in business management and or those who enjoy a remarkable read about smart business policies, would absolutely love the insight that this book has to offer. A fantastic addition to any business lovers bookshelf! By ktwitz

shareholder discord at the annual meeting.

Robert Cenek

Book Review 5.0 out of 5 stars Predicted the last one and could predict the next one, Effective Executive Compensation: Creating a Total Rewards Strategy for Executives (Hardcover)

In September of 2008 our economic world was turned upside down and few deny that inappropriate executive reward programs were a significant reason. Reward programs incented behavior and decision making that was too short sighted, too excessive, and too disconnected from business sanity. "Effective Executive Compensation: Creating a Total Reward Strategy for Executives" would be a very good book if it were written AFTER the September, 2008 events as it clearly explains what happens when you do it wrong, but it was written BEFORE, which makes it an EXCELLENT book. Get it right and your program can drive business success and get it wrong and your organization can do no better than a boat riding the waves without a motor. To me the key messages from this book are that these programs are complex because no two organizations are the same and therefore each organization should design its own unique program. Probably the worst mistake would be to follow everyone else. The authors clearly get this and know how to explain it. I'd say that this book works on two levels, one as an interesting read and two as And while is it described as a guide for executive reward it really can be used for for all employees. Be prepared to hear things you never heard before and ignore risk.

a reference guide. all reward programs them at your own By JoeAminaPops

APRIL HIGHLIGHT

Shape of the Market

THIS MONTH: GOVERNANCE GROUP ENGAGEMENT As can be seen from the graphic depiction of how engaged these key stakeholders are in the organization, “ GOVERNANCE GROUP ENGAGEMENT varies tremendously over the organizations in the study. Only 40% of the organizations say that their governance group s are engaged as champions of the organization’s mission and vision. In addition only 35% say that their governance group is engaged in long-term goals.

What this graphs reveals…there is great room for most organizations to begin the engagement of their governance groups. The return on any investment in this area is substantial and while it may take some time for most organizations, clearly an opportunity exits .

To view levels of EMPLOYEE Engagement, see the Shape of the Month from our January Issue by clicking ‘HERE’.

WELCOME TO PAIDFAIRLY.COM Are you being paid fairly? Search our FREE Online Salary Survey to learn what you should be getting paid. Compensation touches our lives in more ways than we imagine. It determines what house we live in, car we drive, college our kids attend, vacations we take, our ability to retire on time and how we live our lives. Therefore, it is very important to know if you are being paid fairly. Paidfairly interpolates and then extrapolates real employer-reported salary data points based on revenue, industry and location. In turn, helping anyone gauge their current salary or a potential salary offer, and know if they are being paid fairly.

OUR ONLINE SERVICES ONLINE JOB DESCRIPTIONS MARKET PRICE YOUR JOB

ONLINE GEOGRAPHIC DIFFERENTIAL DATA MARKET PRICING FOR BUSINESSES

OUR OTHER NETWORKS ABOUT US

CUSTOM ANALYSIS

RESEARCH REPORT & SURVEYS

Company Research CONTACT US

THE WAGE GAP:

Women Get 77 cents for Their $1.00 Worth of Work

That’s 98 extra days of work for a woman to be paid on par with a man.

re women paid less than men? The answer to that

question is Yes! Ok, ok there are a very few exceptions which I will get to in a moment. Do our elected officials in Washington DC care? Apparently not enough of them do. On April 8, 2014 the Paycheck Fairness Act was again introduced into the senate, and once again it did not garner the necessary 60 votes needed for

Michael Dennis Graham Michael.graham@grahall.com

debate. Sure this might just be another example of political manipulation and game playing with the Democrats hoping to appeal to women voters and Republicans claiming that this is just another way to ensure the richness of paychecks for litigators.

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P S X : THE WAGE GAP

But seriously, there is a pay gap, really. Even the Washington Post fact checkers found that to be true. The Department of Labor Statistics compares full-time female workers’ wages to those of full-time male workers and finds that women earn 77 cents for every dollar that a man earns. Is that number wrong or misleading? It is certainly neither wrong nor misleading for full time workers. When looking at other demographic groups (with the exception of pharmacists, counselors and health care technicians where women’s pay is even with or a couple cents higher than that of men) the wage gap ranges from 81 cents to 96 cents. But take note, those are still gaps of between 4 and 19 percent! And in a maddening “blame the victim” approach some argue that it’s the woman’s fault for her “career and life-style choices”. But wait, what about the Equal Pay Act of 1963? Fifty years ago the government passed the Equal Pay Act (EPA) that prohibited wage discrimination based on gender. According to finduslaw.com “the EPA provides that the employer may not pay lower wages to employees of one gender than it pays to employees of the other gender, employees within the same establishment for equal work at jobs that require equal skill, effort and responsibility, and that are performed under similar working conditions…. the EPA imposes strict liability on employers who engage in wage discrimination on the basis of gender.” The only way to avoid liability is to present one of four accepted defenses that allow unequal pay for equal work. They are: 1. a seniority system; 2. a merit system; 3. a system which measures earnings by quantity or quality of production; or 4. any other factor other than sex

But here’s the rub… how can a woman know if she is paid less than her male colleagues when there is a culture of secrecy here in the USA

So with the EPA in place, how could something like what happened to Lilly Ledbetter occur? Lilly Ledbetter worked for Goodyear from 1979 to 1998, some 20 years. As a result of an anonymous note left for her as she was retiring, Ledbetter discovered that for years she had been dramatically underpaid as compared to men performing the same job as she. Her case went all the way to the Supreme Court where it was overturned due to statute of limitations requirements because she filed her claim more than 180 days after receiving her first discriminatory paycheck. And that was true, in fact she filed her suit some 20 years after her first discriminatory paycheck. Why didn’t Ledbetter file sooner? She didn’t know at the time – or in fact for years – that she was paid less than her male counterparts. In 2009, Congress passed the Fair Pay Act to help address the statute of limitation issue. Now a plaintiff can sue up to 180 days after receiving any discriminatory paycheck. But here’s the rub… how can a woman know if she is paid less than her male colleagues when there is a culture of secrecy here in the USA around compensation? And it’s not just a culture of confidentiality. Some companies even require that employees sign agreements promising to keep their pay secret under risk of termination. Now this is illegal (as is pay discrimination) but it doesn’t seem to stop some companies from requiring that employees sign those agreements (or stop them from paying women less than men). According to Ariane Hegewisch of the Institute for Women's Policy Research, over 60 percent of workers in the private sector say that they are either prohibited or discouraged from discussing pay.

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P S X : THE WAGE GAP

This “information black hole” is the problem that the Paycheck Fairness Act has been trying to solve. According to the Washington Post, “this bill would make it illegal for employers to retaliate against a worker who inquires about or discloses their wages or the wages of another employee in a complaint or investigation... And as part of this bill, the Equal Employment Opportunity Commission would be required to collect pay information from employers.” Essentially this act would help to provide women with the information they need to determine if they are fairly paid. But, no, the bill couldn’t pass a procedural vote to even get it on the agenda for discussion. Certainly Republicans call foul that this bill was brought up in an election year, claiming it isn’t any more than an attempt by Democrats to capture more female voters. But the irony of all this is that April 8, 2014 was Equal Pay Day. That is the day that measures how many extra days in 2014 that the average female has to work to earn as much as her male counterpart did last year. That’s 98 extra days of work for a woman to be paid on par with a man.

As Charlotte Whitten (a noted feminist and former mayor of Ottawa Canada) years ago said, “Whatever women do, they must do twice as well as men to be thought of half as

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good. Luckily, this is not difficult.”

Sadly, times have not changed that much.

Michael Dennis Graham, michael.graham@grahall.com

T H E E X C H A N G E f o r P e o p l e S t r a t e g y

M a n a g i n g THE M O S T OVERLOOKED

R I S K

in Venture Capital, Hedge Funds and Private Equity Firms By Robert D Birdsell Grahall/EBS Robert.Birdsell@grahall.com

Permanent disability of one or more of their key contributors is not something most organizations imagine. For most organizations, success is highly dependent on just a few of their key executives. When organizations think of key person insurance, life insurance is often used to protect shareholder value, however, that’s typically the point at which the management of human capital risk ends. Organizations often overlook the fact that there is a far greater likelihood that an executive will suffer a disability than death. In fact, there is a 25% greater risk of a disability than of death during the working career of an executive.

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90% of us underestimate our chances of becoming disabled. 85% of us express little or no concern that we might suffer a disability lasting three months or longer. 56% of us don’t realize that the chances of becoming disabled have risen over the past five years.

Ignoring human capital risk has potentially serious consequences.

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While it might save individuals and organizations some money to ignore the possibility of temporary or permanent disability of key contributors, the odds of winning that bet are not as favorable as they might appear. Here are some statistics from the Council of Disability Awareness (CDA):

MANAGING THE MOST OVERLOOKED RISK

Even in light of these statistics, many still dismiss risk of disability as little more than a scare tactic promoted by insurance companies. The facts tell quite a different story based on the findings of the CDA: A typical male, age 35, 5’10”, 170 pounds and a non-smoker who works in an office environment, with some outdoor activity, and who leads a healthy lifestyle has these risks: a 21% chance of becoming disabled for three months or longer during his working career, with a 38% chance that the disability would last five years or longer and with the average disability for someone like him lasting 82 months. If the same person used tobacco and weighed 210 pounds, the risk would increase to a 45% chance of becoming disabled for three months or longer. A typical female, age 35, 5’4”, 125 pounds and non-smoker, who works mostly an office job, with some outdoor physical activity and who leads a healthy lifestyle has these risks: a 24% chance of becoming disabled for three months or longer during her working career, with a 38% chance that the disability would last five years or longer, and with the average disability for someone like her lasting 82 months. If the same person used tobacco and weighed 160 pounds, the risk would increase to a 41% chance of becoming disabled for three months or longer. Based on the facts, it would seem appropriate for venture capital firms, hedge funds, and private equity firms (as well as other professional organizations) that rely heavily on a few key contributors to recognize the potential catastrophic effect that a disability event could have on their investment and organizational sustainability. Some of the most prestigious firms in the business recognize the value of their key contributors as is evidenced by the following excerpts from their 10K’s:

“Our most important asset is our people, and our continued success is highly dependent upon the efforts of our senior managing directors and other professionals. Our future success and growth depends to a substantial degree on our ability to retain and motivate our senior managing directors and other key personnel and to strategically recruit, retain and motivate new talented personnel.”

“We believe that our success depends to a significant extent upon the experience of our Manager's executive officers, whose continued service is not guaranteed. The departure of any of the senior management and investment professionals of our Manager or the loss of our access to KKR's senior management and investment professionals may adversely affect our ability to achieve our investment objectives.”

We all know that developing a technology, a brand, or that ‘secret sauce’ often requires a strong CEO. This person commonly becomes synonymous with the organization’s success; if the CEO were to suffer a disability it could quickly lead to disaster. The risk is enormous: should the CEO be taken out of the picture suddenly, investment capital could be at risk; valuation may decline; and the company’s viability may well be put into serious question. Managing risk is paramount to success in any business. As such, the first step should be to obtain adequate disability protection on the CEO and other key contributors to the company. Here is a case study that illustrates the point: The subject was a 48‐year‐old male, who was the founder and CEO of a startup nanotechnology company providing unique nanotechnology solutions to emerging global textile markets. He was an individual with a distinct track record and proven capabilities. The valuation for the liquidity event was set in excess of $250 million. As the plan was set in motion, the CEO was involved in a cycling accident that left him with severe brain damage. Since his involvement was essential to an efficient sale, transition and the ongoing success of the business, the company suffered significant loss in value and the sale has been placed on hold.

Building investor confidence and enthusiasm are both critical elements to the success of a company. As a prudent move to help reduce risk, firms are best served by viewing the combination of key life and disability insurance programs. Until recently, the only types of disability programs available were the traditional plans which are designed to pay a monthly stream of income to the owner of the policy at the time of a disability. This type of coverage would offer little comfort to a firm who is facing the permanent disability of a key contributor. Many such organizations don’t need a stream of income; they need a substantial lump sum to offset the financial loss they will incur when their leader or other key contributor goes down!

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MANAGING THE MOST OVERLOOKED RISK

Managing and identifying risk is the first step in neutralizing peril. It is now possible to secure millions of dollars of “Lump Sum” disability benefits which previously were not available. The cost often can be measured in basis points and in some instances as little as 30 or 40 basis points per million dollars of coverage. For a lump sum benefit of $25 million the cost could be as low as $75,000 annually. Consider the fact that most organizations would never fail to secure insurance on their real property, but they often overlook their most valuable property: their key human capital which may not be replaceable.

As it turned out, the existing insurance advisor to the firm had obtained $20 million of key person life insurance, a standard practice easily achievable in domestic insurance markets. However, lacking an understanding of how surplus lines markets such as Lloyd’s of London could be utilized, the advisor did not obtain $20 million of lump sum key person disability coverage. The implication seems clear: where there are significant risks such as an equity transaction, the prudent solution is the best one. And even though we all believe such an event won’t happen to us - these things only happen to other people - there is no rational way to justify taking unnecessary chances. Failing to insure against disability risk could severely impair both existing assets and future success should a disability occur. This is why viewing key person disability protection, along with a wellconstructed portfolio of key person life insurance, is the prudent decision and may even be seen as a fiduciary responsibility of the CFO. Where the CEO or other key contributors are crucial to organizational sustainability and success, implementing a comprehensive insurance program is a straightforward and practical risk management tool that can avert a potential disaster.◘◘◘ –Robert D. Birdsell

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Michael Engelhart from Exceptional Risk Advisors, LLC, contributed to this article.

CEO Pay from the Perspective of S h a r e h o l d e r s

By Charles Patton charles.patton@grahall.com

his is the third article in a four part series concerning Chief Executive

Officer (CEO) compensation, focused on those who get the most money and most press – the CEOs of the top 500 Corporations in America. In the first two articles we examined the employee perspective and the customer perspective. We concluded that for these two groups while they may have an adverse opinion on the absolute level of CEO compensation; as a factual matter the individual employee/customer doesn’t really

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“contribute” very much to the compensation of the CEO. Therefore, there is little motivation for members of these groups to be at the forefront of those complaining about CEO Compensation. Corporate shareholders on the other hand feel very directly impacted by CEO compensation. Well not really the absolute level of compensation so much as the disparity between CEO compensation and relative stock price performance. If the CEO is being paid as if they are the brightest and most capable person on the planet, then

shareholders expect stock price performance to similarly reflect this viewpoint. When stock price performance is moving up nicely there is usually very little complaining from shareholders. Instead, it is the popular press that makes hay dramatizing the absolute level of CEO compensation. When dissonance occurs between pay and performance then the fireworks begin. Let’s step back and examine how corporations get to this point. The shareholders are represented by a small group of individuals – the Board of Directors (Board), who are tasked with managing CEO compensation among other important activities. When the Board is engaged in the process of replacing a CEO do you think that trying to find an individual that will accept the least amount of money to do the job is at the top of the selection criteria? No. In fact, prior compensation level is often perceived as a proxy for prior performance. Therefore, the Board believes it should look for high profile, highly paid individuals as confirmation that the Board has selected a

Said differently, even if this CEO earned $13.8 million(3 times as much) which is in excess of the reported $12.3 million average for the S&P 500 company; his/her compensation would be equivalent to .003 of the $4.6 Billion investment. If I’m investing the $4.6 billion, I’m beginning to wonder if I’m paying enough to the person in charge of protecting my capital and making it grow.

qualified high performer. When the selected individual is not inside the corporation the pay escalation begins; especially when the prior CEO is ousted for poor performance. Obviously, the corporation wasn’t paying enough to get a winner! The table is set for dramatic CEO compensation inflation. A successful CEO has plenty of long term compensation money they will be forfeiting at

THEEXCHANGEFORPEOPLESTRATEGYAPRIL 2014

P S X : CEO PAY | SHAREHOLDER PERSPECTIVE

their prior employer. Cha-ching, we need to replace that in order to attract Mr./Mrs. Gold Medal Winner. The individual is so much more capable than our prior CEO we need to pay more so our shareholders have confidence. Cha-ching. Of course, he/she is taking over a poorly performing organization – so the effort and risk are greater. Chaching. And of course, the Board is not in a great bargaining position if the company wants to send a positive “message” to the new CEO that he/she has Board support. Cha-ching. You get the point. This happens. The Board tries to back load the compensation, putting most of it “at risk” with the payoff spread over time. It takes a very careful, thoughtful, analytical, and experienced Compensation Committee to put together a balanced compensation package for the new CEO that sends the right messages, provides the right incentives, and attracts the right person. . If you are a potential CEO or Compensation Committee, now is when you want to call upon your Grahall consultant. This activity just doesn’t occur frequently enough to wing it.

When dissonance occurs between CEO pay and stock performance then the fireworks begin. Now that we have established how CEO pay escalation occurs, the question remains is the shareholder focused on the issue? Certainly, the shareholder wants a CEO who has the capability to manage a corporation well and increase share price. But how much does the shareholder pay? We know that the selection criterion for the S&P 500 indicates that the company’s MINIMUM capitalization should be $4.6 Billion. That’s share price times shares outstanding. If the CEO of this minimum company earns $4.6 million – then CEO compensation represents one tenth of one percent of the investment. (I don’t know about you, but if I made a $5,000 investment in a hot dog stand in New York City; I’m not sure I could buy a hot dog CEO for $5 a year.)

http://business.financialpost.com/2014/04/07/new-u-s-ceo-worker-pay-ratio-regulation-fraught-with-grey-areas/

Source for the $12.3 million quote:

protecting my capital and making it grow.

A slightly different shareholder perspective: If my stock price is reflective of a Price/Earnings ratio of 15, this would mean that earnings (after CEO compensation) for this MINIMUM capitalized company would be $306 million and CEO compensation at the “excessive” $13.8 million would only be 4.4% of earnings. Here’s the apparent deal to the CEO: you do all the work, get all the blame if things go wrong: I get 95% of the profits you get 5%??? Yabba Dabba Doo. How’s that Fred Flintstone?

Here’s the apparent deal to the CEO: you do all the work, get all the blame if things go wrong: I get 95% of the profits you get 5%???

“Say on Pay” legislation has made executive compensation subject to shareholder votes. While this has certainly raised awareness the actual impact to date is not visible. Say-on-pay votes have not dramatically scaled back on C-suite pay packets. In fact, the pace of CEO pay as a multiple to workers has jumped 20% since 2009 when the votes were adopted, according to Bloomberg. The simple fact is that most CEO’s are paid fairly when they perform, and with “at-risk” short-term and long term compensation elements in their compensation package they get whacked when they don’t. If the situation persists shareholders get a new CEO and pay even more to buy a winner.◘◘◘

by Charles Patton charles.patton@grahall.com

THEEXCHANGEFORPEOPLESTRATEGYAPRIL 2014

LIGHTING THE FUSE

IGNITING THE POWER OF PEOPLE

APRIL 2014

By: Jim Finkelstein & Matt Finkelstein

The G O O D Boss and the Bad Boss

Insights for a Healthy and Productive Workplace in Challenging and Changing Economic Times

The question often looms: Why do we work? Perhaps it doesn’t really matter why – we all have to work to some degree or another. Some people work to live and others live to work. Some find a balance between the two where one flows naturally and seamlessly into the other. We spend every day doing stuff and it turns out, oddly and intuitively enough, the people we encounter at work influence our experience there. Our colleagues, clients, peers, and bosses ‐ all of those we cross paths with at work ‐ bear some weight on our satisfaction, productivity, creativity, and diligence.

Let’s look at how one of these groups affects each and every one of us. Most of us have had a boss at some point and many of us may now be or have been a boss. For this purpose we’ll consider a “boss” as any managerial, supervisory, or executive position – really anyone who leads other people is a boss. Bosses are important for this reason: they lead others through their own experience, vision, and values.

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GOOD Boss & the BAD Boss APRIL20144The

I G N I T I N G THE POWER OF PEOPLE LIGHTING THE FUSE:

Not all bosses are created equally, but there are certain characteristics that make for better bosses. In our forty‐six years of combined experience – one of us with 38 as a professional management consultant and the other with 8 as a fresh and reflective worker – we have uncovered prime examples of good bosses.

To enlighten the modern workplace and workforce, here are five examples of good bosses (and they are not mutually exclusive):

1) The Listener – a boss who will listen to and appreciates different points of view. This boss hears and honors their employees’ thoughts and considerations respectfully but with the caveat that these ideas may not be put into action. Listeners understand that their employees were hired for a reason. As such, Listeners trust their employees and value their input. Sometimes, Listeners are even dependent on employee input. Listeners are good bosses because they have insight beyond their own experience and vision, and that insight is influenced by many perspectives. Where employees are encouraged to voice their own opinions and ideas, those employees are more inspired and engaged. 2) The Empowerer – a boss that lets employees run their own show and lets them learn by making some mistakes. These bosses cultivate leadership in their teams. The Empowerer identifies tasks and creates a plan, but lets the employees decide the nuts

and bolts of how the work actually gets done. Empowerers don’t delegate aimlessly, creating a sense of subordination in their teams, but rather they engage employees from the ground up in a focused manner. Employees are inspired to take on leadership roles and collaborate both with their boss and with others. Empowerers are good bosses because they can simultaneously ignite productivity, personal development, and satisfaction among their employees. 3) The Mentor – a boss who teaches, coaches, and guides. This boss doesn’t necessarily need to be older, but rather could be a tad wiser or simply just willing to share. Mentors seek to understand their employees’ experiences and identify which employees need or want mentoring. The relationships with their employees are constructive, meaning that both criticism and praise are offered with the intentions of growing the employee’s skill set. The offer to mentor is either explicitly offered or subtly developed over time. The goal for the Mentor Boss is both current and forward

looking and is always geared to enhance employees’ skills. Mentors are good bosses because they ensure a future for their employees and their companies while inspiring immediate productivity and engagement. 4) The Cool Dude (or Dudette) – a boss that has fun and lets employees have fun. This boss maintains a certain aura of authority while creating a likeable and lively

THEEXCHANGEFORPEOPLESTRATEGYAPRIL 2014 33

GOOD Boss & the BAD Boss APRIL20144The

I G N I T I N G THE POWER OF PEOPLE LIGHTING THE FUSE:

atmosphere. Cool Dudes and Dudettes let their employees enjoy their time at work and find time for small diversions, within the confines that the job still gets done…and done well. These bosses reward their employees with time off or special workplace events within the realm of a respectable workplace culture. The Cool Dudes or Dudettes are good bosses because they understand that employees are people, that all people need some kind of fun, and that happy employees are healthy, productive, and engaged. 5) The Creator – a boss who inspires invention and creativity. These bosses push the limits of their employees to ignite innovation. They challenge intellect and question the status quo, so that new products and ideas are developed from within. The Creator embodies the spirit of imagination and is never overly demanding. Creativity and invention come from a unique mindset, so these bosses correctly identify those on their teams who are keen to this way of thinking. As such, Creators are good bosses because they are motivational and collaborative.

These five bosses, or rather their respective characteristics, exemplify what makes for healthy leadership within organizations. Bosses may embody some or all of these characteristics. The best bosses are able to reflect upon their own natural inclinations and experiences, leveraging

their assets and developing areas of weakness. Common qualities among these five good bosses can make for a great boss who is collaborative, communicative, engaging, and inspirational. Our new cogenerational world is crying out for leaders – of all ages and generations – and hopefully many of us will realize that great leaders can and do exist in the smallest, biggest, nearest, and furthest of places.

We have discovered that good bosses listen well, empower their people, mentor, teach, coach, inspire innovation and creativity, and have fun. It is the flip side of these positive behaviors that we now explore. As they come, these negative bosses are both the ones to

look out for and also to find ways to work with constructively. As no one is truly perfect, we hope these insights will inform and enlighten you to explore the full productivity of your workplace and workmates.

Here they are, five bad bosses:

1) The Talker – a boss that doesn’t give any space for their employees to speak or learn through conversation. This boss is often thought of as a bigmouth, braggart, gossiper, and/or lecturer. They talk and talk and talk and never listen. They interrupt others and are overly self‐involved with their thoughts and expressions. The Talker only listens to himself and disregards anything offered by subordinates. Resenting employees’ input, Talkers stifle creativity and productivity while cultivating widespread discontent amongst their team. Talkers are bad bosses because they miss out on opportunities both for their own development and for that of their employees. 2) The Disenfranchiser – a boss that restrains and suppresses employees from maximizing their true potential. This boss is offensively dominating and oppressive. They restrict and subdue their employees across the board. The Disenfranchiser takes employees’ inspirations and aspirations, and squashes them into subordination. Disenfranchisers offer no reasoning other than their position atop the hierarchy. Their employees are

THEEXCHANGEFORPEOPLESTRATEGYAPRIL 2014

GOOD Boss & the BAD Boss APRIL20144The

I G N I T I N G THE POWER OF PEOPLE LIGHTING THE FUSE:

stifled, bored, and miserable. Disenfranchisers are bad bosses because they deprive their employees of basic needs and future aspirations, forcing them into a hole of isolation. 3) The Disconnector – a boss that closes off and renounces their employees while destroying their confidence. This boss obstructs employees’ activities. They single‐out and isolate employees, and this isolation irks employees to the core. The Disconnector obstructs communication and rejects suggestions from employees. They sit in their offices, apart from their teams, only coming out to intentionally break up projects and partnerships. Disconnectors are bad bosses because they remove essential communication channels and are demeaning towards their employees. 4) The Square Dude (or Dudette) – a boss that is the behind the times, straight‐laced, and struggles to lead and inspire. This boss, perhaps well intentioned and perhaps not, struggles to keep up with contemporary culture whether it is “cool” or not. Instead of quelling misunderstandings, they contribute to strife and friction. The Square Dude (or Dudette) sticks to old ways out of ignorance or contempt for new ways. They force these old ways upon their employees and scoff when they are met with resistance. Square Dudes (or Dudettes) are bad bosses because they are out of touch with the times, stagnating in old ways and unnecessarily forcing these ways upon their employees. 5) The Destroyer – a boss that squashes or saps the strength and motivation out of employees. This boss is perhaps the ultimate bad boss – not just rejecting employees’ needs and dreams, but utterly crushing them as well. All requests for support and guidance are met with sarcasm and blatant disrespect. The Destroyer rivals its naval and starship counterparts on human‐to‐human terms. They are wrought with intensely directed malice towards others. These actions can be either apparent or hidden, adding to their effective destruction. The Destroyer is just simply a bad boss by nature.

These five bad bosses, as gnarly as they’re described, are not necessarily to be feared nor despised. Generally, most people are good and well intentioned, never hoping to fit the

category of a “bad boss.” Granted the few that do wholly fit their descriptions, but we must also acknowledge that every one of us may slip up at times. Perhaps these descriptions will help you reflect upon those few slip‐ups and allow you to explore ways to maximize your potential. Perhaps you may now see deeper into the mishaps of others and give credit when credit is due.

In any case, we support the values of an honest, meaningful and respectful work environment and hope you do too.◘◘◘ Jim Finkelstein is the President and CEO of FutureSense, Inc. (www.futuresense.com) and author of FUSE: Making Sense of the New Cogenerational Workplace™ (www.fusethebook.com), published by Green Leaf Book Group Press in October 2011. Matt Finkelstein, Jim’s son, is a part‐time consultant at FutureSense and a Garden and Wellness Empowerer at MateoSol (www.mateosol.com).

THEEXCHANGEFORPEOPLESTRATEGYAPRIL 2014

ORGANIZATION T A L E N T

M A N A G E M E N T

Power coaching

By Jay Wolf Principle, JCris Consulting Group jay@jcrisconsultinggroup.com

Whether it is in our personal, social or professional lives, we are living in the most competitive time in history. Achievement seems to be the leading indicator of success: the 15 hour workweek, followed by hours at the gym, to reading endless biographies of those who have â&#x20AC;&#x2DC;made itâ&#x20AC;&#x2122;. Today, more and more people are working harder to improve themselves physically, mentally and spiritually - all looking for that behavioral advantage which will take them to the top. In todayâ&#x20AC;&#x2122;s business environment, organizations are looking for every advantage to realize superior financial results. Corporations are finally starting to realize the road they have been traveling on to success has taken a sharp turn. In the past, the greatest effort was put on developing financial capital. Now, it is widely held that to be a superior company, more focus needs to be placed on developing their human capital. This is not to say that developing financial capital is unimportant. It is and always will be, but there needs to be a shift in focus. More emphasis has to be put on the development of human capital if an organization wants to achieve peak performance. The question is how to accomplish that goal.

change behaviors and increase the performance of their employees, especially their leaders. Companies would identify their high-potentials and send them off to countless retreats and seminars to learn the latest theories on enhanced performance. Usually, they started out by learning to be trustworthy of their team members by closing their eyes and falling backwards, hopefully into the arms of some strangers not too bored and still awake enough to catch them. Then came the latest guru and inspirational speaker trying to convince the audience that they have the elusive answers to better performance, which could be learned by reading their latest book. I am not saying that these endeavors were a complete waste of time. As a matter of fact, I believe the complete opposite. There are brilliant consultants, lecturers and very successful business leaders sharing their incredible insight, vast experience and years of exhaustive research. The problem is, you get this great wealth of new information which you are excited about applying at the first opportunity. This new information has taken you out of your comfort zone and stretched you into using new behaviors. So why, after a few days, maybe even a couple of weeks, do you slowly slide back to the comfort of your old behaviors, leaving those new and exciting ideas on the shelf with all those other failed attempts of change? It is because you were never given the tools needed to sustain the new behavior change. Coaching, in this case organizational and executive coaching, is the tool which helps you sustain those new behavior changes. Coaching is now an estimated $1.5 billion dollar industry with a conservative estimate of 30,000 coaches worldwide (according to new research by PriceWaterhouseCoopers which was done for the International Coaching Federation). This is based on 5,415 responses from coaches in 73 countries. Companies, even the federal government, are hiring staff coaches to work with employees. Some employers are even trying to entice prospective new hires by touting executive coaching. In a 2004 survey by Right Management Consultants (Philadelphia), 86% of companies said they used coaching to sharpen the skills of individuals who have been identified as future organizational leaders. It is widely accepted by CFOs and management development specialists that few leadership development interventions have the potential of coaching.

TALENT MANAGEMENT: POWER COACHING

In the past, the norm for organizations was spending millions of dollars on trying to

Coaching, in the theoretical sense, is the process used to facilitate others So what is coaching, really?

to discover the best way to successfully accomplish a goal. It is a collaborative process that empowers people to realize their potential through building awareness, responsibility and action toward positive, lasting change. Coaching is more about asking the right questions, than providing answers. A coach engages in a collaborative alliance with the individual to establish and clarify purpose and goals, and to then develop a plan of action to achieve these goals. Coaching is all about self-directed learning. Like the old saying goes, “give a man a fish and he eats for a day, teach a man to fish and he eats for a lifetime.” Coaching is a tremendous discipline that has the potential to help people achieve whatever they desire. As a matter of fact, it has been proven that in order to really stretch yourself and truly achieve your goal, coaching is a necessity, not a luxury. Ask any true achiever if they could have reached their goal alone. An honest answer will be a resounding ‘no’. As great as the potential of coaching is, years of experience has shown me that the predominant current model of coaching, self-directed learning, does not work in the high stakes, fast-paced, time sensitive world of corporate America. Left to figure things out for themselves, employees feel frustrated and confused more often than not. Constantly having to deal with deadlines, results and the desire to achieve, employees welcome the idea of coaching and finding new ways to improve their performance. They do not have the time to figure things out for themselves. They want a coach, but with a different model. At JCris Consulting Group, we have developed such a model and use it with great success. The Power Coaching model is a hybrid style of coaching. It combines the principles of coaching and consulting in order to facilitate positive action and peak performance. It maintains that a Power Coach must have an expertise in the area in which they are coaching. This allows them to take a more assertive and directive approach. Power Coaches always stay true to the fundamental principle of not giving answers, but because of their expertise, have the freedom to offer alternative ways of thinking in order to help guide the individual to reach their goal in the shortest amount of time.

www.THEEXCHANGEforpeoplestrategy.com APRIL 2014

Thought drives behaviors and behaviors drive results. Power Coaching helps individuals develop new ways of thinking by exploring their motives and values and aligning them with their job requirements and their organizations’ vision. Using optimistic questioning, effective stretch S.M.A.R.T. Goal Setting and proper feedback, Power Coaching brings employees out of their comfort zones and helps them reach their peak performance and realized potential. Power Coaching takes a systematic approach. Dedicated to continually moving an employee forward toward achieving results, it is always done in alignment and with the organization. First, a full set of assessments are used to establish the current reality. Then the desired reality is identified, along with a ‘process’, or steps, to reach that new reality. The Power Coach then helps the employees create S.M.A.R.T. stretch goals that become the bridge Power Coaches believe in: maintain a concrete vision of the end result, with a commitment to the newly established process to get there. A focus on end results without attention to process is doomed to fail. Power Coaching works, but be wary of those coaches who promise an ROI of ridiculous proportion. A Power Coach knows there is no such thing as a hard ROI in coaching. Coaching is a long-term investment in the development of an organizations’ most important asset – their human capital.

TALENT MANAGEMENT: POWER COACHING

Power Coaching is based on the cognitive foundation of motives-driven thought.

C R E A T I N G A R O S T E R J U S T L I K E T H E P R O S by Christian Liakos, BullseyeEvaluation, Inc. cliakos@bepms.com

There are similarities between building a team roster for a sports franchise and building a businessâ&#x20AC;&#x2122;s talent bench strength. If you look at any sports team or just follow the scouting combines or a professional draft it doesnâ&#x20AC;&#x2122;t take a genius to see that teams are constantly assessing and identifying ways to close skill gaps in order to strengthen the team and put the best squad on the field.

or any championship franchise,

achieving victory year after year is more difficult than winning that first championship. Every year is a quest to continue to attract, sign, retain and develop new talent to compliment the team. Sports teams use coaches, scouts, combines, and host drafts to find new players. To guarantee a high level of bench strength requires that coaches, scouts, combines, and host drafts work effectively to identify and deliver outstanding new talent.

Winning and success only happens when thereâ&#x20AC;&#x2122;s a competitive team on the field or in the office hallways.

In businesses it’s all about creating a culture of coaching and mentoring to develop employees and their skills. Setting career paths and succession plans help identify future leaders, and assessing and training employees at all levels increases retention rates, reduces skill gaps and risks, and creates institutional knowledge. In conjunction with coaching and mentoring, leveraging tools like assessments, learning management, talent management, succession planning, compensation planning, and performance management allow for the ability to profile and recruit the best skilled and proficient workforce. Winning and success only happens when there’s a competitive team on the field or in the office hallways. ◘◘◘ – Christian Liakos, cliakos@bepms.com

THEEXCHANGEFORPEOPLESTRATEGYAPRIL 2014

Steve Broadbent & Chris Nyland Fulcrum Partners LLC fulcrumpartnersllc.com

A D V A N T A G E S

T O

PRE-TAX DEFERRAL OF INCOME in an U N C E R T A I N Tax Environment A new trend is upon us. Employees who once routinely deferred compensation are now rethinking those habits as they consider updates to their financial plans. Among the concerns is whether it might be better to take income today because of the uncertainty of tax increases in the future. The uncertainty was highlighted in the 2012 “fiscal cliff” negotiations in which the top Federal tax rates were increased and a number of “revenue enhancements” were added, which are nothing more than new taxes under the proverbial sheep’s clothing. This article shows how you should consider recent and future tax rate changes and investment returns when analyzing whether to participate in your company's nonqualified deferred compensation plan (DCP).

A Challenge to Current Thinking on Income Deferral The new conventional wisdom reverses the time-honored thought that one should tuck away income in deferred accounts now to pay lower taxes in retirement later. But is the conventional wisdom correct? A study by Fulcrum Partners LLC suggests that in all but a few scenarios, even if taxes do rise in the years ahead while working or during retirement, the

A D V A N T A G E S

accumulated savings that may be achieved over the long term through

T O

deferral of income and related taxes under an DCP plan are still greater than the amount that could be accumulated through after-tax investing in a

investment P Rpersonal E-T A X account. DEFERRAL OF INCOME

U N C E R T A I N Tax Environment in anfactors: Propelling the new conventional wisdom of "don't defer" are the following



DCP participants now anticipate a change in federal tax policy that will cause an upward shift in their marginal tax rates with no prospect for tax rates to decline during retirement.



At the same time, the provisions of Internal Revenue Code (IRC) Section 409A that govern all income deferred after January 1, 2005, have decreased participant flexibility in certain respects regarding timing of deferral elections and distributions.



DCP accounts lack the security of qualified retirement plans such as a 401(k) account; therefore, many participants have decreased or even stopped deferring income into a DCP because of the financial uncertainty of their employer.

THEEXCHANGEFORPEOPLESTRATEGYAPRIL 2014 47

PSX: ADVANTAGES TO PRE-TAX DEFFERAL

The combination of these factors has caused the DCP liabilities in my companies to level off in recent years as compared to the significant growth in DCPs prior to 2008.

Basic Truths Still Hold While basic truths still hold, the wisdom of crowds may change soon. Here's why:  Two of the factors causing a decline in participation will fade away with time. Plan sponsors and plan participants have gained more experience in the effective management of deferred compensation under the Section 409A regulations. While the regulations do impose some restrictions on you, the effective operation of a DCP under these new regulations merely requires some additional planning.  Limited recovery from the recent recession is underway and you are no longer bombarded with bad economic news almost every day. The slow economic recovery has created new optimism among DCP participants about their employers and their individual financial plans. Will Taxes Rise? Immediately following the 2012 Presidential election, we witnessed a contentious battle in Congress over the ”fiscal cliff” issues, which in the end brought us a higher capital gains rate and an increase to the top marginal income tax rate. In the coming months, we will see debates over the debt ceiling and the so-called “Grand Bargain”

PSXAPRIL 2014

which will attempt to provide a combined solution to the debt ceiling, reducing the

nation’s debt, tax reform, and an outline for future Federal budgets. These debates will create additional pressure for more increases to both capital gains and income tax rates. On top of the fiscal issues cited above, executives are enduring a new 3.8% tax on investment income for individuals with a modified adjusted gross income in excess of

$200,000 for single filers and $250,000 for joint filers. As you consider pre-tax investing in a nonqualified DCP versus an after-tax alternative it is important to remember this tax does not apply to investment gains in a DCP.

The focus of our study examines the impact of an immediate increase in tax rates while contributing to a DCP and an increase in tax rates while taking distributions from a plan during retirement. The impact of the timing of these tax increases is compared to the after-tax investment alternative. Despite the new certainty on tax rates in the near-term, the long-term tax policy impact on well-planned retirement savings plans is also impossible to predict. Taxes could be higher when distributions are made in retirement, or when scheduled or inservice distributions are made five or ten years from now. It is also possible, although unlikely, that they could be lower. So there is still a very good chance taxes will go upâ&#x20AC;&#x201D;and stay upâ&#x20AC;&#x201D;for a significant portion of your retirement planning time horizon.

Deferral with Higher Tax Rates Ahead We think that having higher income and higher tax rates in the future does not automatically lead to the conclusion, which many have made, that it makes no sense to defer income now if taxes may be higher when you receive distributions in retirement, or when scheduled or in-service distributions are received five or ten years from now. Here is how we went about the study. Variables and Assumptions With a split Congress, it is all but impossible to predict the outcome of the continuing budget and tax negotiations. To compensate for this uncertainty, we created a large number of scenarios to compare (1) after-tax investing in a personal investment

THEEXCHANGEFORPEOPLESTRATEGYAPRIL 2014

PSX: ADVANTAGES TO PRE-TAX DEFFERAL

account (i.e. a regular taxable brokerage account) outside your employer's benefit plans to (2) the pre-tax deferral of income into an employer-sponsored DCP. The important variables for the analysis are:  Personal investment accounts are taxed as 100% long-term capital gains. (In reality, a diversified personal investment account typically would be taxed as a combination of capital gains and ordinary income; however, this assumption was selected to provide the best advantage to personal investment accounts.)  Deferred compensation is taxed as 100% ordinary income at the time of distribution.  While the long-term capital gains rate is currently 20%, we examined the impact of both the previous 15% capital gains tax rate and the current 20% rate.  Marginal federal and state income tax rates are examined at 34%, 37%, 41%, and 45%. (These rates are based on the recent increase in the top rate from 35% to 39.6%. At the time this analysis was completed, an increase in the next tier from 33% to 36% was expected; therefore, this marginal rate is included as well. An additional 5% was added to the above rates as the average top marginal state income tax. FICA (Social Security and Medicare) taxes were not factored into this analysis as all compensation, whether deferred into a qualified (e.g. 401(k) plan) or nonqualified plan, or taken into income, is taxed for FICA at the time the compensation is earned, not when it is distributed.  Pre-tax earnings rates are 3%, 7%, or 10%.  Investment horizons of 10 and 20 years.

PSXAPRIL 2014

 Distributions occur either in lump sum or in installments over a 10-year period.

For simplicity in presentation, this analysis assumed that a single amount of $10,000 was invested in either a personal investment account or a DCP account in all scenarios. The amount used for the after-tax investing in your personal account is $10,000 minus the income tax owed in the year earned. The single deposit of $10,000 was then tested in approximately 75 scenarios using the variables listed above. The analysis compared the value of the personal investment account to the

DCP after capital gains or ordinary income taxes were paid. The personal investment account was taxed at the capital gains rate at the end of each calendar year (the study assumed non-tax managed mutual funds with a high asset turnover) and the DCP account was taxed at ordinary income rates when distributions were received from the plan. DCP Does Better In almost all scenarios, the DCP provided superior results. The only scenarios favoring the personal investment account are based on the highest wage earners who are willing to settle for a meager 3% pre-tax return and invest their income over a short 10-year period. In all other scenarios, a DCP account provided an advantageâ&#x20AC;&#x201D;in terms of the total amount accumulated after taxes are paidâ&#x20AC;&#x201D;ranging from a low of 1.75% to 47.75%. Obviously, the recent increase in capital gains rates from 15% to 20% provides an additional advantage to a DCP ranging from 3% to 15% depending on the rate of return and length of the investment. The following chart provides an example of pre-tax versus after-tax investing. This scenario assumes a 45-year-old defers $10,000 per year for five years on a pre-tax basis, and leaves these funds in a deferred compensation account until retirement at age 65. The DCP participant then receives annual installments from the DCP account over a period of ten years, each taxed at a 37% tax rate for ordinary income. The pre-tax deferral of income is compared to investing the after-tax equivalent of $10,000 ($6,600 after a 34% combined marginal federal and state tax rate) per year for five years. Again, these funds remain in the account until age 65 and are taxed annually at either a 15% or a 20% capital gains tax rate. The participant withdraws equal sums from the investment account over ten years starting at age 65. In all scenarios, the investments are earning a pre-tax rate of 7%.

THEEXCHANGEFORPEOPLESTRATEGYAPRIL 2014

PSX: ADVANTAGES TO PRE-TAX DEFFERAL

PSXAPRIL 2014 52

Lower Rates Now Do Not Matter What can you take away from this chart? DCP plans continue to be advantaged over time even if income tax rates rise again in the coming years. The assumption of the capital gains rate is important, as the 20% capital gains rate (as opposed to the previous 15% rate) makes the DCP look even better. The compounding of pre-tax money will always beat after-tax investing, assuming equal pre-tax rates of return on the investments.

If taxes are lowered during your retirement, the advantage of a DCP does not change. The following chart assumes a 37% marginal income tax rate during the deferral or investment years, and a 34% rate during retirement. The results do not look substantially different from those shown on the previous chart.

PSX: AVANTAGES TO PRE-TAX DEFFERAL

The following chart compares after-tax investing at both a 15% and 20% capital gains tax rate to pre-tax deferral of income in a DCP, assuming a 7% pre-tax rate of return on the deferred income or investment. The pair of percentages represents the marginal income tax rate at the time of deferral/investment and at the time of distribution, respectively. The percentages in the deferral for 10 and 20 years columns represent the advantage of the DCP over the personal investment accountâ&#x20AC;&#x201D;in terms of the total amount accumulated after all taxes are paid. Example: A participant defers $10,000 for 20 years and takes a lump sum payment following the twentieth year. If the participant's tax rate at the time of deferral is 34% and at distribution is 37%, the advantage of a DCP over an after-tax investment of the same $10,000 ($6,600 aftertax @ 34% tax rate) is 24.22%.

Advantage of the Pre-Tax Deferral of Income over the Equivalent After-Tax Alternative using various Capital Gains and Federal Income Tax scenarios

Personal Investment Account as Taxes Rise The pre-tax investment rate of return is a significant factor in the comparison of DCP to aftertax investing. Taxable investment will continue to perform worse in comparison to a DCP account as you raise the marginal tax rates. The DCP will be further advantaged if income tax rates increase immediately instead of gradually over a few years. The assumption of the recent increase in the capital gains rate from 15% to 20% is also important to this analysis as demonstrated above. Additionally, the Affordable Care Act, otherwise known as Obamacare, includes a 3.8% Medicare surtax on investment income. Distributions from DCPs are treated as ordinary income, not investment income. While not included directly into this analysis, the Obamacare Net Investment Income surtax on investment income will further improve the advantage of pre-tax deferrals.

Security Concerns and Investment Choices The recent turbulence in the economy is a reminder that our investment portfolios should be well diversified. Some people eligible for a nonqualified DCP will continue to reject the DCP if they are taking a low-risk/low-return approach, are concerned about the near-term illiquidity of their DCP account, or worry about the credit risk to their employer. However, assuming a normal risk threshold and minimal security concerns, pre-tax deferral of income is a sound investment strategy when ordinary income tax rates are changing. Liquid funds in money market accounts are an important part of everyone's financial plan and a well-diversified portfolio. However, the money market investments are best held outside of an employer-sponsored DCP, as low-yielding accounts do not reap a significant advantage from being inside a pre-tax DCP. If all of your investing is in a low-return style, then DCP is not for you. However, those who look long-term and assume "normal" equity returns over time will clearly win with a Deferred Compensation Plan.◘◘◘ By Steve Broadbent and Chris Nyland steve.broadbent@fulcrumpartnersllc.com chris.nyland@fulcrumpartnersllc.com

Steve Broadbent (CA LIC OC48841) and Christopher Nyland (CA LIC 0C90758) are registered representatives of, and securities products and services are offered through ValMark Securities, Inc. Member FINRA, SPIC, 130 Springside Drive, Akron, Ohio 44333-2431 * 1-800-765-5201. Fulcrum Partners is a separate entity from ValMark Securities, Inc.

Deferred Compensation Plan Provides Advantages Over

THEEXCHANGEFORPEOPLESTRATEGYAPRIL 2014 55

RELATIONSHIPS THAT MATTER

For those seeking relationship advantage Practices for Individual Contributors, Leaders and Entrepreneurs™

Create business

advantage by tapping into the creativity of your prospects. Specialized interpersonal skills can significantly increase your effectiveness in new business conversations and presentations.

Imagine a radical new way of teaming with your prospects! In this world where blatant commercialism has taken over large portions of television and radio programming, where high profile companies purchase professional sports stadiums for the purpose of advertising, where product placement is prevalent in movies, and ads have secured a large portion of the “internet real-estate” we would like to explore alternatives ways – better ways – to garner attention. Marvin Smith Deliberate Synergy marvin_smith@comcast.net

Companies use visuals of their logos and advertising on personal items such as tee shirts, sports shoes, jackets, beer cozies, beach towels, key chains, and the like. And they use them in public spaces such as sports stadiums, garbage cans, bus stops, bridges, and blimps. The outcome: everything has a brand name or logo. The Blinding Glimpse into the Obvious for this month addresses finding ways to attract attention to your value proposition without the heavy advertising push that is so prevalent today. K e y

S t r a t e g y : Make relationships your platform to attract the buyers, participants, users of your product or service. Here some thoughts that have worked for relationship oriented sales and marketing, gleaned from highly successful individuals who enroll others in programs, products, and lifelong decisions. I suspect it will work for People Strategies as well since gaining commitment is the key to success. Personal Practices, Skills & Capabilities Be in the Moment: Being present, responsive and tuned in is critical for establishing rapport. This rapport will help you to move around during the conversation and share control of the meeting with your prospect. Make Meaning: Make connections that may not make immediate sense from what you see happening. This takes skill at cracking the code and reading between the lines. Some strategies for this kind of code cracking include questioning, which is a linear function, and the fundamental component of collecting information, thinking, and learning. Get curious; ask permission to ask questions that give you a foundation to build an effective proposal and help you understand beyond obvious facts and needs. Send a compelling message: Make offers that are irresistible to your prospects. This entails knowing their business and their needs in ways that are new to them. Surprise your clients and prospects with what insights you can create in their minds. Make the prospective organization your hobby; liken it to a medical operation: wanting your physician to collect surgical data that pays particular attention to the minute particulars. Small changes and subtleties can make a quantum difference. Develop a recruiting personality so that people are attracted to what you are saying and are listening generously to you as you are talking. For more on the Recruiting Personality, please see my article in the January Issue of PSX!

THEEXCHANGEFORPEOPLESTRATEGYAPRIL 2014

Guessing is another strategy for code cracking (a right-brained function) which does not yield immediate right answers. This strategy, however, can help you bump into unexpected outcomes as you interact with your prospect. This kind of thinking can help generate unique and powerful ideas. Listen to prospects until they have said something new to you! You increase your effectiveness if you are at the intersection at the moment your prospects make new connections. If they are thinking in new ways, while in your presence, you will be the first to know. Being first in many aspects creates a competitive advantage. Increase your self-awareness: Be honest with yourself about your skills and capabilities; make plans to acquire what you need. Being defensive, or avoiding the development of necessary skills and capabilities is a fast way of slowing down your progress in a rapidly moving world. The sales person needs competence in marketing, buyer preference analysis, facilitation, idea generation and development. The ability to communicate a message that integrates the pain-claim-gains elements is a strong attraction to buyers and provides a powerful advantage. Perform Practical Research: Find out why you did or did not get the business: What did you do well and how can I give you more of that?  Follow up as a regular practice.  Make a contract with prospects to ask questions. Example: What could have been done better, or differently to win your business?  Become a faster learner, so that today’s failure can be the front-runner for tomorrow’s success.  Develop a list of Buyer Preferences and use a compiled list as a platform to build portions of your program. Tap Into Creative Visioning: End the bias against yourself: With your mind’s eye, see yourself being successful. Purposely create a win-win situation for you and your buyer. See this successful image in such vivid detail that you can touch it, feel it, tell a story about it. Appear in the image yourself as the leading character. Utilize Value Partnering: Find a thinking partner, form a strategic alliance, get synergy going with someone who is of a different mind or who has a different skill than yours. “Many ideas grow better when they are transplanted in a mind other than in the one where they sprang up” - Oliver Wendell Holmes.

“Nothing is more dangerous than an idea when it’s the only one you have”. - Emile Chartier Be collaborative: Tap into co-workers, prospects, peers in similar and dissimilar industries Use Consultative Selling: After generous listening and establishing rapport, (like an examining physician), ask the prospect for permission to probe a little more in specific areas in order to help him/her get the maximum benefit from you. Proceed by being gentle while asking for critical information. Ask questions like,  Are there others bidding for the work?  Have you established a budget, pricing boundaries, delivery requirements, etc.?  Who are the decision makers?  How many chances will I have to get this right? (Work on getting more than one time at the plate; this allows for problem solving and shows versatility.)  Then take some personal risks:  Is there anything I have not asked that you think is important?  I will be working personally on this one.  I have a pay-for-performance option if you are interested.  What are the conditions to be your vendor of choice?  What are your long-range/ larger possibilities?  How will you benefit by making the right decision?  Are there other decision makers or stakeholders involved?  When will you be making the decision? Problem Solving  Before you leave probe for concerns or objections that might make moving ahead difficult.  Generate ideas or adjustments to the initial offering that solve the issues that you hear.  This deepens the relationship and gives a clear sample of how issues would be handled after the agreement to proceed.

Admittedly, this low-key power approach is not for everyone, however, on a situational basis, if you see opportunities to be powerful without flaunting a brand or product, this might be a worthwhile experiment. –Marvin Smith

THEEXCHANGEFORPEOPLESTRATEGYAPRIL 2014

BIGGER DATA:

In last month’s issue of PSX we looked at how organizations can use data that resides within the organization to gain additional competitive advantage. In this article we will look at data that is widely available and accessible on competitors and comparators that can help organizations sustain and successfully grow their businesses.

and Why Human Resources Departments Don’t Play Well …(They Play Fair) …Michael Dennis Graham | Michael.graham@grahall.com | Grahall, LLC

PSXAPRIL 2014

The CIA Side of People Strategy

PSX: BIGGER DATA | THECIA SIDEOFPEOPLESTRATEGY 62

We wonder why human resources departments don’t have a Director of Central People Intelligence. Data is expanding at an enormous rate and turning data into intelligence, and insight is a key component of competitive advantage. Let’s imagine what sources of information might be accessed by this Director of Central People Intelligence. (We’ll call him Edgar for convenience). Edgar could peruse hiring information found on local, regional, and international job boards. It would seem likely that employees would both look for and be looked at by competitors using these job boards. Demand for and availability of workers both highly skilled and less so assessed on a geographic basis would be posted here. Closer to home, Edgar could compile information from carefully scripted interviews conducted with competitors’ employees who are looking for new jobs. It is striking how much information is volunteered by individuals looking for positions. Competitor “troop strength” could probably be assessed by such things as car count at factories and offices, number of shifts being used in factories, . Business expansion (new plant, product, or contract) and contraction plans (plant closures or layoffs) are documented in newspapers (both print and digital). And of course the internet is replete with information about employers and their employees. This is where Edgar can, for example, access annual reports and SEC filings which contain information of annual and long-term goals used to motivate management. He can also get his hands on labor department forms such as 5500’s which often speak to the compensation and benefit programs of competitors. Social media is another rich source of information on individuals, especially those trolling for new employment opportunities. In fact most individuals put into their LinkedIn profile their new job titles and often their new responsibilities. It doesn’t take a rocket scientist to patch the information

together to see a very informative picture of competitor organizations. Once data is assembled, it can be analyzed and combined to create insight into opportunities. For example, population models connected with geographic physical buildings and or office space owned (permanent) verses leased (temporary) would show a level of “troop strength” and budget deployment and even commitment to initiatives. The specifics on incentive plan goals from the annual reports could be assembled into a fairly clear picture of the competitors goals and objectives overall. Executive pay levels of the publically listed executives are available on line and the next two layers of management pay would not be hard to estimate. A model of a competitor’s pay levels using Glass Door, Paid Fairly or some other similar service matched with its population can be put together with some significant degree of accuracy thereby showing not only its expense but the organizations productivity compared to industry. Plant or office closings or expansions could indicate a shift in strategy. Merger’s and divestitures and the resulting layoffs are sure fire indicators of asset (both human and hardscape) redeployment. One of the most important people issues is the way in which the firm is governed. Annual reports have a significant amount of information specific to the Board of Directors governance approach if the company is publically listed on an exchange. As a matter of fact we see from 60 to 100 aspects of board governance in each and every proxy. Once interpretations are made then Edgar can explore and develop opportunities. For example, perhaps disruptive surgical hiring would add competitive advantage. If Edgar were to hire key individuals from a competitor, it might both disrupt the competitor’s process and enhance Edgar’s own company growth. Often times in durable products it is easy to foretell the future contraction of production by the buildup of a sample of inventory sitting in shipping or railway stations.

THEEXCHANGEFORPEOPLESTRATEGYAPRIL 2014 63

We encourage you to look at things differently, more deeply, and more often. Use (don’t misuse and certainly don’t disregard) the information you have at hand or could obtain. It could mean the difference between good and great.

Bigger Data is here and represents a good source of reconnaissance. Individuals in the compensation and benefits departments within organizations have been sharing information about rates of pay and levels of benefits through neutral sources for decades. It is probably time to investigate how informative other less neutral sources can be for an organization. Many war strategists believe that reconnaissance wins wars since knowledge of the competitors strategies are the most informative of all intelligence.

…Michael Dennis Graham

THEEXCHANGEFORPEOPLESTRATEGYAPRIL 2014

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