Compensation Trends in 2014: Removing the South Beach Option

Article by Larry Hartmann

When coveted basketball star LeBron James became a free agent in 2010, the world watched as the Cleveland Cavaliers tried to hold onto their superstar while every other NBA team tried to court him. When he finally decided his future, he hosted an ESPN TV special infamously called “The Decision” to announce his intentions. Thirteen million people worldwide watched as LeBron famously proclaimed, “I will be taking my talents to South Beach” and joined the Miami Heat, leaving fans and ownership in Cleveland devastated.

Certainly, this event was memorable for sports fans. But what does this story have to do with the equipment finance and leasing industry? Well, there is some serious speculation that March 15, 2014 could be the industry’s version of “The Decision” date for many employees. It’s a Y2K event of sorts, where the clock will strike midnight and employees will make new decisions. On this date, employees will have a complete grasp of important things. First, how did their 2013 bonus plans pay out for the year? Second, what type of salary increase did they receive? Lastly, what does the future hold for all aspects of compensation in 2014 and beyond? The “triple witching hour” of leasing and finance compensation will arrive. This comes on the heels of several years of muted increases and disappointing bonus payouts. By March, employees will get a tangible sense of their value where they currently work and will have to decide: Do I stay put, or do I take my talents to the South Beach of the equipment finance world?

What supports this human capital hypothesis that major change and turnover could be on the horizon? Is it hyperbolized or factual? According to a recent study by the Hay Group, as growth builds and employment opportunities increase, worldwide employee turnover is set to accelerate in 2014, after broadly flat levels in recent years. The number of workers taking flight is expected to reach 161.7 million in 2014, a 12.9 % increase compared to 2012. Looking closer at the leasing niche, the ZRG Partners Hiring Index, which tracks hiring demand in the industry, hit its highest level since 2008. Hiring demand is clearly up, especially for top talent. Existing players are seeking growth and the imperfect storm of new players entering the space is adding additional pressure to the talent pools. Using sports vernacular, the leasing industry is adding new expansion teams to an already large league. We have added five new expansion clubs that each need 52 players and this is impacting the entire league.

So, with the clock ticking and pressure mounting, what does this mean to you and what should you do?

For Leaders Working Hard to Keep the Team Together

As leaders addressing this issue, it’s complicated. In addition to the “South Beach” risks and according to experts, in the United States alone, the next decade is set to see the retirement of over 75 million workers. This retirement statistic includes 50% of the CEOs of major organizations. The available talent to replace those retiring will need to be picked from the next generation of just 45 million workers. While this is a macro trend, these ratios seem even more skewed within the equipment finance and leasing market with the continued graying of the leasing industry that has gone unchecked for decades.

Also, consider what has been going on the past few years in human resources? While employees have generally been less likely to change jobs in the past, companies have been making subtle changes in compensation models revolving around a few key concepts. They are:

  1. Changing the variable compensation plans to align better with their business strategy and results;
  2. Thinking further about differentiating and rewarding ‘mission-critical’ roles as well as roles with high costs of replacement. This means getting away from parity and thinking about rewarding “A” players in different ways;
  3. Setting more challenging revenue and income goals and rewarding superior performance, but not overpaying for average or poor performance.

The big overhand to this has been integrating parent company metrics and cultures into the equipment finance and leasing businesses. For decades, the finance and leasing units were able to operate with a detachment from banking standards in compensation. However, over the past few years, bank-owned leasing companies have fought parent company pressure to introduce “balanced scorecard” models for compensation factoring parent company performance with business unit performance. Concepts previously held as sacred, such as “compensation caps” and “bank like variable compensation plans” have been finally driven into the leasing groups due to regulation, scrutiny and pressure. The questions is, how will these changes now work when it comes time to review actual bonuses in good times?

Will these decisions be right, but the results in retaining talent a problem? Time will tell.

What Can the Workforce Expect in 2014?

So, good times mean better opportunities for employees, right? An imbalance in the supply and demand of talent can create good financial outcomes. What can you expect in 2014?

Let’s start with the facts and happenings in the broader markets. According to many experts in the general employment field, U.S. employees can expect median base salary increases of 3.0% in 2014. Good news … your base salary should at least outpace inflation and this is probably a good benchmark. But what about the all-important variable compensation component … the bonuses?

For staff workers in critical areas such as credit, documentation, funding, collections and asset management, the bonuses should be at target ranges, based on most organizations overachieving on targeted results. At the recent Equipment Leasing and Finance Association conference in Orlando, the sentiment was clearly that these were good times for all, with the lowest delinquency and write-off numbers in recent history. Couple this with continued low cost of funds and continued efficiency from headcount austerity, it all adds up to generally good financial results for the masses. This is the norm for 2013 as we speak with various leaders in the market. Given all of this, bonuses should be reflective of the overwhelmingly positive results going on, assuming your firm is realizing the same types of success that appears broadly across the industry.

In the leadership area, for Vice President and Director level roles, bonuses should also approach targets with supporting rationale for overachievement of bonus targets. What is the norm for these types of roles? We see a great divide in the annual bonus structures. Some firms provide typical 25% to 40% bonus targets based on three factors we see used rather broadly. These factors include 1) individual performance, 2) business unit performance and 3) overall company performance. For some firms overachievement in bonus payments is not part of the compensation plan.

On the other hand, we see another segment of companies providing senior leadership with leveraged variable compensation plans. For example, a target bonus could be 40% of base salary for a leader but based on the basket of factors, it’s possible to earn 125% to 200% of the target bonus. In good times, these types of plans should pay off nicely, but the flip side of these plans is faster declines and lower payouts in the difficult markets.

The other component of leadership compensation is long term incentives. We see these being reintroduced back into the rank and file of leadership. Retention is back on the top of the list of HR risks and long-term equity plans provide a hedge against departures. These incentives have moved from stock options to restricted stock grants with forward vesting for many institutional players with public stock.

At the top of the corporate ladder, for the C-Suite leaders, we are expecting good to great bonus payouts and continued growth in long-term plans. Result driven bonuses should bear fruit for successful leaders.

In the sales and business development area, this could be more of a mixed bag. While profits and portfolio results are solid, we do see some challenges in maintaining aggressive volume and growth targets for 2013. For example, we have seen organizations seeking 25% to 35% top line originations growth in their annual plans. What happens when success is achieved but growth is only 20%, which is still solid growth, but below target? How will parent organizations look at good, but not great, growth results for sales and business segment leaders?

So, the big question: Do you stay or do you go? Is now the time to test the free agent markets? Does staying mean you maintain the security of moderate cost of living increases or do you venture out and interview for new opportunities where 15% to 25% pay increases for making a move are becoming the new norm for changing jobs?

Conclusion

Compensation is a hotly contested topic and certainly very important to companies and employees alike. For every argument, there’s a counter-argument. This year’s bonus season will certainly create interesting conversation, controversy and opportunity for employees and companies alike.

While financial incentives are important, just like LeBron James and his decision to jump ship to Miami, employees want to win and feel like they can succeed. Compensation is part of the formula, but not the only part.

In the end, whether you decide to take your talents to your own virtual South Beach or decide to take a healthy bonus and increase, and actually vacation in South Beach, the times are good for both scenarios.