Executive Compensation Strategy for Large-Scale Transformation

Leading Services Company Case Study

Compensation in Special Situations / Executive Compensation

Executive Compensation Strategy for Large-Scale Transformation

Business Situation

Following years of bolt-on acquisitions with minimal investment in systems integration, our client in a services business sought to undertake a large-scale transformation that would 1) streamline and consolidate its operations, 2) make it easier to do business with, and 3) scale up new, ancillary revenue lines.

Challenge

While successful and profitable, lower revenue growth and a heavy reliance on share buybacks to drive EPS growth had resulted in a low relative valuation. The CEO’s determination to undertake this substantial transformation would be a multi-year effort and a cultural break. An early-identified principle of the effort was to create both risk and upside—penalties for business-as-usual (BAU) performance and reward for transformational success.

Our Impact

Solution: “Turbo-Charged” PSUs and One-Time Bonuses for Broad Base

We re-purposed the Company’s PSU program, doubling its maximum upside (from 2x to 4x target) and anchored BAU goals to a 50% payout rather than the previous 100%. Goals for revenue growth to be driven by higher customer retention (“easier to do business with”) and new revenue streams as well as profit (streamline the core operations and benefit from profitable top-line adds) were set with internal reference to the transformational effort and back-tested against top-decile growth rates of large-cap companies over multi-year periods.

  • Given the “all hands” nature of the effort, a meaningful spot-bonus award program was developed for employees who did not participate in the Company’s equity program
    The turbo-charged PSU design was set for two cycles, covering the two years anticipated for the transformation project and two additional years for the results to play out
    Given the stakes involved, the Compensation Committee asked the full Board to participate in the final approval of the program and the goals established in the PSU design

Results

  • Revenue and operating profit accelerated considerably during the program, leading to payouts that reflected near-maximum performance under the program
  • Market cap doubled over the course of the four-year period and the relative valuation reached and then edged above the peer median
  • The transition back to a “normal” pay opportunity was aided by continued high growth opportunity established during the transformation
  • While the program undertook Say on Pay (SOP) risk for having an unconventionally high upside, proxy advisors were accepting, and SOP votes continued to be mid-90s both before and during the program

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