Transcript Changing Behavior in the Wealth Economy

Changing Behavior in the
Wealth Economy
WorldatWork
2001 Annual Conference and Exhibition
Fred E. Whittlesey
7 May 2001
Presentation Overview

What is the “Wealth Economy” (and is there one?)

Characteristics of the Wealth Economy

Human Capital Management Challenges of the Wealth Economy

Human Capital Management Alternatives for the Wealth Economy

The Wealth Economy at Broadcom Corporation

Solutions for the Wealth Economy
What is the Wealth Economy?
Macroeconomically:

Record levels of equity prices and multiples

Record levels of equity holdings by investors and employees

Record levels of liquid assets

Record levels of real estate prices
Resulting in:

Lower savings rates

Higher consumption rates

Reliance on capital asset appreciation
What is the Wealth Economy?
Managerially, an economic climate created by:

Decades of wealth creation in the technology sector and the economy overall

Easy money from the bull market

Market factors overriding internal pay strategies

Realization of the need for self-funded capital accumulation

Growing use of equity-based compensation as a compensation vehicle

Workforce with fundamentally different financial needs and expectations
Characteristics of the Wealth Economy

Prevalence of and media attention to “millionaires” creating higher standards
and expectations

Trend toward individual decision making vs. corporate and government
administration

Political initiatives that seek to change traditional approaches to capital
formation: Social Security funds invested in the stock market
The Internal Wealth Economy of a Corporation
The challenges of:

Voluntary workers

Vastly changed ideas about financial independence thresholds

Multi-class society
Depending on original and ongoing staffing strategies, the advantages of:

Population with a blurred line between work and play – life always organized
around the workplace

Workers with diverse interests and corresponding alternative work roles

Candidates attracted by the success stories
Human Capital Management Challenges
For the Haves:
 Retention – vs. retirement, competitor, new industry
 Commitment – vs. changing to a lower-sacrifice lifestyle
 Balancing the small-company memories with larger-company business needs
For the Have-Nots:
 Heightened expectations based on early joiners’ risk-reward outcome
 Consequences of extreme risk-taking to catch-up to the Haves
 Highly visible reference points underscore “timing is everything”
 Retention – vs. a faster get-rich opportunity
The Four Elements of Remuneration
Cash
Goods and Services
Wage and salary
Short-term incentive programs
Long-term incentive programs
Liquidation of other forms of pay
Deferred cash (savings/retirement)
Expense reimbursement
Health and welfare benefits
Work tools
Leisure items
Education and training
Social activities
Securities
Time and Place
Grant
Option
Purchase
Common
Second class
Preferred
Convertible
Paid time off
Work schedule
Work location
Unpaid time off
Location rules
Location value
The Impact on Remuneration Systems
For the Haves:
 Traditional financial programs are meaningless
Base salary unnoticed
Business expense reimbursement unimportant
Most benefit plans inconsequential and too rigid
Company car policy insulting
 Equity compensation still important but scale is unaffordable through
traditional plans
 “Fourth quadrant” now primary area of interest
Time
Place
Choice
 Interesting work, etc. assumed as a given
The Impact on Remuneration Systems
For Have-Nots:
 Traditional programs needed as short-term bridge
Base salary provides cash flow
Business expense reimbursement needed
Benefit plans’ value seen in terms of cash conservation
Company car policy a temporary form of assistance
 Special deals requested due to “ratchet effect”
 Equity compensation is critical and the primary focus
Upside opportunity expected
Guarantees increasingly expected if “things go wrong”
 “Fourth quadrant” is for future dreaming
 Interesting work, etc. assumed as a given
Broadcom: Company Characteristics
Ultra high-growth resulting from multiple high-growth market segments
Growth from 1,100 to 2,800 employees in 9 months
Aggressive M&A strategy supplementing internal development
40% of employees from 18 acquisitions closed in 24 months
Focus on Execution, Execution, Execution
Flat organization structure
Decentralized business units
Minimal corporate policy/structure
Broadcom’s Approach to Remuneration
Total Compensation Philosophy
Focus on total compensation value
Emphasis on long-term stock-based compensation
Over time, substantial wealth transfer to employees
Emphasis on financial returns over non-financial benefits
Total Compensation Strategy
Conservative cash compensation
Top-of-the-market benefit program
Top-of-the-market stock equity programs
Broadcom’s Approach to Total Compensation
Cash Compensation Strategy
Conservative base salary at hire
No cash bonuses
Salary increases governed by total compensation perspective
Internal equity emphasized over market competitiveness
Stock Compensation Strategy
Largest transfer of wealth to employees in world history
Strong retention focus
Ongoing review of absolute and relative stock position
Aggressive program to address underwater options
Broadcom’s Approach to Total Compensation
Cash Compensation – a temporary bridge in cashflow, not a reward system
No job descriptions, salary grades, ranges, or structures
No reference to survey data
No assumption of annual salary increases
Salary increase elimination being considered based on absolute and relative
total compensation levels
Base salary reduction/ elimination being considered based on similar criteria
Equity Compensation – the source of reward
Stock options only
99th percentile grant amounts
Creative design of vesting periods to accomplish compensation objectives
Broadcom’s Employee Stock Option Position
35%
30%
25%
20%
15%
10%
5%
0%
B
R
C
M
A
M
C
C
P
M
C
S
V
T
S
S
M
R
V
L
I
N
T
C
C
O
M
S
C
S
C
O
J
N
P
R
Q
C
O
M
Note: Calculated based on granted stock options as a % of shares outstanding shares taken from
most recent 10K’s, and shares outstanding per FirstCall 4/11/01.
Have we Changed Behavior? Created Wealth?
Staffing
 Focus on hiring top 10% of talent pool
 Less than 0.5% turnover per year since Company inception
 Over 90% of candidates from employee referral (no referral bonus program)
 Over 90% offer acceptance rate (on top of a low-offer-to-candidate ratio)
Compensation [@ 12-month stock price high ($274)]
 Over time, 99% of total compensation from stock option gains
 Highest proportion of employee millionaires in history
 Average unvested option gains of $10 million per employee
And Now…?
Compensation [@ 24-month stock price low ($20)]
 All but a few newly-hired employees have some underwater options
 Substantial proportion of employees have only underwater options
 Still have hundreds of millionaires, based only on outstanding options
 Dual-class society of millionaires and underwater-only employees
Compensation Philosophy and Strategy
 No change in philosophy: low cash, high equity
 Solutions biased toward those with long-term confidence
 Equity-based solutions to equity-based issues
 Cash-based solutions require “investing” in BRCM
Broadcom’s Wealth Creation Response
Stock Option Exchange and Supplemental Option Program
 Program allowing maximum employee choice for addressing underwater
option positions, with two alternatives
 Six-plus-one cancel/regrant program with 100% replacement
 Supplemental option grant with grant size based on original grant
price
 Complete vesting preservation and credit regardless of combination of
choices
Broadcom’s Wealth Creation Response
Complementary Strategies and Programs
 Material headcount reduction due to economic slowdown
 No change in cash compensation philosophy and delivery
 Employee loan program established through partnership with financial
institution
 Increased flexibility in choice of cash/stock mix for new hires
 Exploring cash/equity exchange program for current employees
Why the Strategy Works at Broadcom
Strong Culture Driven by CEO – a company of owners








Exceptionally high expectations
No excuses (including laws of physics or need for sleep)
24/7 availability and instant response
Individual ownership of tasks and results (“Who owns this?”)
Open communication regarding sacrifices and payoffs
Aggressive but civil focus on results
No politics
No resource constraints but rigorous scrutiny to expenditures
Daily vigilance to compensation philosophy and strategy
 Intensive work with hiring managers
 Extensive work educating candidates on philosophy and potential
 Proactive coaching with acquired companies
Conclusions: Changing Behavior
Providing a wealth accumulation opportunity will be the core challenge in
attracting talent
 “Competitive” salary, benefits, “work experience” will be the ante for
consideration
Key challenge for successful companies will be ensuring the commitment and
retention of employees who have met their initial wealth accumulation target
 Traditional compensation delivery approaches will be irrelevant
Behavior change efforts must be linked to wealth creation programs – most
current approaches to “rewards” accomplish neither of these
 Rethinking the entire financial and structural basis of the work
relationship is required
Solutions to Managing in the Wealth Economy
 Hire those who want to change the world, not become millionaires
 Redefine the “organization” and peoples’ potential roles in it
Employee
Consultant
Advisor
Service Provider of Supporting Business
 Redefine the potential financial relationships with workers
Employer/compensator
Business partner
Lender
Co-Investor
Venture Capitalist
 Recognize the coming free-agent economy and transition from compensation
structures to deal-making
Solutions to Managing in the Wealth Economy
 Maintain a consistent position on wealth creation and implicit compensation
strategy
 Expand the temporal perimeters of the organization – contrary to “work hours”
 Expand the physical perimeters of the organization – contrary to “the
workplace”
 Expand the business perimeters of the organization – contrary to outsourcing
 Expand the workers’ opportunities on the balance sheet – assets, liabilities,
equity
 Expand the workers’ opportunities on the income statement – revenue, income,
cash flow