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Fred E. Whittlesey 7 May 2001 Changing Behavior in the Wealth Economy WorldatWork 2001 Annual Conference and Exhibition.

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Presentation on theme: "Fred E. Whittlesey 7 May 2001 Changing Behavior in the Wealth Economy WorldatWork 2001 Annual Conference and Exhibition."— Presentation transcript:

1 Fred E. Whittlesey 7 May 2001 Changing Behavior in the Wealth Economy WorldatWork 2001 Annual Conference and Exhibition

2 About the Speaker Fred Whittlesey is the Director, Compensation/HR Technology for Broadcom Corporation and the former founding Principal of Compensation and Performance Management, Inc. (CPM), a management consulting firm based in Newport Beach, CA. CPM helps organizations allocate financial capital to human capital. Fred specializes in improving organization performance through the evaluation, design, and implementation of performance-based compensation programs and the underlying performance management processes. His 16 years of management consulting experience included positions with Towers Perrin and William M. Mercer. Prior to founding CPM, he was director of the Western Region compensation consulting practice at KPMG Peat Marwick. Fred is an instructor for the WorldatWork, UCLA Anderson Graduate School of Management, and UCLA Extension on financial aspects of managing people in organizations. His recent articles include "Changing Employee Behavior in a Changing Workplace" appearing in Compensation and Benefits Management and "Designing Shorter-Tem Cash Incentive Compensation Plans" published in the book Incentive Compensation in Employee Ownership Companies by the National Center for Employee Ownership. Fred received his MBA from UCLA with concentrations in human resource management and marketing. He graduated Phi Beta Kappa and Magna Cum Laude from San Diego State University with a BA in industrial/organizational psychology. He also earned the Certified Equity Professional (CEP) designation from the Santa Clara University Leavey School of Business Administration.

3 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

4 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

5 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

6 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

7 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

8 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

9 The Four Elements of Remuneration Cash Securities Goods and Services Time and Place 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 Grant Option Purchase Common Second class Preferred Convertible Paid time off Work schedule Work location Unpaid time off Location rules Location value

10 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

11 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

12 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

13 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

14 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

15 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

16 Broadcom’s Employee Stock Option Position 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.

17 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

18 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

19 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

20 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

21 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

22 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

23 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

24 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

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