How do you motivate executives and reward their performance when factors beyond their control regularly sway your company's fortunes?
Maria Del Busto, global chief human resource officer, RCL
Just ask Royal Caribbean Cruises Ltd. (RCL), the world's second-largest cruise company. In an industry keenly affected by nearly every major event, RCL's innovative performance-based pay programs keep executives focused on company goals and engaged in their work, no matter what challenges are thrown their way.
"Even when our executives do everything right, events they can't influence affect our business significantly," said Maria Del Busto, RCL's global chief human resource officer. "The 9/11 attacks, volcanic eruptions in Iceland, the tsunami in Japan, and global and regional economic crises are just a few examples. To keep our executives motivated, our pay program must reward them for meeting crucial company objectives, while carefully accounting for the external challenges."
Partnering With Towers Watson
RCL leaders asked Towers Watson to help them improve the company's performance-based pay programs to meet that objective. "Having worked with Towers Watson for more than 15 years, we knew they could help us step back and take a holistic look at our long- and short-term incentive programs," said Guillermo Villa, RCL's vice president for global total rewards. "Though both programs had evolved considerably over the years, they had lost value both literally and figuratively. We needed help to analyze the programs, compare them to those of others in our industry, recommend new plan designs, and get buy-in from our board and our executives themselves."
Assessing the Plans
To clearly understand RCL's pay program and the obstacles it posed, Towers Watson consultants met individually with more than 20 executives. "Because Towers Watson was a neutral participant in the process, our people didn't hesitate to be completely honest about what they valued and how well they understood what they had been receiving. This built a foundation for a serious discussion about how we define meaningful performance at RCL. Just as important, the meetings built goodwill. Everyone greatly appreciated having the chance to be heard, and that helped us win the executives' support later when we launched the new program," Villa said.
External Market Analysis
The Towers Watson team next studied the performance-based pay programs of other companies in the leisure and tourism industries, asking the following questions:
- Annual bonuses. Which performance metric does the company use — operating income, earnings before interest and taxes, returns or something else?
- Performance areas. Are measures of both corporate and business unit performance used to calculate rewards? How are organization, brand, division and personal performance weighted in reward calculations?
- LTI vehicles. Do stock options or performance shares anchor the LTI program? What percentage of LTI awards is performance-based?
- Measurement period. Are LTI awards based on performance over a period of one year, three years or something different? Is vesting required?
Performance Shares Reinforce Corporate Objectives
Guillermo Villa, vice president, global total rewards, RCL, and senior Towers Watson consultant Dana Furrow
The answers helped the team reshape RCL's LTI program. "We recommended that RCL replace stock options with performance shares: full-value shares awarded to executives when they meet specific goals within a set time period," explains senior Towers Watson consultant Dana Furrow. "Leaders determine the maximum number of shares an executive can receive by dividing the desired equity value of the reward by RCL's stock price on the date of the grant."
At the same time, the company sets a performance target: a specific return on invested capital (ROIC) or a level of earnings per share (EPS). If RCL's performance meets the ROIC target, the executive receives the target award of a specific number of shares. If it exceeds the target, additional shares are awarded, and if it falls below the target, the number of shares awarded decreases.
The measurement period for calculating share awards is one year. The shares are delivered three years after the initial grant date. Their value is the number of shares awarded multiplied by the stock price at the time of delivery.
Short-Term Incentive Plan
The team also reconfigured RCL's short-term incentive plan. Under the new plan, an employee's bonus target is based on her job level and the scope of her responsibilities, as well as marketplace factors. To determine an individual's award amount, leaders look at EPS, specific company and brand key performance indicators (KPIs), and the employee's performance.
KPIs Assess and Foster Performance
The six KPIs are crucial to the bonus plan's effectiveness. The indicators paint a picture of RCL's priorities as they track performance across the company and its individual brands. In addition to quantitative metrics, including net revenue yield and net cruise costs, the company uses qualitative KPIs, including safety, guest satisfaction and employee engagement.
To keep the metrics easy for employees to understand, RCL illustrates each KPI using a traffic-light model: Silver indicates threshold performance; red indicates performance below the threshold, and green indicates above-threshold performance.
Furrow and Villa with senior Towers Watson consultant Todd Manas (right)
After RCL's initial explanation of the new plans to executives, the Towers Watson team re-interviewed 16 of those who had shared their thoughts at the outset. "The feedback was terrific," Todd Manas, a senior consultant at Towers Watson, said. "They saw the new plans as more valuable and transparent than the old. More importantly, they not only had a better understanding of RCL's performance goals, but could clearly explain them to employees in their divisions."
Del Busto and Villa are thrilled with the results of their work with Towers Watson. "Now our executives clearly see the direct connections between their performance and their rewards, even when world events rattle our stock price. We're ready for whatever the world sends our way."