Too often, by the time business leaders discover their compensation offering is inadequate it’s too late. They lose a key player to another organization that has offered her a “better deal” or fail to secure a top recruit because their value proposition just isn’t compelling. In short, a pay strategy cannot be an afterthought. It has to be approached strategically and comprehensively or it will fail in its ability to attract, develop and retain premier talent.

The word that could be used to describe the compensation approach of most companies VisionLink encounters is—“incomplete.” If they are successful businesses, they have inevitably done some good things, but they just haven’t gone far enough in their pay offering. For example, they may have a well thought out salary structure, a robust benefit package and a solid annual incentive plan but they have no means of sharing long-term value with those who create it. Or maybe they do have a program that rewards sustained performance but the company’s 401(k) plan doesn’t allow highly compensated people to defer as much income as they would like. As a result, they are getting hit hard by taxes and it is diluting the wealth building ability of those employees.

So how does one approach the construction of a compensation strategy that is both complete and competitive? Where do you start and what does a “complete” value proposition look like? That is what this guide intends to answer.

Pay Strategy

Clayton Christensen is widely considered one of the world’s prominent thought leaders on the subject of innovation.  His observations on creative disruption have changed the way businesses evaluate their competition and shown how companies can remain not only relevant but ahead of the transformation curve.

Christensen’s latest writings focus on a concept called the “theory of jobs to be done” in which he posits: “When we buy a product, we essentially ‘hire’ something to get a job done. If it does the job well, when we are confronted with the same job, we hire that same product again. And if the product does a crummy job, we ‘fire’ it and look around for something else we might hire to solve the problem.”  (Clayton Christensen: The Theory of Jobs To Be Done, Harvard Business School, Working Knowledge, Dina Gerdeman, October 3, 2016)

Christensen’s premise doesn’t just apply to the products we deliver to the marketplace.  It applies to all of the systems and strategies we employ in our business including those related to compensation.  His question is a good place to start when developing a comprehensive pay strategy that can serve the needs of both shareholders and employees in creating a unified financial vision for growing the business.

Think about it.  What if all CEOs carefully answered these questions as they considered their approach to compensation: What job are you hiring your rewards strategy to do?  What is it intended to achieve?  What problem is it intended to solve?  And how will you know if it is performing its job? 

How to Begin Answering the Question

To determine what job you are hiring your pay strategy to do, you must start by addressing why you pay your people at all.  Too often, business leaders look at compensation as an issue they just have to “deal with” and don’t give it much strategic thought.  Perhaps they institute an annual incentive plan because they think they need one to be competitive, but then end up resenting the plan because employees view it as entitlement.  So, they “fire” their bonus plan and “hire” another one in an attempt to change behavior or otherwise rewire the way their employees think.  In reality, employing an incentive plan to make sure you’re offering a competitive pay package could be a legitimate reason to “hire” (institute) a bonus arrangement—if, in fact, that’s the job you need done.  But you have to know that going in before you can evaluate whether or not it’s fulfilling its role.

A more strategic approach to pay would be to adopt the same mindset you bring to building a go-to-market strategy for the products you develop.  Presumably, when you build a new offering for your customer base, you think in terms of the issues it is going to solve for them.  You are careful to consider the audience to which you are appealing and then determine what they will be able to do easier, faster, cheaper or better as a result of your product.  If you get it right, the market responds.  When you don’t, your sales reveal that you missed the mark.

Approaching compensation design is really no different.  What is the problem compensation needs to help solve in your business?  What is not happening organizationally now that needs to happen and how might a given pay strategy be a potential solution?  And who is the audience to whom the value proposition needs to appeal if the outcomes you’re looking for are going to be fulfilled?  Here are some of the core drivers and results that might be considered in defining the “job” you want compensation to do for you. 

Christensen makes the point that until consumers find a product that does the job they need it to, they will come up with “work arounds” to get done what they need to get done.  Similarly, business leaders are constantly coming up with “work arounds” for their pay strategies because there is no core philosophy driving the construction of pay and no cohesive structure in which to manage, evaluate and adjust their approach.  (A pay philosophy and total compensation structure are discussed in more detail later.)

Solving the Right Problem

Effective problem solving is something with which every organization wrestles.  And few are very good at consistently solving the right problem.  Consequently, businesses devote time and resources to issues that aren’t central to maintaining or improving a company’s growth trajectory. Inefficiencies emerge and waste is the result.  Waste is an unrecoverable, real cost to an enterprise.

Similarly, businesses often put pay plans in place that are designed to address a particular issue without clearly identifying the problem those strategies are intended to resolve.  Consequently, they end up encouraging behaviors or outcomes that not only don’t address the key barriers the company is facing (the job they need their pay strategy to do), they create new problems in their place. Here are just a few examples:

  • In an attempt to overcome a lack of stewardship for key initiatives (original problem), a company institutes an annual bonus plan.It later discovers that an entitlement mindset has emerged and the company has put itself in the position of paying out incentive income even during unprofitable periods (two new problems).
  • The owner of an enterprise wants to overcome a short-term focus (original problem) and grow her business value in anticipation of a sale. She institutes a phantom stock plan that pays out a benefit only upon the sale of the company–which she anticipates happening in 5-7 years.  At the five year mark, she gets a second wind and decides not to sell the business. Employees are left wondering when they will be paid for the value they helped create (new problem). What was intended as a positive, uniting incentive becomes a morale breaker (additional problem).

Certainly, many more examples of this phenomenon could be given. Hopefully, these adequately illustrate what happens when insufficient attention is paid to addressing the right problem with a compensation solution.  In each of these examples, a valid problem had been identified; however the analysis of a potential remedy was incomplete. As a result, these companies not only didn’t fully solve the original problem, they created additional (often worse) issues in its place.  There is nothing less effective than adding growth barriers to a business when your intent is to remove them.

This tendency doesn’t stem solely from an inability to clearly identify the problem business leaders are trying to solve. Rather, the issue is they often just don’t go far enough in considering all the implications of a given compensation strategy.  They may be focused on the right problem but the solution they intend to implement will create barriers they haven’t yet considered.  Business leaders need to be able to envision this at the outset, not just recognize it in hindsight.

What this phenomenon leads to is an excess of unintended consequences that become a drag on the organization.  Instead, pay should reinforce strategic outcomes that leverage the company’s ability to achieve greater performance. If companies focus properly on the “right” problem, and all of the implications of a considered rewards plan, strategic byproducts will emerge and magnify the results a company achieves.  Here is an example of solving a problem in a way that creates this positive effect while avoiding unintended (harmful) outcomes.

XYZ Company is in growth mode and needs to attract certain people to fill key positions. The problem is it doesn’t want to lock in high salaries. However, it is in a highly competitive market for talent. The best people have several career options within the industry if they are good at what they do.  

As a solution, the company decides to peg salaries between the 45th and 50th percentile of “market pay” but provide significant upside potential through value-sharing.  The latter will provide unlimited “earnable” income that will be divided between short and long-term value-sharing plans.  Fifty percent of the incentive will be earned as an annual bonus and the other 50% will be applied to phantom shares based on a formula value.

The phantom shares fully vest over 60 months and start paying out benefits in the seventh year. Thresholds and metrics of company, department and individual performance are set to define benefits under each plan (earnable shares and bonus ranges) by employee tiers. The thresholds and metrics ensure that benefits are only paid when “sufficient” value has been created (see discussion of productivity profit later on in this guide).  

An Employee Value Statement is instituted to illustrate the total value proposition for each key producer over the next ten years if a targeted level of performance is achieved.  Through the Value Statement, employees can see that their financial partnership with the company is not limited to a $175,000 salary plus bonus.  Instead, they are participating in a $2.5 million dollar opportunity over 10 years (or whatever values and time period apply to that company’s value proposition).  And the company’s pay philosophy explains why their pay package is constructed that way and how the organization defines value creation; which is the foundation of the value sharing in which the employees participate.

Let’s think about how this approach solved the problem at hand while creating “strategic byproducts” instead of harmful “unintended consequences.”  The company created a pay strategy that offered potential recruits significant upside earnings potential while simultaneously limiting the owner’s guaranteed compensation exposure (solution).  In doing so, it clearly framed the financial partnership the owners wish to have with their key people (strategic byproduct). The business differentiated itself in a competitive talent market without over-committing on salary levels (strategic byproduct).  

Additional strategic byproducts of this approach include an increase in the ownership mindset on the part of key producers and the creation of a more unified financial vision for growing the business. Further, the organization is able to construct a pay approach that significantly drives value for shareholders while still creating rich payouts for employees due to the “self-financing” approach to value-sharing that is adopted (see section on Pay ROI further on).  Benefits are only paid out of productivity profit—a threshold of
value creation defined in the company’s compensation philosophy statement.
 This approach created a “wealth multiplier” effect because all stakeholder rewards were tied to unified, business growth components.

When you consider all of the things a pay strategy can help you achieve as just described, thinking about the job you’ve hired it to perform becomes a very logical and essential first step in the development of your rewards approach. Christensen’s concept can transform the way you think about compensation and lead to pay solutions that effectively address the problems you need to solve and leverage the opportunities on which you wish to capitalize.

Establish a Pay Philosophy

Once you have a general sense for the job you are hiring compensation to do you are prepared to formulate your philosophy about pay.  Too many businesses don’t take the time to do this.  As a result, their employees don’t understand what drives compensation decisions or the rationale behind their pay package.  And business leaders end up trying one rewards program after another in search of a strategy that “works.”

An article that appeared in Entrepreneur Magazine’s online edition made the following observation about this issue:

Only 20 percent of people say they understand how their employer determines pay, according to compensation research firm Payscale.  But that doesn't have to be the case, and it shouldn't be. "Ten years ago, employers held all the cards.  Now, employees can be much better armed with data," said Tim Low, PayScale's senior vice president of marketing.  With sites such as PayScale and Salary.com, employees have a greater ability to research what their work is worth and a better opportunity to ensure they're being paid fairly.

At VisionLink, in our work with CEOs across the country we hear countless stories about employees making the case for a certain level or type of pay (bonus, stock, etc.) based on the data they found on the internet.  Unfortunately, too many CEOs have a reactive response when approached by employees about pay issues.  As a result, they often end up making matters worse instead of better with their knee jerk remedies and band aid solutionsFrequently, the business leader lives to regret his or her action because it either opens the flood gates to further requests or creates an ad hoc approach to addressing something that should have been handled strategically.

What’s just been described happens to organizations that have no core philosophy guiding how they make compensation decisions and what their rewards strategy will be.  A pay philosophy is a written statement that company owners and senior strategy leaders draft to spell out a value system and construct that guides how people will be paid in the company and why.  It should be constructed in a format that can be easily shared and referenced both when leadership makes decisions about specific compensation programs and when it communicates the nature of the organization’s pay system and its components to employees.  It acts as a kind of compensation “constitution” for those charged with envisioning, creating and sustaining the rewards strategy of the company. 

A good compensation philosophy statement will define and articulate the following:

  1. How owners define value creation. This means delineating and communicating the threshold at which owners feel that business performance is attributable to people at work in the business and not just shareholder capital (already) at work. (See discussion about productivity profit later in this report.)

  2. How and with whom owners believe value should be shared.  This addresses what happens with the value that is created through the productivity and performance of individuals and teams in the organization.  Will the company share equity?  If so, under what circumstances?  If not equity, how will value be shared?  And so on.  (See also #5.)

  3. How increased earnings opportunities can be attained.  Organizational leaders need to decide, for example, whether they want higher income potential to be realized by moving up through salary grades or whether value sharing will be the primary means of increasing one’s compensation.  This means that, philosophically, leadership needs to spell out the extent to which pay levels will be driven primarily by performance factors—be they individual, team/department or company related.

  4. The balance the business wants to maintain between guaranteed and variable compensation.  This a further refinement of #3 that defines how the company will address its pay construct in real life terms and on what basis.  For example, where does the company want to be relative to market pay for salaries?  What about for total compensation?  If it believes it should be at the 80th percentile for salaries, what will this mean for how much emphasis will be placed on value sharing opportunities?  Will the balance between salary and variable pay differ for each pay grade or tier?  (Probably)  And why does the company believe this is the right balance to strike? All of these questions should be addressed in the philosophy statement.
  5. The rewards emphasis the company wants to put on short versus long-term value sharing.  This is really a decision about whether the company will be focused more on immediate or on sustained results.  Business leaders need to determine whether they want employees focused on performance “sprints” (of say 12 months or less) or longer-term outcomes.  Again, will this vary by tier or other employee classification?  If so, what is the right balance at each level?  This is not an “either or” issue but rather one of emphasis. Pay through value sharing is one of the ways the company communicates performance and results priorities. If both short and sustained performance are of equal value, the pay philosophy should articulate that.

  6. How the company will finance its value sharing plans.  This is easily determined if company owners have been clear in their value creation definition as described in #1.  For example, a business might say that value sharing must be “self-financing”—meaning benefits will only be earned when sufficient value has been created—and will be paid solely out of a productivity profit.  A business’s productivity profit is the net operating income that remains after accounting for a capital “charge” (from operating income) to protect the return shareholders expect on their capital contribution. (A more complete discussion of productivity profit is included in the section on compensation ROI further on.)

  7. How the company will address merit versus cost of living increases.  If an organization has clearly defined what value creation means, and is committed to the concept of a productivity profit, the philosophical framework is in place to define what it intends for merit pay.  When the other six factors listed here are addressed properly, cost of living increases will likely only apply to limited positions within the organization.   All increases will be merit-based.  In conjunction with #4, leadership just needs to determine how much weight it will place on guaranteed compensation versus incentives and with the former, what performance criteria will drive the salary increases for which employees can become eligible. 

A philosophy statement may address more or less than those seven issues.  What’s critical is that an organization thinks through what it’s willing to “pay for” and why.  If it has made the effort to get clear in its thinking about the role it wants compensation to play, it can address employee questions and challenges from a position of operational integrity and strength.  When it can communicate a well thought-out philosophy, some employees may still disagree with or not like it, but they can’t claim it’s unfair.  This is because the philosophy statement is merely reflecting the economic values of the organization in support of the company’s vision, business model and strategy.  In a sense, it becomes a kind of screening device for recruiting and retaining talent.   If someone doesn’t relate to the rewards philosophy of the business, there’s a good chance that person is not a good fit for the organization.   After all, the compensation philosophy in essence describes the nature of the financial partnership company leadership wants to have with its employees.  If an employee is looking for a different kind of economic relationship, the pay philosophy will bring that conflict to light. 

The CEO’s Role

One of the core conclusions of this compensation philosophy discussion is that pay requires strategic thinking.  Strategy requires leadership.  As a result, CEOs must assume a governing role in the discussion of a pay philosophy.   An organization’s compensation values emerge from the company’s performance framework—for which the company’s chief executive is responsible.  They must reflect and support shareholders’ growth expectations and enable a performance culture

The CEO is the ultimate steward of the shareholders’ interests and he or she relies upon a productive workforce to make sustained results possible.  That is why the chief executive’s role in building the company’s pay philosophy and strategy is so important.

When a philosophy is defined and enforced, there is inherent accountability built into the way people are compensated—thereby making pay another engine of growth within the business.  In that sense, rewards can become a kind of growth partner to the organization’s business leader.  The accountability that is baked into compensation rooted in a clear philosophy has two dimensions: 1) pay becomes accountable for generating a positive return because it is tied to value creation, and; 2) the way people are compensated ties employees’ financial interests to the outcomes the company needs for breakthrough growth to be achieved.

Too many chief executives want to keep compensation planning at arm’s length and view it as a cost that needs to be contained as much as possible.  Leaders who approach things that way keep themselves from using pay as the strategic tool it is intended to be.  The result is that compensation ends up hindering company performance instead of being a growth driver.  Conversely, the underlying assumption of a rewards philosophy is that pay is a critical investment that has to be properly allocated and measured for its return.  Chief executives who treat it as such find compensation to be a critical factor driving the performance they need

When a CEO engages in the practice of developing a clear compensation philosophy, he or she will find most pay-related decisions become much easier to make.  They essentially make themselves.  In addition, employees will have greater clarity about the vision of the future business, the business model and strategy that will fulfill that vision, the roles they play in that model and strategy and what’s expected of them in those roles, and how they will be rewarded for fulfilling those expectations.  And that kind of
line of sight is the primary source of employee productivity, performance and engagement. (A more complete discussion of line of sight is included later on in this guide.)

Completing Your Pay Strategy

Now that we have decided what job we want compensation to do and have developed a pay philosophy to define the underlying principles that will guide our approach to pay, we are ready to start considering what our rewards strategy should include.  So let’s talk about what it means to have a “complete” compensation plan—one that makes our employee value proposition both compelling and balanced.

One of the “jobs” most companies hire their pay strategy to do is reinforce the performance standards the company needs to maintain for its growth goals to be achieved.  Business leaders have performance standards because they are trying to develop a performance culture.  That environment exists when virtuous cycles of focus, execution and sustained success are reinforced and repeated.  When they are, consistent wins are the result and a culture of confidence emerges; people know the company is going to succeed and they are invested in its victories.  So the question we need to answer for ourselves is this: What approach to pay will reinforce and encourage that kind of cultural mindset and unleash employee commitment and engagement instead of stifling it?

Unfortunately, there is not one magic plan or strategy that ensures a performance culture will take hold in an organization.  However, there is a secret to developing rewards strategies that unleash greater motivation on the part of your workforce.  The secret lies in appealing to what might be referred to as the employee “financial hierarchy of needs” when it comes to constructing a pay approach.  Borrowing from Maslow’s concept, we can examine compensation in the context employees apply as they evaluate whether or not their employer’s value proposition is “motivating.”

Fostering Trust Accelerates Performance

There are five levels to the pay “hierarchy” that your people evaluate in making a determination about the quality of the value proposition you offer them.  While each level serves a different purpose, as a total unit they communicate whether or not your organization demonstrates integrity in the way it operates.  Employees want to see continuity between the company’s vision, its business model and strategy, their roles and what’s expected of them in those roles and how they will be rewarded for achieving those expectations.  If that kind of line of sight doesn’t exist, employee dissonance takes root.  Left unaddressed, the incongruity individuals are experiencing breeds distrust, which is the enemy of engagement and performance. 

In his book The Speed of Trust, author Stephen M. R. Covey asserts that the trust level in an organization affects two things: speed and cost. When trust goes down, speed goes down and costs go up.  Conversely, when trust goes up, speed goes up and costs go down. We could probably also deduce from this that when trust and speed go up, sustained performance also goes up. 

In short, trust has a huge economic impact.  Accelerated results coupled with diminishing costs are the epitome of the performance most business leaders seek.  Simply put, trust means confidence. The opposite of trust, mistrust, is suspicion. Covey makes the point that whether it's high or low, trust is the "hidden variable" in the formula for organizational success. The author explains it this way:

The low trust environment is a result of violating principles--not only individually, but organizationally. Leaders are missing the solution because they are not looking at the systems, structures, processes and policies that affect day-to-day behaviors. They are focused on the symptoms instead of the principles that promote trust.

This misalignment creates symbols that represent and communicate underlying values to everyone in the organization. A symbol can be either negative or positive; from a 500-page employee handbook, to a newly appointed CEO who refuses to accept a pay raise because it might send the wrong message to workers.

In summary, get compensation right and you will see trust increase in your organization.  If you increase trust, you increase speed--and when you increase both, costs go down and sustained results go up.

Employee Financial Hierarchy of Needs

With that framework in mind, let’s examine the five levels within the employee financial hierarchy of needs and how, when they are effectively addressed, employee trust in the organization improves.  This sequence is the secret to building a pay strategy that builds confidence and, therefore, higher performance and engagement. 

  1. Cash Flow and Living Standard.  Employees make decisions about where to live, where their kids can go to school, what kind of vacations they can take, how much they can invest, what kind of car they can afford to buy and a host of other financial decisions based on the compensation they anticipate receiving from their employer.   This is one of the most basic evaluations your employees make.  If they sense their level of skill and experience should allow them to maintain a standard of living above that which your pay offering is allowing them to enjoy, they will likely constantly be on the lookout for a better economic opportunity.  Conversely, when you apply a pay philosophy that articulates an income opportunity (both short and long-term) that is tied to value creation, your employees feel in control of their earning capacity—and therefore are less likely to be thinking the “grass is greener” elsewhere.  When push comes to shove, your people will typically pick a higher standard of living over intrinsic rewards every time. 

    Companies address this need by constructing an effective balance between salary and annual incentive compensation.  Those are the two primary means your people look at to determine the kind of living standard they will have under your compensation offering.  A company’s pay philosophy should articulate what kind of balance it will strike between guaranteed and incentive pay, including annual bonuses.  It can then use pay data to decide where it wants to be relative to the market on both issues.  Some may determine it’s best to be at a mid-range percentile of market pay for salaries but provide high or unlimited upside potential through value-sharing.  Others may feel a better strategy is to be at the high end of the market for salaries and provide modest incentives.  It’s all dependent upon the outcomes a given company wants to achieve and who it needs to attract to produce those outcomes.
  1. Risk ProtectionEmployees evaluate their financial vulnerability differently depending on where they are in their careers and in their family life.  For example, a millennial employee who is single and in her first or second career position is not likely heavily focused on the quality of her employer’s health plan and the amount of life insurance her beneficiaries will receive if she dies.  Conversely, a highly paid and high-performing executive with a family might insist on flexibility in how his benefit dollars are allocated.  He may want to have access to a range of health plan options, a group legal benefit or disability income insurance that replaces his earnings if he is no longer able to work. He wants to have control over how to manage the financial risks to which he is vulnerable at this stage of his career.

    Where companies run into trouble and lose the confidence of their workforce is when they take a “one size fits all” approach to constructing benefits.  At a minimum, organizations should consider having an executive benefit arrangement that supplements its general plans so the needs of both key contributors and entry level employees are properly addressed.  This again breeds confidence and trust in company leadership because it reflects an awareness of who their people are and where those employees place this need in their financial hierarchy.
  1. Retirement Planning.  Most employees look to the company for whom they work as the channel through which they can accumulate funds for retirement.  However, as with the benefits category, this area needs to reflect the distinct needs employees have depending on their career and life circumstance.

    The most common deficit that exists in this regard is in providing for highly compensated employees.  Qualified retirement programs such as 401(k) create a kind of reverse discrimination for high income earners.  The amount of contribution they can make to a qualified plan is dictated by what non-highly compensated people contribute.  As a result, they are not able to accumulate as high a retirement value relative to their incomes as people with more modest incomes.  In addition, employees with high incomes look to their retirement plans as a means of sheltering income from current taxation.  This becomes almost as important to them as the amount they can accumulate towards retirement.

    Smart companies solve this issue by offering their executive and other management level employees some kind of supplemental 401(k) or deferred compensation plan.  Often, they will include a match that is tied to performance so key people are incented to drive better results—knowing that the increased value they are creating is going to inure to their long-term financial benefit.
  1. Long-Term Value Sharing. Of paramount importance to “catalysts”and other top performers in your organization is participation in the value they help create.  Those of superior talent are attracted to the value sharing concept because they want and expect to participate financially in the growth they help create.  Here we are talking about those possessed of abilities that can dramatically change the growth of the business.  Catalysts represent the kind of talent most businesses should be trying to attract.  There is competition for these people because there is such a shortage of highly-skilled individuals in today’s talent marketplace.  And businesses are not just competing against other companies for them. Most catalysts will start their own businesses if the opportunity with a given organization doesn’t mirror the entrepreneurial experience they’re looking for—including and especially financially.

    In an interview with TV talk show host Charlie Rose not long before Facebook went public, Mark Zuckerberg said this:

    I actually think the biggest thing for us is that a big part of being a technology company is getting the best engineers and designers and talented people around the world.  And one of the ways that you can do that is you compensate people with equity or options.  Right?

    So you get people who want to join the company both for the mission because they believe that Facebook is doing this awesome thing and they want to be a part of connecting everyone in the world.  But also if the company does well then they get financially rewarded and can be set.

    ... we've made this implicit promise to our investors and to our employees that by compensating them with equity and by giving them equity that at some point we`re going to make that equity worth something publicly and liquidly -- in a liquid way.  Now, the promise isn't that we`re going to do it on any kind of short-term time horizon. The promise is that we`re going to build this company so that it`s great over the long term.  And that we`re always making these decisions for the long term. (From a transcript of an interview on Charlie Rose, PBS, on November 12, 2011; emphasis added.)

    The point Zuckerberg was making had little to do with whether or not a company should share equity or go public.  There is a larger principle he is defining.  When companies can attract and retain the kind of people that think and perform as he describes, they are in a unique position to sustain results.  This is because a distinct and lasting interdependency emerges between the employees’ skills and the company’s resources that extend those skills (capital, co-workers, suppliers, products, technology, etc.).  Talented contributors soon learn that their skills are not as unique and applicable outside the company as they are within the enterprise. That’s a mindset a company should want its talent to have because of the mutual dependency it creates.  Long-term value sharing reinforces that sense of shared dependence and therefore leads to higher performance.
  1. Wealth Accumulation. In an employee’s mind, all of the above translates to the total wealth accumulation opportunity your value proposition represents to them.  Each person has a different contribution ambition in mind for their future which will require a certain wealth standard to achieve. As a result, your key people in particular take a composite view of the pay programs you offer and evaluate whether they will provide them the accumulation opportunity they’re looking for.  If your value proposition doesn’t, they will search for an organization that will provide it.  On the other hand, when your offering is consistent with their personal growth ambitions, they feel motivated to realize the full benefit of what their compensation provides.  It’s not that any specific program is a motivator for them, per se.  It is the comprehensive yet personal impact of their value proposition that makes achievement of the company’s financial goals more relevant to them; thus driving them to higher levels of performance.

    This secret to building pay strategies that motivate employees to perform on a higher level requires a different mindset about compensation than most company leaders are used to adopting.  No longer can organizations deal with their pay plans as necessary “evils” they have to just “deal with.”  Business leaders must embrace pay as engine of performance which, when constructed properly, can help a culture of confidence to take root and success be sustained.

The Four Parts of a Complete Pay Strategy

Once we have an understanding of the employee financial hierarchy of needs, we can turn our attention to how those areas of focus translate to a compensation approach a company should adopt if it intends to address those expectations.  A pay strategy is complete when it includes four critical parts.  Each of these elements assumes the company has already thought through its compensation philosophy and will develop specific plans within each of these categories that reflect the principles to which its leadership has committed in that written document. 

  1. A Value-Centered Salary Structure. Companies normally tie their salary levels to market pay in one form or another. At VisionLink, we are certainly proponents of looking at market data in making those evaluations and many of our clients engage us to help them with that analysis.  However, companies run into trouble if they rely too completely on those surveys to build their salary structure.  Heavy emphasis must also be placed on evaluating data in the context of the organization’s value creation standards and performing an “internal equity” analysis.  This means that salaries tied to roles and stewardships which have a direct impact on company or even department performance are defined and adjusted based on the value employees create—or at least should be able to impact.  Internal equity means that the company acknowledges certain positions should be measured for their value creation impact and opportunity relative to other positions and not solely based on what market data says that role is worth.

    With that understanding in mind, an organization must then decide what salary construct it is going to use.  In a traditional approach, positions are organized within a variety of salary ranges, each with a minimum, midpoint, and maximum.  Rewards eligibility and targets are determined by those levels.  In a broadband structure, positions are categorized within a few wider ranges to allow for maximum discretion in pay decisions. Rewards eligibility is flexibly determined by band.  A hybrid salary structure allows for broad elasticity inside a progressive pay hierarchy by blending the traditional and broadband approaches.

    There isn’t a right or wrong approach to creating salary bands.  What’s important is that employees know what the salary hierarchy is and how one moves through it.  In addition, they want to understand the company’s philosophy about fixed pay.  For example, one company may decide it wants to be at the 45th percentile of market pay for its executive level employees while another will target the 80th to 90th percentile.  In either case, the philosophy needs to articulate the company’s position on salaries as it relates to the value creation and internal equity elements just discussed (whether the company’s philosophy is high salaries with lower value sharing or vice versa).

    All of this points to the need for companies to have a system for gathering and evaluating market pay data.  Because data is imperfect, it is recommended that three to four surveys be obtained and then averaged to determine a justifiable market level for each category of positions. Again, the organization’s philosophy statement will (or should) address what roles may fall outside the dictates of the data and where it wants to be relative to market pay for others. 
  1. Balanced Value Sharing (Short and Long-Term Incentive Plans). This has to do with using pay to reinforce the importance of maintaining the revenue engine of the company while simultaneously focusing on growth—and doing so in a way that helps employees achieve their wealth-building goals while still protecting shareholder growth interests and ambitions.  If your compensation strategy rewards only one or the other (short or long-term performance), employees will likely have only half the focus you want them to have.  The value sharing approach you adopt needs to emphasize both priorities and help the company sustain a kind of performance equilibrium.  This allows incentive plan participants to realize significant earnings potential by being completely aligned with the growth goals of the company in their performance.

    Although there is no silver bullet for how to strike the exact right balance between short and long-term rewards in every organization, here are some general guidelines to keep in mind.
  1. Short-term value sharing should reward the successful maintenance of the company's revenue engine.You want a reward system that reinforces the execution of the business model but with an eye on the leverage points that impact the growth trajectory of the business. This will require you to define clear roles, outcomes and expectations.  Since the business model defines how the company generates revenue, if some component of pay is not tied to it you can’t expect it to be an area of focus for your people.

    High performers feel empowered by this approach.  It affords them a level of control over their annual earnings contingent on their ability to impact value creation.  They see this component of pay as a means to maintaining the living standard they feel they’ve “earned” at this stage of their careers while also building wealth.  And by tying value sharing to roles, outcomes and expectations, the company is able to provide superior income opportunities without putting shareholders at risk.   This is because the value sharing approach promotes accountability; you share only in the value you create.

  1. Long-term value-sharing should reward sustained, "good" profits.When the first guideline (just discussed) is followed, profitability should—at least in theory—occur regularly. However, you shouldn’t be interested in just any kind of profits; you want good profits.  Good profits are those that build lasting value. "Bad" profits, on the other hand, come with an offsetting long-term cost—diminished customer or supplier relationships, lowered cultural morale, impaired growth leverage, and so on.  The right combination of short and long-term value sharing creates operational integrity and accountability in your pay strategy.  The dual focus encourages participants to pay attention to what needs to get done “this year” without sacrificing the long view—because both their immediate and long-term economic well-being is tied to both performance periods.

    Each organization needs to determine which long-term value sharing approach is best for its company.  Sometimes offering stock is inevitable, but there are a range of options available that don’t involve giving equity away. Most organizations need outside help in determining both the right balance between short and long-term incentive plans and what kind of plan will best accommodate the results they are trying to achieve.  

    However, regardless of the specific plan chosen, a competitive pay strategy must include a means for top producers to participate in the growth they help drive.  This makes them feel like a true partner in the company’s success and allows them to have an element of their earnings opportunity that mirrors that of owners.  That creates a unified financial vision for business growth.
  1. A Flexible and Comprehensive Benefits Package. Premier talent is looking for ways to maximize its wealth building opportunities.  As a result, when it comes to benefits, high performers want options.  As indicated earlier, some may be married, have children and are concerned about superior medical protection.  Others may be single and would prefer to have “adequate” coverage for health risks but want to make sure their income will be replaced in the event of a disability.  You may have employees who will embrace vision care while others would prefer to use those dollars for a legal benefit or to increase the funding of their health savings account.

    The message here is that you shouldn’t assume a “one size fits all” approach to benefits is going to work when you’re competing for talent You must understand the profile of the people you want to attract and retain and then think in terms of the range of needs and desires different groups will have when it comes to this rewards element.  Flexibility but with limits is a good philosophy to assume in today’s environment.  You can’t be everything to everyone, but you can provide a range of benefits that makes your people feel like they have choices.
  1. Executive Benefits. You make a mistake if you assume you can treat key producers like everyone else in the organization.  Again, in a competitive talent environment, the best people have options.  Others will offer them a car allowance, flextime, sabbaticals, education funding or other perks.  As with the flexible benefits approach addressed above, you will need to determine what combination of offerings the people you are trying to attract will find most valuable.

    Security benefits are an inexpensive but meaningful way to address the needs of the primary growth contributors in your organization.  Cash value life insurance plans, supplemental disability replacement coverages and even long-term care insurance (for those over 50) can round out your offering in a way that makes participants feel like you understand the financial vulnerabilities they face.  This can be an important differentiator when competing for premier talent.

    One of the most critical executive benefit areas for attracting and retaining highly compensated people is some form of 401(k) mirror or deferred compensation plan.  These programs serve two purposes.  First, they allow key contributors to build a retirement account that will replace a higher percentage of their earnings than a qualified retirement plan is able to.  Second, it offers participants a means of deferring income to a future date so they can save current income taxes.  The limitations on contributions to 401(k) plans make it difficult for high income individual to experience any meaningful tax relief through that kind of channel.  And this is an important issue for high income earners.

More could be said about each of the four elements of a “complete” compensation strategy.  Your organization should explore what additional plans or approaches would best bolster each particular area within your offering.  Regardless of what should be added or subtracted to meet the demands of your circumstance, hopefully the framework just covered gives you a sense for what it will take to build a value proposition that allows you to compete in the talent wars that are raging.   The competition is only going to increase.

Build and Maintain a Total Compensation Structure (TCS)

A TCS is a framework you build for managing and analyzing the range of pay and benefit plans you are offering.  Ideally, it gives you an “all in one place” view of every employee tier, what plans each is eligible for and at what level.  It allows you to evaluate your entire value proposition as a whole instead of each individual component in isolation.  Within this framework, it is easier to make decisions and adjustments in specific pay plans because you can measure each against its impact on the whole picture.

When properly designed, a pay structure becomes the practical, “real life” manifestation of a company’s rewards philosophy.  Ideally, a company’s TCS is consulted before adding any new program.  That way, as plans are developed, they are always measured against their impact on the composite pay strategy. A total compensation structure gives company leadership a comprehensive lateral view of all rewards programs and the degree of their alignment with the organization’s rewards philosophy.   A pay structure is much more than a salary structure (although a salary structure is part of it).  If a pay philosophy is the company’s “North Star,” the TCS is its sextant guiding the organization to the desired rewards and results destination.

A pay structure can be used by an organization of any size.  Let’s assume that the pay structure illustrated below was built based on a company’s pay philosophy for its unique organization.  Rewards eligibility is classified by grade level (1-14).  Each position within the business falls into one of the assigned grades.  The structure defines competitive salary ranges, identifies bonus and long-term incentive targets, shows the retirement plan match percentage and establishes budgets for health and other benefit plans. 


When a TCS is built properly, it allows you to have integrity in how you operate your overall compensation strategy.  By integrity we mean there is continuity and consistency between the company vision, the business model and strategy, the pay philosophy, employee roles and expectations and specific rewards for achieving results. That structure creates the assessment symmetry needed to achieve the right balance between salaries and incentives—and every other part of your pay offering.  The chart referenced above illustrates what a Total Compensation Structure dashboard might look like once it is complete.

In the end, perfect design is rarely achieved in an organization’s approach to compensation. However, if you use the Total Compensation Structure in your planning, you will be able to quickly identify gaps and deficiencies and move more efficiently to make the alterations and adjustments that are needed.

From “Complete” Compensation to Total Rewards

Many business leaders conclude compensation is not a factor in engagement because they read that pay (and incentives more specifically) is not a “motivator” when it comes to employee performance.  It’s an age-old conflict in search of a resolution.  However, the question of whether compensation does or doesn’t impact motivation really misses the point.  In the context addressed here, we’re not talking about pay being used to “motivate” anyone. Rather, compensation—including value-sharing—should be part of a larger Total Rewards framework an organization adopts of which financial rewards are just one component.  Growth-oriented companies use a Total Rewards approach to ensure their employees’ intrinsic drive is not stifled by factors that inhibit the autonomy, mastery and purpose--elements authors like Daniel Pink point to as the primary forces motivating performance.  In a Total Rewards construct, equal attention is paid to:

  1. Compelling Future. This means the company paints a clear and persuasive picture of where the organization is headed and why it’s meaningful. More importantly, it communicates why a given employee (in the context of his or her role and unique abilities) is critical to the fulfillment of that vision.  This addresses the purpose element upon which intrinsic motivation relies.
  1. Positive Work Environment. For intrinsic motivators to be unleashed, employees need to feel as though they are working within the realm of their unique abilities, that other team members have complimentary capacities, that they are sufficiently empowered to produce the outcomes for which they have responsibility and that they share the values of the organization.  This produces the autonomy component essential to motivation.
  1. Personal and Professional Development. Motivation is fueled when employees feel as though they work in an environment that accelerates their ability to improve.  This usually happens when the combination of resources to which an employee is exposed within the organization creates a unique learning experience—one that allows him or her to excel.  This enables the mastery factor to take hold that intrinsic motivation feeds upon.
  1. Financial Rewards. Value-sharing gives shape and definition to the wealth multiplier opportunity that is the natural outgrowth of organizational success.  It performs a kind of continuity role in the Total Rewards make up by putting a financially codifying exclamation point on the relationship.  As previously indicated, in essence a value-sharing philosophy sends the following message to success-oriented employees: “We consider you to be an essential growth partner in this company and have confidence in your ability to help us achieve the future business we’ve envisioned.  As a result, we want you to be clear about the financial nature of our partnership and what it can mean to you as we achieve sustained success.”  This speaks to all three motivational areas—purpose, autonomy and mastery—and allows the employee to see how their role in the company will help them fulfill their contribution aspirations.

A pay strategy is only “compete” if it is constructed within the framework of a Total Rewards philosophy and approach.

Measuring ROI on Compensation

Return on investment.  How often is that term spoken of in business?  It's what shareholders expect. It's what CEOs are paid to achieve.  Yet, when it comes to pay, ROI is seldom referenced.  As a result, rewards programs are not typically held to account for their contribution to shareholder value and business growth in the same way other corporate investments are measured.  Well, we live in a business age where that lack of accountability isn't acceptable anymore.  As a result, a rewards strategy isn’t “complete” unless it is generating a measurably positive return.  So, let's talk about one way a chief executive can get a better handle on the ROI on compensation his company is generating.

Improved investment return in business is driven by a combination of these three factors: 1) new or increased revenue streams and sources; 2) better margins, and; 3) lowered expenses.  A beneficial result in these areas results in profit.  In short, when performance is improved in these measures, profitability increases.  When it isn’t…well, CEOs begin looking for other work.

Shareholder value, however, is improved when there is economic profit—or what some call value-added profit.   Economic profit is a measure of return on residual business income—that amount of income remaining after accounting for financial capital costs.  These typically include interest, depreciation, amortization and cost of equity.

Let’s now use those principles and standards to determine how you can measure the return on your company’s compensation investment.  We’ll do so by working through an exercise together.  Each part will begin with a question that you should answer for your business.  This guide will offer some sample numbers, however, to show how the calculation works.  For our purposes, don’t worry about gathering precise numbers for your organization before proceeding.  You can return to this exercise and be more thorough with it later.  For now, just estimate and focus on the concept.

  1. What is the amount of your total rewards investment for this year (salaries, commissions, bonuses, deferred award accruals, core benefits, executive benefits, retirement contributions, payroll taxes, etc.)?  

    Write that number down. We’ll refer back to it in a minute.  In my example, I’ll peg the total rewards investment at $25 million.
  1. If your company were to identify a shareholder’s capital account, what would owners calculate its value to be? How much is in the capital account?  (This would include equity, debt, accumulated interest and any other amounts owners consider to be part of their capital contribution to the business.)

    Again, just estimate here and keep track of that number.  For my sample business, I’ll identify a capital account of $20 million. 
  1. What do your company’s shareholders consider to be the cost of that capital?

    (Cost of capital refers to what owners consider it “costs” them to have those assets tied up in the business.  In other words, if that capital weren’t invested in the present enterprise, they could invest it in some other entity or source and drive a real return.  As a result, having those assets tied up in the company represents a real cost to them.)

    For purposes of this calculation, some organizations use their corporate borrowing rate while others arrive at a percentage based on some other means or measure.  Anything from 8% to 25% is typical.

    For my example, I’ll use 12%.
  1. Now calculate a capital “charge” by applying the percentage you just chose against your capital account.

    If we were using my figures, the calculation would look like this: $20,000,000 (capital account) X 12% (cost of capital) = $2,400,000 (capital charge).

    This figure is important in identifying the amount of profit that should be attributed to capital already at work in the business before human capital is involved.  It is also one way of measuring a value creation threshold for your company. 

    In other words, in my example, profits would have to exceed $2.4 million before shareholders consider added value to have taken place.  Added value, in this ROI measurement, is that which is attributable to the contribution of people. 
  1. What will your net operating income be for this year?

    Again, just estimate.  For this exercise, I’ll assume $10 million.
  1. Now calculate your productivity profit by subtracting the capital charge from your net operating income.

    Productivity profit
     works on the same principle as the economic or value-added profit referenced above.  It is the amount of net operating income in your business that can be reasonably attributed to the contribution of people at work in the business as opposed to other assets at work (those accounted for in the capital account). 

    Applying the figures I’ve been using as examples, the calculation would look like this: $10,000,000 (net operating income) - $2,400,000 (capital charge) = $7,600,000 (productivity profit).
  1. Let’s now calculate the return on your organization’s investment in pay by dividing your productivity profit by the figure you identified at the start of this exercise (your company’s total rewards investment).

    What you’re trying to isolate here is the ratio between your productivity profit and what you’re investing in compensation and benefits each year.  We’ll talk in just a minute about the significance of that ratio and how to use it.

    Using my figures again, the calculation would look like this: $7,600,000 (productivity profit) / $25,000,000 (total rewards investment) = 30.4% (return on total rewards investment or ROTRI™).

    When most business leaders first go through that calculation, they look at the ROTRI™ percentage and ask: “Is that good or bad?”  The answer is it’s neither.  Right now, it just exists as a baseline measure.  Companies’ ROTRIs™ will cover a broad range because assumptions for margins and the economic profit factors discussed earlier differ widely from business to business and industry to industry.

    Your return on compensation investment is tied to improvement in your ROTRI™ ratio and productivity profit.  You want to see growth in each.  If not, your compensation ROI is suffering—and shareholder value is likely following suit.

This approach to measuring the return on pay for your company can be helpful in a number of different ways.  Perhaps foremost, it gives you a means of defining value creation for your business (value created after accounting for a capital charge).  It also puts you in the position of transforming incentive plans into value sharing plans that are “self-financing.”  This means incentives are paid out of productivity profit—and only when that measure meets the threshold you set for value sharing.

Chief executives have an obligation to shareholders to be prudent stewards of the investment being made in human capital through compensation.  Measuring the return they are generating on pay—typically, the largest investment the company consistently makes—is one way that stewardship can be effectively fulfilled.

Build “Line of Sight”

One of the “jobs” most business leaders want their pay strategy to do is create greater employee engagement. That’s one of the ways they know their value proposition is compelling. And a key to greater engagement and performance is improved line of sight.  This concept has to do with the ability an employee working within a business to see the relationship between certain interdependent elements that drive the company’s success and how they relate to his or her role and rewards.  When individuals come to work every day with a clear view of how those components are connected—and can relate them to their personal vision and motivation—they find meaning in their work.  Engagement follows.

CEOs are responsible for creating line of sight.  They certainly need the assistance of executive and managerial surrogates to help communicate and reinforce each of its components, but the overarching messaging has to come from the chief executive.  That requires the primary business leader to have clarity in his own mind about how certain engagement factors are nurtured and a commitment to a communication effort that consistently and relentlessly reinforces the connection between those elements.

So, what are the components of line of sight and how do you improve each in your business?  There are six.  Let’s define each and talk about what you can do to magnify their impact. 

  1. Articulate a Clear Vision.Too many enterprise leaders take for granted what their employees understand about the future of their companies and why it matters.  Articulating a vision of the prospective business is not simply a matter of communicating next year’s sales and profit goals—or even those of the next three, five or 10 years.  A vision can only be considered clear once all employees can explain why the company is in business, what purpose it serves, the standards and principles that guide the cultural norms the organization is committed to and what it will mean to customers, employees, communities and even the world if the business succeeds in fulfilling its purpose—and there is consistency in how the workforce explains that vision.

    This idea is what author Simon Sinek described as “Start with Why”  in his best-selling book. When employees have embraced a clear vision of the future company as just described, revenue and profit goals have context and are drenched in meaning and purpose.  “If we meet these targets, here’s the impact we’ll be able to have and what it will mean to you.  Your role is critical because it impacts our ability to (fill in the blank).”  The significance of every other engagement element depends upon a clear and compelling company vision.
  1. Define and Reinforce the Business Model. The company’s business model describes how the company produces, sustains and grows revenue.  There are virtuous cycles that perpetuate the revenue cycle of the model.  A key area of focus for the CEO should be to identify the leverage points in those cycles—the performance areas that provide potential for growth—and what roles and outcomes need to be fulfilled to obtain that leverage.  The business leader needs to then be able to communicate those roles and results to the employees and teams responsible for them in a way that makes those people want to assume stewardship over their achievement.   This can only happen when a chief executive effectively reinforces the connection between the business model and the company vision.

    Few employees can explain what the business model of their company is—no less what their role in it is.  If that’s the case, it’s the failure of company leadership not the workforce. Getting people to understand the revenue engine of the company and how they impact it requires consistent, clear communication in a variety of contexts and settings. 
  1. Define and Reinforce the Business Strategy.  Whereas a company’s business model describes how the enterprise drives revenue, its business strategy expresses how it will compete in the marketplace with that model.  The success of a business strategy relies upon the development of the performance culture described earlier which is the product of a performance framework a CEO defines.  The business strategy answers certain key questions that define how the company will succeed with its product or service.  “What is our core value proposition?”  “What is our competitive advantage?”  “What differentiates our offering from any other product, service or experience in the marketplace?”  “What kind of talent do we have to bring into our business if we’re going win?”   “What is our strategy for recruiting that talent?”  And so on.

    The culture of an organization determines whether that business will have a competitive advantage or disadvantage.  When chief executives are able to grow and sustain a culture of confidence—one that “wins” consistently and is a magnet for premier talent—they are able to perpetuate success.  That kind of repetitive high performance forges its own engagement virtuous cycle.  The factors driving success become so deeply embedded in the culture that a kind of “flywheel effect” kicks in, as Jim Collins described in his book, Good to Great.  The CEOs role is to make sure everyone is clear on the business strategy that makes that kind of sustained winning possible.
  1. Recruit to a Role—not to a Position—and then Define Success.   All workforce data indicate that we are entering a period of significant scarcity when it comes to recruiting highly skilled talent. And the kind of skilled talent organizations need is catalysts and strategic leaders as previously indicated; people who can come in and positively impact the growth trajectory of the business.  Catalysts are entrepreneurial-oriented individuals who either want to use the resources of a winning organization to create something meaningful and rewarding or start their own business.  These people aren’t looking to fill a position on your organizational chart.  Instead they want to fulfill a role that will positively impact the future of your business.  They are strategic leaders with unique abilities who want (and you need) to spend all of their time focused on issues that have strategic impact  Because of the increasing scarcity of this kind of employee, companies will find themselves in heavy competition for their services—making the success and reinforcement of all the elements discussed here all the more important.

    The responsibility of the chief executive is to clearly define these kind of high impact roles in the organization and effectively communicate their relationship to the vision, business model and business strategy of the company.  This needs to cascade down through the ranks so everyone in the company knows what his or her role is and how success is defined for that role.  You can have a great vision and a stellar business model and strategy, but if your people just think they’re being paid to carry out a position instead of fulfill a role, there will be a dilution of performance.  This is because line of sight has been short-circuited at the most rudimentary level.
  1. Preach Productivity Profit.For full ownership of results to take root in an organization, employees must come to understand how value creation is defined for the business that employs them.  Defining and then teaching employees about productivity profit is a way of doing that.  As explained above, productivity profit is the net operating income that remains after assessing a capital “charge” to account for the return shareholder’s expect on their capital investment.  It’s a way of isolating the profits attributable to people at work in the business as opposed to owner capital at work.

    CEOs need to preach value creation and productivity profit at every turn.  They need to effectively communicate how these two factors are keys to the company becoming a wealth multiplier, where all stakeholders benefit from the growth multiple the business is able to sustain.  When productivity profit increases, it tells the company that everyone is winning—customers, shareholders and employees.  Once a company is able to clearly define and communicate what value creation means, it makes the formation and reinforcement of an effective pay philosophy natural and easy.  The company shares value with those who help create it.  The greater the value creation, the greater the wealth sharing that can occur—and faster the company’s vision can be realized.
  1. Build a Financial Partnership with Employees. The natural culmination of forging an effective link between the elements just described is to define how people will be rewarded for having success in their roles.  Value creation should lead to value sharing.  And all employee earnings potential should be tied to the productivity profit of the company and defined in the organization’s compensation philosophy statement.  This allows CEOs to codify a financial partnership with key recruits and those already in the organization in a way that seems fair and compelling.  When employees are able to embrace the company vision, know how the business produces revenue and competes in the marketplace, understand their role and how success is defined for that role, see what it means to create value and why productivity profit matters, and are given a rewards package that reflects a true financial partnership, then they feel free to engage to a fuller extent.

By framing compensation as a financial partnership, a chief executive is building and communicating continuity.  The rewards approach conveys organizational and operational integrity.  Employees sense there is consistency to every element of their experience with the company. That consistency breeds trust which accelerates performance and lubricates the engines of success the company needs to fulfill its vision.

If you lead a business and want your value proposition to be both complete and compelling, focus on these six elements. 

Measuring the Success of Your Pay Strategy

Compensation plans are strategic tools that can only wield only so much power.  They are primarily intended to communicate to employees "what's important" to the organization.  Their role is to give proportion and timelines to priorities and place a value on their fulfillment.  If effectively designed, pay plans should introduce then promote a consistent and unified financial vision for growing the future company.  They should also reinforce a person's role in the business model of the company and what their financial stake is in meeting the expectations associated with that role.  While the metrics associated with some specific pay plans might be tied to company performance, it isn't the compensation plan's job to achieve that result.  It is simply a mechanism for defining the financial partnership that exists between the company and the employee when roles are fulfilled.  And here's the key, it is also (or should be) a gatekeeper that protects shareholders from paying out value if it hasn't been created (see ROI discussion above).

So, if that's the appropriate role of a pay strategy, how do you measure pay strategy success?  Well, the measure should be whether or not it is fulfilling its role, if it is doing the job you hired it to do as we discussed at the outset.  So, to determine if your pay strategy is successful, here are some questions that can guide you to the right conclusion.

  1. Value Creation. Before designing the rewards plan, did you clearly define what value creation means for your business?  Does the pay strategy you implemented include metrics consistent with that definition? Does value-sharing occur out of productivity profit--the threshold at which shareholders have already received an appropriate return on their capital account?  If the answer is yes to these questions, then it means the plan is only paying out value when value has been created—it is self-financing.  This also suggests that during periods of economic decline or stagnation, the plan is self-restricting in its payouts.  This should be considered a successful approach.

  2. Pay Philosophy.Have you defined a clear pay philosophy and written it down?  Is the pay philosophy communicated effectively to employees?  Are the company's compensation strategies consistent with the pay philosophy?  If you answered each of those questions affirmatively, then the company is being clear about what is willing to "pay for" and is implementing plans that follow that rule.  This again should be considered a successful approach.

  3. Market Pay.Do you compare your compensation plans and salary levels to market pay standards?  Does your philosophy statement define where the company wants to be relative to market pay both in terms of salaries and total compensation?  Do those in charge of evaluating these standards also perform an "internal equity analysis" to compare the data with the value the company places on given roles and positions?  If this is the approach being adopted, then the company is using some outside metrics to determine whether it is over or underpaying for certain roles and positions in the organization--particularly for salaries.  When it follows this methodology, it knows that it is keeping itself “competitive” in its attempt to attract and retain the best talent.  If it likewise offers significant upside potential relative to the market, but within the value creation parameters defined above, then it knows it has a competitive advantage in attracting key producers.  That is also a successful approach to pay.

  4. Total Rewards.Do you market a future to employees? Do you offer a compelling vision?  Do you nurture a positive work environment?  Are there opportunities for personal and professional development?  Is the financial partnership with your employees clearly defined and communicated?  These questions point to what is known as a "total rewards" approach to building a value proposition for employees.  If you adopt this framework, you are not expecting financial rewards to be the sole issue upon which attracting and retaining key producers is based. If you pay attention to each of those questions, and work hard to ensure evaluation and implementation in all categories, your company will become a magnet for the "right” talent.   And companies that get great people usually get great results.  Hence, a total rewards approach is a successful one.

  5. Line of Sight. Can employees articulate the organization’s vision—where it is headed and the purposes it is serving by achieving its growth goals? Can they explain the business model and strategy of the company? Can they clearly define their role in the business model and strategy including the outcomes for which they are responsible?  Do they display a sense of stewardship in that regard?  Can they clearly explain how they are rewarded if they fulfill the expectations associated with their role?  If so, then you have created line of sight and your pay strategy is succeeding.

If you feel good about your answers to these questions, then you can safely assume you have a complete and compelling compensation plan in place.  Your strategy is complete and compelling because it is based on a sound definition of value creation and a clear philosophy about value sharing.  It is complete and compelling because it protects shareholders.  It is complete and compelling because there is a clear basis for the pay levels that have been set.  It is complete and compelling because it effectively defines the financial partnership between employees and owners.  It is complete and compelling because it markets a future that attracts the best talent and creates line of sight.

So, as you consider what “job” you’ve “hired” your compensation strategy to do, commit to “hiring” the most effective plan possible.  Be complete and be compelling.  Hopefully, this guide has helped you towards that end.

Need Help with Your Pay Strategy?

If you lead a business and are struggling with developing an effective compensation approach, it might be the right time to have a conversation with a VisionLink consultant.  To speak with one of our experts about the rewards issues you are facing, call us at 1-888-703-0080. 

About the Author

Ken GibsonKen Gibson
Senior Vice President, The VisionLink Advisory Group


Ken has been consulting with middle-market private and public companies on executive compensation and benefits issues for over 30 years. In addition, he has authored numerous articles and white papers addressing compensation and rewards topics that modern businesses face. Ken also conducts a monthly webinar series on compensation best practices for business leaders throughout North America. His client work centers on the development of overall compensation strategies designed to enhance and improve shareholder value and workplace productivity. He is one of VisionLink’s six principals.

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How to Develop a Complete and Compelling Pay Strategy ReportA pay strategy cannot be an afterthought. It has to be approached strategically and comprehensively or you will fail in attracting, developing and retaining premier talent. But how do you do that? What does a complete pay program look like and where do you begin if you want to develop one?

Now you no longer need to wonder. VisionLink’s free new guide offers you comprehensive insight into how to build a rewards strategy that is both complete and compelling. It shares the secrets of experts who have spent the last 20 years designing successful rewards strategies for hundreds of businesses.

Construct a compensation strategy that is both complete and competitive!