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.

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. 

• Improve short and long-term profitability (increased revenue, improved margins, lower costs).
• Improve shareholder value.
• Accelerate innovation.
• Increase the company’s ability to attract and retain premier talent.
• Provide clarity about roles, expectations and outcomes.
• Instill a stewardship approach to employee roles.
• Enable an ownership mindset on the part of key people.
• Link employee rewards to performance.
• Build a unified financial vision for growing the business.

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).

• A private business begins sharing stock with key producers in an attempt to overcome attrition and the inability to compete for premier talent (original problem). In doing so, the equity position of previous shareholders is diluted and new shareholders have few options for capitalizing on value increases in the business other than waiting for a major transition event such as the sale of the company (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 45^th and 50^th 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.

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 solutions.  Frequently, 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 80^th 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.)

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.

2. Risk Protection. Employees 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.

3. 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.

4. 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.

5. 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 45^th percentile of market pay for its executive level employees while another will target the 80^th to 90^th 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. 

2. 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.

2. 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.

3. 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.

4. 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.