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.
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:
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.
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:
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.
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.
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.
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.
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.
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.
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:
A pay strategy is only “compete” if it is constructed within the framework of a Total Rewards philosophy and approach.
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.
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.
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.
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.
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.
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
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.
A 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?
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Construct a compensation strategy that is both complete and competitive!