First off, I prefer the term Ownership Mindset rather than Engagement. It’s more descriptive (to me at least). If I think and act like I own the business I will feel responsible, at some level, for all the crucial activities of the business. While my job might not include Sales, for example, I will feel committed to assisting, rather than criticizing or (worse yet) ignoring the sales effort. And so forth.  I’ll also feel responsible for expenses, margins, productivity improvements, and so on.

So where does compensation fit in? Well, how are Owners paid? If they’re running the company they’re probably drawing a salary and maybe even paying themselves a bonus. Even if they are they often view their “compensation” as a combination of things, perhaps including dividends, but certainly including some form of long-term reward. They’re probably either anticipating a sale of the business or some type of long-term ongoing cash arrangement.

The point is that Owners look not only at the short-term, but also the long-term. They want to accomplish this year’s goals but they also have some meaningful long-term goals in mind.

So if we want employees to think and act like Owners, shouldn’t their compensation plan reflect some of the same features? The simplest thing to do is to implement some type of long-term incentive program that ties to shareholder value creation. Such plans, done well, will do two things: (1) keep the employee “invested” in a long-term focus, and (2) create a meaningful wealth accumulation opportunity for those who deserve it.

 I presented a Webinar on this subject earlier this week. You can find it here.

Often, business owners or CEOs complain that something is “out of sync” with their compensation plans. Usually, they’re looking at a specific issue (salaries, bonus plan, etc.) and have sensed something wrong. Thus, they’re looking for help. No matter what the complaint the solution is usually the same. They need to come to grips with the reality of pay in today’s world. Thus, my three step solution:

1. Recognize what’s wrong. You have not aligned pay with your business plan. The way you pay your people impacts performance and profits, as well as attraction and retention. Until you better align your plans you will not achieve the full potential results you’re capable of.
2. Here’s what you need to do. You need to make sure every element of comp and benefits is positively impacting results. You need to diagnose your pay practices to identify areas that can be improved to have an immediate impact on performance. This will include ways to:
   1. Cut unnecessary expenses
   2. Reward people for better execution
   3. Share the highest rewards with those who produce the best results
   4. Enhance the perceived and actual value of every element of comp and benefits
3. If you do so, here’s what you should expect.
   1. Greater respect for and commitment to profits and growth among your team
   2. An improved return for shareholders on your compensation investment
   3. A more unified vision for growing the business
   4. A bigger wealth opportunity for shareholders and employees

It takes a commitment and a little time. But the results can change the direction and value of your business.

What’s the most common question asked of a compensation consultant? Probably, “How much should I be paying for a controller (or any other position)?” Or it’s cousin question: “Are our salaries ‘at market?’” I’ve blogged about those questions before. But I suggest that there’s a more important, fundamental question.

 “How should we be paying our employees?”

 The ‘How’ question is much more interesting because it has a greater impact on profits and growth. It breaks down to three sub-questions: (1) which pieces of compensation should we use? (2) who participates? (3) in what proportion?

 For example:

• Should we use performance incentives? Yes
• Who participates? All executives, directors and managers
• In what proportion? Executives—40% of salary; directors—25%; managers—20%

These decisions make a bigger impact on the company than just the ‘how much’ answer. Why were certain groups excluded? What’s the impact on hiring? Retention? Partnership commitment? How is it balanced with other incentives and the size of our total rewards investment (TRI)?

 Without a guiding strategy that links the pay philosophy to the business plan these sorts of decisions get made based primarily on budgetary factors. As a result, pay is taken for granted and plays no role in creating a unified culture and vision within the organization.

 Start with a well-developed pay philosophy that is deemed worthy of a great business plan. Then build a structure that fosters strong decision-making and accountability. Everyone will see that the ‘how much’ question is dwarfed by the importance of the ‘how’ question.

I remember working for an organization years ago that established a stock option plan. At the end of the year I received a letter from some finance VP whom I’d never heard of notifying me of the number of options I had received. I had no idea why I had received them, or why I received the number I did. I shrugged my shoulders and said, “Ok, that’s great.” But it did nothing for my sense of connection with the company and its mission.  If anything, it made me realize how stupid their pay programs were.  What’s that called? A negative return on the compensation investment.

 A recent article in Employee Benefit News pointed out some simple truths about employee engagement. Did you know that companies with high levels of employee engagement produce significantly higher returns for shareholders than those with lower engagement scores? Large companies have recognized this for a long time. But smaller companies overlook this vital connection to productivity and profits.

 As a compensation consultant I’ve observed that incentive plans simply don’t work without meaningful levels of employee engagement. When employees don’t feel connected to the business mission and purpose they are more likely to view a bonus plan as either (a) an entitlement, or (b) a manipulation scheme. This is the main reason that most bonus plans don’t work. Employees want to perceive the bonus payment as the natural result of contributing to the well-being of the organization. And they also want to see the connection between their role and the company’s success.

Top performing companies pay attention to employee engagement levels. Engagement is the contribution employees make to the partnership relationship with the employer. And incentive plans should be viewed as the employees’ share of the partnership returns.

(Tip of the hat to my wise friend Doug at the Fast Growth Blog for pointing me to the article in EB News)