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Ken Gibson
April 8th, 2013 by Ken Gibson

Setting Compensation Priorities

Determining what’s most important “right now” can be difficult in any context. The issue can take on an additional layer of complexity when trying to address which compensation program should get most of your attention at a given point in time.  Should you perform some kind of salary study to see if you are competitive with the market?  Is it time to revise the annual bonus plan?  How are you going to address the promises made to key people that they will participate in company growth through some kind of  long-term value-sharing arrangement?  Is it time to begin sharing stock with employees?  Is there an alternative to stock you should be considering? And so on.  The list of issues can be endless–and every item on that list is important.

Unfortunately, there is no silver bullet solution for setting compensation priorities.  And I don’t know that I can,  in a short blog post, define the best answer for the myriad circumstances businesses might be experiencing. That would be like asking a doctor to tell all potential patients what health measure is the most critical for them to address right now. It’s impossible.  That said, there are some logical questions that can be posed to help guide you in setting pay priorities.  Here are a few to consider:

  1. Compensation Philosophy Statement. Do you have a written compensation philosophy statement? Does it clearly articulate what the company will pay for and how it plans to share value? Does it define where the company wants to be relative to market pay standards for salaries and total compensation?  Does it establish a balance between guaranteed and incentive pay?  What about between short-term and long-term incentives (or what VisionLink refers to as value-sharing)?
  2. Pay Grades. Have you established clear pay grades? Are you satisfied your organization is competitive with market pay standards for the most critical positions in your company? Are your salary levels consistent with your compensation philosophy?
  3. Incentives. What is most critical to your organization right now–sales growth, short-term performance (12 months or less) or long-term performance (12 months or longer)?  I know they’re all important, but which is crucial right now?  Do you have an incentive plan that addresses that need? Is it clear?  Is it “working?”
  4. Growth.  Does your company plan to grow?  Does it have a clear business model and strategy? (The model defines how the company generates and grows revenue; the strategy focuses on how the business will compete in the marketplace.)  Have you identified a compensation strategy that reinforces your growth plan?  Is it tied to specific roles and clear performance expectations?

I suppose the list of questions could be longer, but this offers some pretty good categories and issues to examine as you consider what pay programs might be most important “right now” for your company.  I would also submit they are organized in a pretty logical order. First, define your philosophy. Be very clear and comprehensive. Next, make sure your pay grades and associated salaries are well defined and competitive–as well as consistent with your philosophy statement. Then, define what kind of performance you most need employees to focus on right now. Force yourself to be clear about that issue.  (This isn’t to suggest all three elements summarized above won’t need to be ultimately addressed, if not right now.) Finally, be clear about your growth plans and how compensation can be used as a strategic tool to support that effort.  Don’t fall into the trap of ignoring this priority because you think today and tomorrow are all you can worry about “right now.”  The way you pay your people is a powerful communication tool. It tells them what you consider to be important. If growth is important to you, don’t pay your workforce  in a way that communicates it isn’t.

In the end, sorting through these priorities is an important skill for any company that wishes to develop a value proposition that is a competitive advantage in recruiting and retaining premier talent.

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Posted in Business Growth & Compensation, Business Growth and Rewards, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent, Return on Compensation Investment, Uncategorized | No Comments »

Ken Gibson
February 21st, 2013 by Ken Gibson

What is a “Successful” Compensation Plan?

It’s not uncommon for a prospective client to inquire about the kinds of results companies  have achieved through the compensation plans we’ve helped them implement.  It seems like a valid question but in truth it misses the mark.  What really needs to be answered is how the success of  a given compensation plan should be measured.  What determines a successful pay plan?  Let me explain the distinction.

If we install, say, a phantom stock plan for a client and that company goes on to double revenues over the next three years, should we credit that success to the new compensation strategy?  Probably not. After all, there are many factors that potentially impacted the organization’s performance over that period.  It may have introduced a new product, made a key acquisition, saw a competitor leave the marketplace or caught some phenomenon in the economy at just the right time.  Would the company have had that success without the phantom stock plan?  Possibly.  Conversely, if the company’s revenues remained flat over that same period, does it mean the phantom stock plan was a flop?  Also, probably not.  Confused? Are you asking, “So why bother implementing any pay plan if there’s no way of knowing its impact on company results?” Well, not so fast. I’m not saying there’s no impact.  It’s just more subtle than that. Here’s why.

Compensation plans are strategic tools that wield only so much power.  They are primarily intended to communicate to employees “what’s important” to the organization.  They 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 building 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 a 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.

So, if that’s the appropriate role of  a pay strategy, how do you measure a compensation plan’s success?  Well, the measure should be whether or not it is fulfilling its role. To determine that, here are some questions that should be answered.

  • Before designing the plan, did the company clearly define what value creation is? Does the plan include metrics consistent with that definition?  Does value sharing occur out of productivity profit–the threshold at which shareholders have already received an appropriate return on their capital account?  If the answer is yes to these questions, then it means the plan is only paying out value when value has been created–it’s self financing.  This also suggests that during periods of economic decline or stagnation, the plan is self-restricting in its payouts. That’s a successful approach.
  • Does the company have a clear philosophy statement?   Is the pay philosophy communicated effectively to employees? Are the company’s compensation strategies consistent with the pay philosophy?  If you answered affirmatively to each of those questions, then the company is being clear about what is willing to “pay for” and is implementing plans that follow that rule. This again must be considered a successful approach.
  • Does the company compare its pay strategies to market pay standards? Does it’s philosophy statement define where the company wants to be relative to market pay and total compensation? Do those in charge of evaluating these standards also perform an “internal equity analysis” to compare the data with the value the company places on given roles and positions? If this is the approach being adopted, then the company is using some outside metrics to determine if it is over or underpaying for certain functions to be fulfilled in the organization–particularly relative to salaries.  When such is the case, it knows that it is not making itself noncompetitive in trying to attract and retain the best talent. If it likewise offers significant upside potential relative to the market, but within the parameters defined in the first bullet point, then it knows it has a competitive advantage in attracting key producers.  That’s also a successful approach to pay.
  • Does the company market a future to employees?  Is there a compelling vision?  Is there a positive work environment? Are there opportunities for personal and professional development? Is the financial partnership with employees clearly defined?  These questions point to what is what is known as a “total rewards” approach to building a value proposition for employees. If a company adopts this framework, it is not expecting remuneration to be the sole issue upon which attracting and retaining key producers is based.  If it pays attention to each of those questions, and works hard to ensure evaluation and implementation in all categories, it will become more successful at becoming a magnet for the “right talent.” And companies that get great people usually get great results. Hence, a total rewards approach is a successful one.
If your company feels good about its answers to these questions, then my position is that you have a successful compensation strategy in place.  It is successful because it is based on a sound definition of value creation and a clear philosophy about value sharing.  It is successful because it protects shareholders.  It is successful because there is a clear basis for the pay levels that have been set.  It is successful because it effectively defines the financial partnership between employees and ownership.  It is successful because it markets a future that attracts the best talent.
So, here’s to your success.

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Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent, Phantom Stock, Uncategorized | No Comments »

Ken Gibson
January 24th, 2013 by Ken Gibson

Compensation Tips for 2013

Now that we’re at the start of a new year, many organizations are looking at their compensation strategies and attempting to break new ground in their effort to develop pay programs that will support business growth.  Hopefully, the issues discussed in this space, as well as the webinars, white papers and e-books VisionLink has produced, will give you a “leg up” in your attempt to improve things.  That said, I thought it might be helpful to offer a few tips about steps to consider taking this year if you haven’t already addressed them.  They are in no particular order of importance–just a kind of “brain dump” on compensation issues that should take priority in your pay planning.

  • Plan compensation strategies that will address a high income tax environment.  Everyone, but especially your highly compensated people, are going to face higher tax rates  in 2013 and beyond.  It’s time to consider a strategic deferred compensation plan if you haven’t previously, or shore up the one already in place. (For further insight in this regard, consider watching our February webinar entitled: “Compensation Strategies for a High Income Tax Environment.”)
  • Put more emphasis on value sharing and upside earnings potential and less on guaranteed income. Hopefully your company is committed to innovation and keeping at bay those organizations intent on the “creative destruction” of your business. You will need to recruit talent that has entrepreneurial capacity and inclinations.  They will want a pay program that simulates what they could have if they started their own business. (For more ideas in this regard, check out our December 2012 webinar entitled: “The Future of Compensation: What’s Next and Why.”)
  • Begin measuring the return on your company’s total compensation investment; know your organization’s “productivity profit.” If you’re going to share value you’ll need to get very good at defining value creation for your firm. Incentives (value sharing) should be “self-financing” and come out of the productivity profit of the company. This is the profit that is calculated after an appropriate capital “charge” is assessed against the earnings of the business. The capital charge reflects the amount of return shareholders should expect to receive on the operating capital already at work in the business. (For a more complete understanding of this concept, check out our September 2012 webinar entitled: “Compensation Standards that Both Shareholders and Employees Will Embrace.”)
  • Adopt a “Total Rewards” approach. This means you recognize that financial rewards represent only one of four elements employees will evaluate this year in deciding to either join your company or stay with it.  They will also want to know if the company has a compelling future–and that its fulfillment relies on their unique abilities and contributions as key producers. Premier talent will seek a positive work environment–one in which it enjoys the team of people it works with, the nature of its role in the organization and that it has the ability to get problems solved. Finally, your best people will want to know that there are personal and professional development opportunities.  This is not just training.  This means that their unique abilities are aligned properly with the company’s resources so they get better at what they do because they are part of your organization.
  • Implement an effective rewards reinforcement strategy.  A “B-” plan that is highly promoted and well communicated will have more value than a “A+” plan that employees heard about once in a launch meeting but hasn’t been talked about since.
  • Craft and communicate a  compensation philosophy. Put it in writing.  Make this the year you clearly define what you will “pay for” and how you feel value should be shared in the organization. Define where the company wants to be relative to market pay standards for salary versus total compensation (including value sharing).  Communicate that philosophy as often as you can in team or company-wide meetings and whenever or wherever the vision and strategy of the business is being discussed.

There are certainly more things that could be added , but that’s a pretty good list for now.  If you do the things indicated here, you will see measurable improvement in your ability to recruit and retain the best people and keep them properly focused on the outcomes you want achieved.  You will sense a greater ownership mentality emerging in the organization and a more unified financial vision for growing the business will be apparent.

The proof is in the doing. Try it. Test it.

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Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent | No Comments »

Ken Gibson
December 12th, 2012 by Ken Gibson

What is a “Fair” Compensation Plan?

Who doesn’t want to be called fair, right?  A desire to be considered fair is in our bones and to be called unfair is one of life’s ultimate insults. (Unless of course it’s your teenager claiming something is unfair; in which case you know you’re on the right track. But I digress.)  Likewise, we instinctively sense unfairness when we experience it.

Fairness in compensation, however, is a topic almost no one seems to want to think about.  How can we objectively determine if a pay plan is fair and do we even want to “go there?”  Well, I think we can (determine it) and should (go there).  Here’s a list of questions I think a company should consider to determine if their compensation package is “fair.”

  • Compensation Philosophy Statement. Has your company put in writing it’s philosophy about compensation and what it is willing “pay for”?  Does your company communicate that philosophy to its employees?
  • Market Pay. Do your current salary levels comport with market pay standards?  Are they consistent with where your compensation philosophy statement says you want to be in this regard?  (E.g. 50th percentile of market pay.)
  • Value Sharing. Does your company define value creation for its employees and have a mechanism for sharing value that is created–both short-term and long-term (particularly for key producers)?  Is it consistent with your compensation philosophy statement about sharing value?
  • Benefits. Does your benefit’s package offer employees an “adequate” if not superior opportunity to insure against risks that could impact their financial future and allow them a mechanism for retirement planning?  Does it recognize the potential  ”reverse discrimination” impact of qualified retirement plan restrictions for high income earners and allow the latter opportunities to offset those limitations (i.e. 401(k) mirror plans or other supplemental executive retirement plans)?  Is there adequate choice and flexibility in your benefit plan?
  • Line of Sight.  Do your compensation philosophy and its associated plans create a clear link between the vision of the company, it’s business model and strategy, roles inherent in that strategy and expectations associated with those roles, and how individuals will be rewarded for fulfilling those expectations?

I suppose other questions and categories could be added to that list, but that’s a pretty good start.  I believe most companies have more control over the sense of fairness employees feel about compensation than they sometimes allow.  For example, many are confronted by employees who have looked at market pay data online and concluded they are under paid for their positions.  Never mind that there is a range of variables in evaluating such data, and that employees who are overpaid will never make that known to their employer.  The overriding issue is that most companies don’t have a philosophy driving their pay strategies.  They are not armed with a cohesive approach, so they are left sensing that such employees feel the company is “unfair” when it comes to pay–regardless of the logical explanations that are offered in response to their challenges. Such business leaders need an approach to rewards that will allow them to respond in such situations with something like the following:

“Our company’s philosophy about compensation is that we will pay salaries at the 45 percentile of what market pay data indicates for the positions in our organization.  (By the way, our last check of that data indicates you are at the 47% for your position, based on an average of four surveys we evaluated.) However, we also believe in providing significant upside potential through the two value-sharing plans you are eligible for.  Our annual bonus plan allows you to earn an additional 25% plus of salary if you and the company meet the performance standards we have set and communicated. Likewise, you participate in a phantom stock plan that allows you to earn an additional 30% of your salary in phantom shares of stock which, if we continue to meet our targets, will grow in value and be paid out to you in five years.  You also are part of our company’s deferred compensation plan which has a performance match of up to 25% of your contributions.  That is not counting the match we give all employees on their 401(k) program contributions. All told, your pay package has a value of $1.7 million over the next five years.”

I think most people would not only would consider such an approach “fair” but would likely find it a compelling reason to join and or stay with such an organization.  And by the way, the “self-financing” approach to the value sharing described here makes CEOs and shareholders happy to write incentive payout checks. Value is being paid out of superior value created–and nothing is paid if certain performance thresholds aren’t met.  So it is not only a fair approach for employees but for the business as well.

Companies that give this much thought to their approach to pay communicate the value they place in the relationship with their people and a respect for the unique contributions individual members of the workforce make. That sense of partnership makes fairness self evident.

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Posted in Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent, Phantom Stock, Return on Compensation Investment, Uncategorized | No Comments »

Ken Gibson
October 26th, 2012 by Ken Gibson

The Future of Compensation

Where is compensation headed in the future and why? It’s a compelling subject for a number of reasons, not the least of which is that pay programs represent the largest budget item most business leaders have to manage.  And the trends so far have American companies paying attention to this issue probably more than they ever have before.  Why is that?  Well…much of it has to do with the economic environment of the past three plus years that has fundamentally altered the way business leaders, employees (or potential employees) and the public (through the eyes of the media) look at financial rewards within the business. Owners and CEOs are worried about locking key producers into high salaried positions. Talent that has been sitting on the sidelines is concerned about coming back into the labor force and getting locked into a salary that is far below what it earned at its peak. And the public (the media) is concerned about “fairness.”  So this leaves everyone looking for effective solutions and asking where this is all headed from here.

To understand where compensation is headed, we must first understand where business is headed; specifically, what kind of people are businesses going to want and need to attract to remain competitive.  The key word in this regard is innovation. The focus on creative energy within organizations both large and small is bigger than it has ever been–and it will only increase in the future.  Pick up any business publication these days and you would be hard pressed to find one that doesn’t have multiple articles on innovation–how it happens, who is most innovative or how to breed greater levels of this quality within a company.  So how does this relate, first of all, to the kind of talent businesses are looking to attract?  Consider this insight offered by Scott D. Anthony in the September issue of Harvard Business Review.  Mr. Anthony is the managing director of Innosight Asia-Pacific and the author of The Little Black Book of Innovation (Harvard Business Review Press, 2012):

“It’s early days still, but the evidence is compelling that we are entering a new era of innovation, in which entrepreneurial individuals, or ‘catalysts,’ within big companies are using those companies’ resources, scale, and growing agility to develop solutions to global challenges in ways that few others can…These companies have pushed into territory that was once the province of entrepreneurs, NGOs, and governments—from delivering health care technology, clean water, and new agricultural capabilities in developing countries to managing energy, traffic, public transit, and crime in the world’s major cities.” (“The New Corporate Garage”, Harvard Business Review, September 2012, Scott D. Anthony)

The trend that this article and others point out has to do with the focus businesses have adopted on hiring entrepreneurial individuals (catalysts) that can leverage the company’s resources to create and innovate. And the article goes on to point out that “Whereas the inventions that characterized the first three eras [of innovation development in American companies] were typically (but not always) technological breakthroughs, fourth-era innovations are likely to involve business models. One analysis shows that from 1997 to 2007 more than half of the companies that made it onto the Fortune 500 before their 25th birthdays—including Amazon, Starbucks, and AutoNation—were business model innovators.”

If you take just these two elements–catalysts and business models–it becomes clear where compensation needs to go if it is going to support the need for businesses to innovate.  Pay strategies need to attract people with entrepreneur capabilities and reward them for leveraging the ability of the company to expand, magnify or otherwise accelerate the virtuous cycles of the company’s business model. Intuition will tell you that this need is not going to be addressed by simply paying competitive salaries or even generous bonuses.  Catalysts are going to seek a compensation structure that will reflect the entrepreneurial experience they are seeking within the business.  They want a stake in the value they help create.  For some, this may mean–at least initially–that they will ask for equity in the business.  And in a certain number of cases, sharing stock might be appropriate.  However, there are multiple ways to share value without sharing equity–and companies will become more and more interested in understanding how that can be done.  At a recent CEO2CEO conference that I attended on innovation, more than one business leader talked about how their companies had developed a venture pool within the business that is awarded to producers that ignite relevant, profitable innovation that further fuels or enhances the business model. Phantom stock, profit pools, SARs, Performance Unit Plans and their variations will also play a larger and larger role in shaping the total value proposition that a “catalyst” employee is offered and will demand.

In short, the compensation of the future will not necessarily involve only new pay “schemes”  that have never been used before, although some such plans are emerging (e.g. the internal venture capital fund just mentioned). Rather, it will be a matter of companies paying more attention to the range of pay elements they combine to create a financial opportunity that matches what the innovators of the future will seek.  It will become both a question of how much those individuals are paid and how that compensation comes to them.

To learn more about the compensation trends for the future, tune into our webinar on December 4 entitled “The Future of Compensation: What’s Next and Why?”

 

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Ken Gibson
October 10th, 2012 by Ken Gibson

What Problem does your Compensation Strategy Solve?

One of the “filters” through which the effectiveness of a given rewards plan should be evaluated is problem solving.  Every strategy should be assessed, in part, in terms of the problem it will help resolve. Too often,  compensation solutions that are put in place create behaviors or outcomes that miss the target in solving key barriers a company is facing or, worse yet, create a new problem that didn’t exist before a given pay strategy was implemented.  Here are just a few examples of what I mean:

  • In an attempt to overcome a lack of stewardship for key initiatives (the problem), a company institutes an annual bonus plan.  It later discovers it has created an entitlement mindset and placed the company in the position of paying out incentive income even during periods of distressed economic performance.
  • A private business begins sharing stock with key producers as a means of overcoming attrition and the inability to compete for premier talent (the 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 a major transition event such as the sale of the business.
  • The owner of an enterprise wants to overcome a short-term focus (the problem) and grow her business value in anticipation of a sale. She institutes a phantom stock plan that vests only upon the sale of the businesses–which she anticipates being in approximately 5-7 years.  At the five year mark, she gets a second wind and decides not to sell the business for an indefinite amount of time. Employees are left wondering when they will realize the value they helped create. What was intended as a positive, uniting incentive becomes a morale breaker.

Certainly, many more examples of this phenomenon could be illustrated. Hopefully, the ones indicated give you an idea of what happens when inadequate attention is paid to solving the right problem with a compensation solution.

This issue is not solely a function of companies developing pay strategies without clearly identifying the problem they are trying to solve. Instead,  they often don’t go quite far enough in thinking through all the relevant implications of a given strategy that’s being considered.  They may be focused on the right problem but the solution they are implementing is creating more barriers than it resolves. Such is the case in the illustrations given above.  The result is a company that perpetuates a plethora of “unintended (harmful) consequences” instead of (positive) “strategic byproducts.”  If companies focus properly on the “right” problem and all of the implications of a considered strategy, the “strategic byproduct” multiple will become self evident and self perpetuating.  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 and it is in a highly competitive talent market. The best people have several career options within the industry if they are good at what they do.  So, the company decides to peg salaries at the 50th percentile of “market pay” but provide significant upside potential through value sharing.  They determine to provide up to 100% of salary in additional, incentive income that will be divided between short-term 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, with a value that is tied to a formula built into the plan. The phantom shares vest in three years and pay out value in five.  Thresholds and metrics of company, department and individual performance are set for accruing benefits under each plan–both of which ensure that value is only paid out when “sufficient” value has been created.  An employee value statement is developed to demonstrate to the key producer what his total value proposition will be with the company over the next five or ten years if a targeted level of performance is achieved.  He learns that he is not merely being offered a $160,000 salaried position but a $1.8 million dollar opportunity over five years with the company.

Let’s think about how this approach solved the problem at hand while creating “strategic byproducts” instead of  ”unintended consequences.”  The company put itself in the position of offering potential recruits a plan that was rich in upside potential while limiting guaranteed income. (Problem solution.) It framed the relationship with the new employee as a partnership with ownership to grow the business. (Strategic byproduct.) It differentiated itself in a competitive talent market without over committing on salaries. (Problem solution.)  Additional strategic byproducts of this approach included an ownership mindset on the part of key producers and a more unified financial vision for growing the business. In addition, the business was able to construct a pay approach that significantly drove value for shareholders while still creating rich payouts for employees, due to a “self-financing” approach to the incentives. It created a “wealth multiplier” environment because all stakeholder rewards were tied to unified, business growth components.

In the end, most organizations need help in avoiding the pitfall of unintended consequences with their pay strategies when trying to solve problems.  They need individuals or consultants that have experience with multiple options for solving key business barriers and can guide the process in a way the leverages the strategic outcomes that are achieved.  The right questions need to be asked and appropriate challenges need to be made to solutions being offered that don’t adequately address the full ramifications of implementation.

This principle can be applied in other aspects of the business as well. For a broader treatment of effective problem solving in an organization see the Dwayne Spradlin article in the September 2012 edition of Harvard Business Review.

To see how phantom stock plans are often used as a strategic tool to solve specific problems within an organization while creating multiple strategic byproducts, tune into our upcoming broadcast entitled, “What is Phantom Stock and Why do I Keep Hearing about It?”  Click here to register.

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Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent, Phantom Stock | 1 Comment »

Ken Gibson
August 24th, 2012 by Ken Gibson

Is Your Top Talent Looking Elsewhere?

A recent study reported in the Harvard Business Review reveals that some of today’s most sought after talent is constantly networking and looking for the next “better” opportunity.  What the study’s sponsors found in their data was this:

“We reached these conclusions after conducting face-to-face interviews and analyzing two large international databases created from online surveys of more than 1,200 employees. We found that young high achievers—30 years old, on average, and with strong academic records, degrees from elite institutions, and international internship experience—are antsy. Three-quarters sent out résumés, contacted search firms, and interviewed for jobs at least once a year during their first employment stint. Nearly 95% regularly engaged in related activities such as updating résumés and seeking information on prospective employers. They left their companies, on average, after 28 months.

“And who can blame them? Comparing the peripatetic managers’ salary histories with those of peers who stayed put, we found that each change of employer created a measurable advantage in pay; in fact, a job change was the biggest single determinant of a pay increase.”

These results reinforce something we have preached for a very long time.  When companies look to develop a value proposition for their key people, they must adopt a “total rewards” view of their efforts.  This approach has four equally important components that must be constantly addressed and measured if a business is going to succeed in attracting and retaining top talent.  The four elements are these:

Compelling Vision

Key people must be able to view the future of the company as something they believe in and want to help fulfill. Further, they need to be able to see themselves in that future and believe their unique abilities are necessary for its realization.

Positive Work Environment

People want to enjoy the nature of their roles, get along well with the group of people they work with, have good communication and an ability to solve problems with ownership and top management, and be able to apply their distinctive abilities in a way that “makes a difference.”  They also want praise for superior efforts and constructive feedback about how to best use the resources of the organization in fulfilling their stewardships.

Personal and Professional Development

This means more than just career advancement potential. In addition to a positive work environment, employees want to see that their unique abilities are not only being utilized in the organization, but that they are being improved.  If they are going to stay, they must believe that their skill level will be advanced and magnified in part because of the resources they have to work with within the business. This includes the other people with whom they interact, the tools available to complete their assignments, the level of training they receive, the innovation they are responsible for and the level of capital deployment toward their areas of accountability.

Financial Rewards

Compensation should act as a kind of thread of continuity that pulls these other elements together and creates a sense of partnership between the owners and their key talent.  High producers have confidence in their skill level and want rewards that provide an opportunity to participate in the value they help create. They view this as a trust and fairness issue.  When compensation reflects a ” fair” approach, confidence in the organization is increased and a unified financial vision for growing the business emerges.  Fairness is perceived when compensation addresses the following key issues that most employees care about:

  • Cash Flow and Standard of Living–Beyond what market pay studies suggest, high level talent have an intuitive sense of what their skills and experience should allow them to enjoy in terms of  a standard of living. This is supported primarily by their salary and short-term value sharing arrangements such as annual bonuses.
  • Security–Employees want to know there is at least an adequate if not a superior approach to insuring against health risks and providing for retirement.  Benefit plans should not be overlooked or discounted in their ability to assuage concerns most  carry in this regard.
  • Wealth Accumulation Opportunities–Key producers want to know that if they create value there is a mechanism for them to participate in that wealth multiple. For the most part, particularly younger talent–such as those cited in the study–are looking for a kind of mini-entrepreneurial experience inside the business they work for.  They want a similar opportunity to that which ownership enjoys. This does not necessarily mean equity has to be shared.  There are other ways of addressing that issue. (Click here to learn about alternatives.) What’s important to them is that there be a mechanism in place for building wealth through their affiliation with the business.  This can’t be emphasized enough.

In my view, if the young employees cited in the study were having the total rewards experience described here, the statistics would be very different.  Companies have more power than they think  to attract and retain key talent.  It begins with the adoption of a wealth multiplier mindset–one in which ownership comes to understand that their own personal wealth standard will increase in relation to that which they allow other stakeholders to participate in.  Our experience has been that this is what differentiates wealth multipliers from mere wealth creators.

For more information on this topic, view our webinar entitled What Your Employees are not Telling You about Your Current Rewards Programs.

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Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent | 1 Comment »

Ken Gibson
August 7th, 2012 by Ken Gibson

Bain, Productivity, Capitalism and Compensation

In this election season, much is being made of whether or not Mitt Romney created or destroyed jobs while at Bain.  Most reasonable business people understand that the discussion misses the point entirely and reveals complete ignorance on the part of some in government about how capitalism works, and what its inherent risks are.  However, it does give us an opportunity to reflect on how some basic principles of capitalism apply to our businesses and the innovation cycles that fuel creative destruction.  Wise companies will apply these same principles in their approach to compensation by recognizing what should be rewarded.  I’ll explain, but first let’s set the stage by using Bain as the platform for our discussion.

In a recent Wall St. Journal editorial, Andy Kessler nails the Bain issue and uses it to describe the broader effect of capitalism at work in our modern society:

“Did Mitt Romney and Bain Capital help office-supply retailer Staples create 88,000 jobs? 43,000? 252? Actually, Staples probably destroyed 100,000 jobs while creating millions of new ones.

“Since 1986, Staples has opened 2,000 stores, eliminating the jobs of distributors and brokers who charged nasty markups for paper and office supplies. But it enabled hundreds of thousands of small (and not so small) businesses to stock themselves cheaply and conveniently and expand their operations.

“It’s the same story elsewhere.  Apple employs just 47,000 people, and Google under 25,000. Like Staples, they have destroyed many old jobs, like making paper maps and pink ‘While You Were Out’ notepads. But by lowering the cost of doing business they’ve enabled innumerable entrepreneurs to start new businesses and employ hundreds of thousands, even millions, of workers world-wide—all while capital gets redeployed more effectively.”

That last phrase is key.  The effective deployment of capital in any aspect of business or the economy is what fuels growth.  And people are at the fulcrum of capital deployment. Likewise, they represent human capital at work in a business and financial capital is invested in them.  The question, then, is whether a business is constantly evaluating it’s capital deployment and determining if it is leveraging the company’s ability to grow and keep ahead of the Staples, Apples and others who are mining the creative destruction landscape and determining how they can reinvent the future.  All of this is good for the economy, good for jobs creation and good for businesses. It is a system that rewards productivity and productivity is found at the intersection of effectiveness and efficiency.

Kessler drives the productivity point home this way:

“Economists define productivity as output per worker hour. But ramping up the output of trolleys or 8-track tapes won’t increase living standards. It is not just technical efficiency that matters, it is also effectiveness—that is, producing what the economy really needs and consumers will pay for.

“And so, in a broader sense, productivity is really about doing the right things the right way. Using modern construction equipment, we could build a pyramid on the National Mall in Washington with amazing efficiency, but it would not be effective.

“So how does productivity result in more employment?

“Three ways. First, some new technology comes along that allows something never before possible. Cash from an ATM, stock trading from an airplane’s aisle seat, ads next to Google search results.

“The inventor or entrepreneur who uses the invention benefits from sales and wealth and hires people to produce the good or service. We don’t hear about this. Instead we hear about the layoffs of bank tellers, stockbrokers and media salesmen. So productivity becomes the boogeyman for job losses. And many economic cranks would prefer that we just hire back the tellers and toll collectors.

“This is a big mistake because new, cheaper technology becomes a platform for others to create or expand businesses that never before made economic sense…

“The third way productivity results in more employment is by attracting capital to satisfy new consumer demands. In a competitive economy, productivity—doing more with less—always lowers the cost of products or services: $5,000 computers become $500 tablets. Consumers get to spend the difference elsewhere in the economy, and entrepreneurs will be happy to sell them what they want or create new things they never heard of, but will want. And those with capital will be eager to fund these entrepreneurs. Win, win.

“The mechanism to decide the most effective use for this capital is profits. The stock market bundles profits and is the divining rod of productivity, allocating capital in cycle after cycle toward the economy’s most productive companies and best-compensated jobs. And it does so better than any elite economist or politician picking pork-barrel projects and relabeling them as ‘investments.’ ”

All of this should offer huge clues to business owners, CEOs and others who need to make strategic determinations about how to deploy capital that will be invested in compensation.  The natural cascading logic should look something like this:

  • A business creates value by meeting demands in the marketplace
  • The level of productivity achieved in the value creation process is reflected in profits
  • Business leaders need to reward productivity because it is the most effective and efficient deployment of capital, and results in greater profitability
  • Employees apply their unique abilities towards value creation in the business
  • Compensation, then, must reward productivity by sharing value with those who help create it
  • Companies that take this approach to remuneration become magnets for premier talent and accelerate their ability to create value productively and fuel growth

In the end, compensation strategies must both reflect and reinforce productivity cycles within the business.  If they do, then rewards will become a natural extension of the overall productive deployment of capital in the business.  When this happens, the business wins, employees win, the economy wins and, as a result,  job creation is magnified.

To learn about three “real life” examples of businesses that have taken this approach, tune into our upcoming webinar on June 24 entitled ”Success Stories in Pay for Performance.”

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Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent | 3 Comments »

Ken Gibson
July 6th, 2012 by Ken Gibson

Getting People to Accept Change in Compensation

One of the fears many business leaders have about tinkering with compensation is that employees won’t accept the change when they introduce it.  They worry about “push back” when announcing a more structured annual incentive, for example, or if they move in the direction of a pay for performance philosophy.  Most of these concerns emerge from a fundamental assumption that employees will view any change as something being taken away.  This doesn’t have to be the case.

Introducing any kind of structural change in compensation requires a strategic communications effort that will create the right paradigm for moving forward.  As indicated in my last post, choosing the right language will be critical.  Words such as clarity, partnership, value sharing, growth, contribution and increased opportunity will be important ingredients.  However, beyond the choice of words, leadership has to begin a top down education about the future of the company that will create a fertile field in which to plant information about changes in pay philosophy and programs.  The messaging from the CEO and those close to him should address the following:

  • The Future Company.  Tell employees where the business is headed and why that is significant. Build confidence in that future by offering enough data about its potential achievement that the message is credible.  Build anticipation about what it means for the company to achieve that level of success–market acceptance, competitive advantage, sustained growth, etc.
  • A Shared Future. Help employees–particularly key producers–see themselves in the future of the company.  Let them know that their unique abilities are critical to the attainment of the company’s growth goals.  Create a feeling of partnership in growing the future company.
  • Value Creation. Paint a picture for employees about what it means to “create value” and why that is significant to sustaining a profitable organization.  Employees need to envision their role in value creation and understand the “abundance mentality” concept–that there is not a limit to the value that is created and what can be shared as a result.
  • A Wealth Multiplier Organization. The value creation discussion should dovetail with one that demonstrates the intent of the company to become a wealth multiplier.  This means that the goal is for value to be shared with those who help create it–and that when more value is created, more value can be shared.
  • Value Sharing. Explain to employees that wealth multiplier organizations are value sharing organizations.  The pay philosophy of the company will be one of sharing value with those that help create it–and that the intent is that all contributors will benefit from the success of building the future company.
  • Compensation Changes. In the aforementioned framework, the introduction of a restructured bonus or salary structure or long-term incentive plan has a context that properly aligns it with the opportunity an employee has within the organization. It is part of a value sharing approach in which the company intends to multiple wealth for all contributors.

Usually, if dramatic changes in compensation are being introduced, they are phased in over time.  A transition period is established so employees have a chance to see where the changes are headed and prepare for them without feeling panicked about the change.  For example, if the company ultimately wants employee incentives to be 50% short-term and 50% long-term for Tier 1 employees, they might have the split be 75/25 the first year, 70/30 the next, then 60/40 before transitioning fully to a 50/50 split.  This kind of transition communicates to employees the company wants to align it’s compensation structure with building the future company and share value with those who create it while respecting the need for employees to get used to the shift.

While what’s presented here is not comprehensive, hopefully it helps you envision how compensation can be framed in a broader strategic discussion when changes are introduced. While your specific approach might differ, if the intent described here is conveyed, the “right” employees will be more open to change.

For more on this topic, view our webinar entitled “How Do I Create a Competitive Advantage with my Compensation Plans?”

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Ken Gibson
June 29th, 2012 by Ken Gibson

The Compensation Portfolio

Language is important. The words we use to describe efforts, intent, purpose, outcomes and so on create images in the audience’s mind and will either enhance or diminish the ultimate message we mean to send.  That’s why, when talking about compensation issues, language creates a mindset from the top down in an organization about what rewards are all about.

In my view, the best way to talk about compensation is in terms of an investment.  All that we do in business is investment and return related.  Cost is a term that should be reserved for those items that are purchased in the context of a company’s overall investment in its business model and plan. Understood this way, salaries, bonuses, benefit plans and other aspects of a rewards strategy are not costs–even though they might be “expensed” on the company’s P&L. This may seem like a minor issue, but it’s not.  Words matter–and once a mindset settles in an organization it is very difficult to uproot or alter it.  Mindsets determine the trajectory of an organization.  Watch (listen to) the language people use in a business and you’ll know what direction an organization is headed.

So, if all we do in business is investment and return related, then what we really have are a series of “portfolios” we are managing in the business.  We have an innovation portfolio.  We have a product portfolio.  We have an R&D portfolio. And we have a compensation portfolio.

If this is the case, what are the asset classes in our rewards investment portfolio?  It’s an interesting question, isn’t it?  If  our investment in compensation is intended to produce a positive return and contribute to growth, how might we best evaluate our allocation?  We might consider thinking in terms of these three compensation “asset classes”:

The Performance Class

This asset group is designed to maintain the performance engine of the company.  It is focused on sustaining the virtuous cycle of the business model and optimizing what needs to be done to secure the current customer or client base.  This level of compensation is paid for helping the company meet its “budgeted” or targeted level of performance each year and to sustain a hopefully growing revenue stream.  It is also designed to appropriately address the need a superior level of talent requires to maintain confidence in the lifestyle it feels is commensurate with its level of skill, experience and unique abilities.  It seeks to protect the financial environment for key people and help them feel a level of security.  This class includes salaries, short-term value sharing arrangements such as annual bonuses, health and welfare benefits (group medical, dental, disability insurance, etc.) and basic retirement plans.

The Growth Class

Growth is future-based and this asset class is designed to encourage, nurture and reinforce future thinking.  It is intended to protect “good” profits in the organization and reward the fulfillment of the future company vision.  Rewards in this category are paid for helping the company achieve superior levels of performance.  In addition, its intent is to be a magnet for a type of employee that can adopt a stewardship approach to protecting shareholder interests.  This quality of employee is also attracted to the idea of participating in value that he helps create.  He is confident that when his unique abilities are combined with the company’s resources, the future company will be realized.  This asset group includes investments such as stock or stock option plans, phantom equity or SARs, profit pools and supplemental executive retirement plans such as deferred compensation. Companies sometimes invest in other executive benefits for this class such as car allowances, executive disability plans, etc. to secure the financial environment of key producers. Ultimately, this asset class should make employees feel like growth partners in the organization and invested in the future business.

The Transformation Class

Ambitious companies seek to fundamentally alter the course of their industries by creating unique breakthroughs.  Think Apple, Disney, Amazon and other companies that have changed the “universe” so to speak by engineering a different and better consumer experience as well as uniquely great opportunities for their employees.  Businesses don’t achieve this kind of revolutionary change by simply paying competitive salaries and bonuses–or even by offering stock.  They may include many of the elements of the other two classes, but their investment strategy is much more ambitious in all aspects of their business, including compensation.  Companies that work on compensation in their transformation portfolio have a wealth multiplier and not just a wealth creator mindset.  They envision people–both the customers they serve and the workforce they employ–experiencing life in a whole different realm.  As a result, they don’t just create compensation programs.  They market a future to their employees on all levels–product development, market penetration, innovation expectations and yes, rewards–so that company “portfolios” are completely aligned.  Every person in the organization, especially those responsible for driving results, knows the relationship between the company vision, its business model and strategy, roles and expectations, and rewards.  When this is achieved, new horizons of performance are attained that were never thought possible.

Hopefully, in reading some of the language used to describe each of these asset classes, you are persuaded by what I said at the outset.  Language is important.  Words matter. Whether you decide to use the terminology I employ here or something else, don’t expect to see any quantum changes in organizational performance until you transform the way you speak about all investments within the company, including and especially compensation.

If you like the concepts presented in this posting, you should also check out our article entitled “Why Long-Term Value Sharing Matters.”

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