Why Not Have a World-Class Compensation Plan?
I assume that as you approach each new year, you don’t think about your business in modest terms. Presumably, you have big plans, and are trying to renew your employees’ vision of the possibilities. Breakthrough growth. New thresholds of success. Expanded sales and market share. Increased profitablity. Greater shareholder value.
With that vision in mind, you are likely trying to effectively communicate your vision to your key people. You want them to understand why that future is important and how confident you are that it can happen, with their help. To that end, you might be holding team meetings, sending letters or intranet communications, inviting key individuals to lunch and generally trying to ignite a fire that will translate into execution and results that reflect the potential you have imagined.
Now, with such goals in mind, can you fathom any successful business leader standing in front of his team and giving a speech that goes something like this?
“This year our target is to do about as well as our competition. We’ve studied what they are doing and hope to mirror their plan as closely as we can. If we carefully manage expenses and make sure we keep our costs down, we should be okay.”
You are laughing right now, right? Well, laughable or not, while that may not be the way an owner, CEO or company president approaches the communication of his business vision, it too often reflects his approach to compensation design–the one strategic tool that best communicates the relationship between vision, business plan, roles, expectations and rewards.
To make the point clearer, here are some common assersions or questions we often hear early on in our discussion with potential clients.
- How many clients do you have in our industry?
- Can you do a market pay study for us?
- Is there a lower cost approach we could take?
- We don’t really want to add anything to our compensation budget, so please keep that in mind as you help us develop new plans
- HR handles compensation issues, you should talk to them
There are more, but you get the idea. Can you see the obvious disconnect between these comments and a company that is trying to achieve breakthrough performance?
Compensation is usually the largest budget item for a business. Company cash is going to be used for that purpose one way or another. The key question is, will it be used as strategically as every other investment in the business, or will it be relegated to just another expense that has to be managed?
If you have applied your energy towards becoming a world-class organization with a clear competitive advantage, why would you not apply the same focus to compensation development? If you need to attract great talent to become a great company, why would you not offer them a world-class compensation plan?
If you are thinking that “world-class” means expensive (as in world-class hotels, first class travel, etc.), then think again. A world class compensation strategy might simply be described as follows:
The business is committed to a compensation strategy that is fully integrated with the business plan and offers a clear competitive advantage in recruiting and retaining top talent.
Having an integrated compensation strategy simply means there is a relationship between how people are paid and the achievement of the strategic goals of the organization. Compensation is an outcome based endeavor. In a world-class environment, those outcomes might include the following:
- Productivity: Employee engagement and commitment reflect an ownership-like determination to drive growth, profits and shareholder value. (Owner statement–”Employees understand the company’s future and are committed to helping fulfill it because they have a vested interest in helping it succeed.”)
- Talent: Great talent is attracted to and remains with the company because they feel passionate about their role in the future of the organization. (Owner statement–”Employees believe in the company’s ability to achieve its targets and that their contribution is vital.”)
- Measures: The cost, impact, and operational efficiency of all compensation/benefits programs are managed, monitored, measured and consistently improved. (Owner statement–”We regularly evaluate and employ mechanisms by which we can improve our systems, drive productivity and save money.”)
In a company with a “world-class” mindset, the speech given by the owner, CEO or president might sound more like the following:
“This year we anticipate having record performance. Building on our past success, as well as the strength of the greatest talent in our industry, we expect to secure a leadership position in our market space and achieve our most ambitious goals. You are a critical part of the future of this organization. We can’t achieve our goals without you. As a result, I want to make sure you understand the rewards you will enjoy if we can all work hard and achieve the performance levels we have targeted. This year, in addition to your salary, you will pariticipate in two incentive plans–one short-term in nature and the other long-term. Both will put you in greater control of the financial results you can realize if we can achieve the goals we have set.”
Such a speech can only be given by a leader that understands the relationship between performance and pay, and the importance of carefully tying the two together in the value proposition employees are offered. Such a speech will also attract great people–individuals that relate to the idea of building something and want to know that their contribution is vital. Such individuals feel valued and counted upon, as a result, they execute differently.
So, as you approach this new year, think in terms of new standards–not just in the goals you set or the initiatives you launch, but also in the way you reward performance. Build a world-class compensation plan.