Most business leaders are cost conscious, because they know that all expenses impact the proverbial bottom line.  As a result, when they consider compensation issues, they commonly think in terms of “managing costs.”  This perspective is revealed to us through statements or questions such as the following:

• I can’t afford to pay incentives right now.
• I’ll need to know what a long-term incentive plan will cost before I….
• What is the market rate of pay for these positions?
• How do I keep my payroll expense under control?

Cost is a large part of our focus when we are engaged to work with clients.  However, we try to help the business leaders we work with to look at costs in two potential contexts:

1. What are the “structural” costs associated with your rewards strategies?  This would include understanding and evaluating all of the known as well as hidden costs across the range of compensation and benefits strategies currently being offered. For example, hidden costs associated with welfare plan utilization, unclear fee sharing associated with 401(k) plan investment offerings and administrative services, and so on.
2. What are the “performance” costs associated with your rewards strategies?  Humm.  What do we mean by performance costs?  Read on.

One of the most costly issues a company can face is under performance.  This occurs when a business isn’t able to achieve sustained results because it either is attracting only good people when what it needs is great talent, or the people it has in key positions are not working in full alignment with the core business model and strategy of the company.  We see this over and over again. 

Too often CEOs are making cost containment decisions about rewards strategies that they believe are saving the company thousands of dollars.  Unfortunately, the issue is being evaluated in a silo and is not being measured against the performance standard that needs to be met.  The question shouldn’t be “how much” compensation are we or should we be paying?  The question needs to be “how” should we pay compensation; meaning, what forms of rewards should be included in our mix and what weight should they each be given to: a) attract the kind of talent we need for the performance level we are seeking, and, b) keep those people properly focused and achieving once they’re here.

So while we’re big proponents of evaluating and measuring structural costs, we believe bigger losses occur when companies don’t properly evaluate the performance costs associated with their compensation game plan.

To read more about this concept, click here.