The following post is an excerpt from a White Paper (with the same title) that VisionLink recently published.  To access the full article, click here.

Value sharing is an issue that, sooner or later, every enterprise leader must confront.  For example, many responsible for driving business growth wonder whether some kind of long-term incentive will enable higher performance; and if so, which approach is best—stock, performance units, phantom equity or some other value sharing plan.  This article offers five compelling reasons why long-term value sharing is critical for any company seeking breakthrough growth.

It is not the intent of this article to make a judgment about which long-term plan is most effective or to describe the advantages and disadvantages of different value sharing approaches.  Instead, we want to consider why such plans matter and how they make companies more productive while multiplying wealth for all stakeholders.

With that understanding as a “jumping off point,” let’s now move on to why long-term value sharing matters.

#1: Value Sharing Attracts the Best Talent and Magnifies Results

To achieve sustained success, companies must attract and keep talented people that know how to compete and are willing and able to assume a stewardship role in representing shareholder interests towards growth.  For such a relationship to be properly fostered, owners and other stakeholders (in this case, key talent) must share both the risks and the rewards associated with value creation.

Those of superior talent are attracted to this idea.  Individuals best equipped to contribute to the future success of the business will see it as an opportunity to have what amounts to a mini-entrepreneurial experience within the construct of someone else’s business model.  As such, they view the company as a mechanism for wealth creation, not just a place to express their passion and talent.  And shareholders should want employees with that perspective representing their interests.

#2: Effectively designed long-term value sharing plans reinforce the company’s business model

A sustainable business model depends, in large part, on a culture that is committed to and, ideally, “invested in” that model’s reinforcement and success. As a result, having key members of a workforce aligned financially with the business model makes both common and strategic sense.  The importance of this concept stems from the nature of the virtuous cycles (revenue perpetuation) the model is intended to produce.

Four Seasons, Verizon and Amazon each have distinct business models and, by extension, unique virtuous cycles.  So, it only stands to reason that their compensation strategies will be equally distinct.  The metrics and measures that stand as gate keepers to payouts (or earned shares, as the case may be) in each organization must reflect and reinforce the virtuous cycles relevant to that business.

# 3: Value Sharing Protects against Bad Profits and Promotes Good Profits

In his book The Ultimate Question, Fred Reichheld, a Bain Fellow and founder of Bain & Company’s Loyalty Practice, offers the following on the subject of profits:

“Whenever a customer feels misled, mistreated, ignored, or coerced, then profits from that customer are bad…Bad profits are about extracting value from customers, not creating value.” (The Ultimate Question, Fred Reichheld, Harvard Business School Publishing Corporation, 2006, 3-4.)

Long-term value sharing arrangements, if designed properly, become a self-enforcing means of perpetuating good profits.  Everyone has an interest in good profits if everyone’s wealth multiplier rises or falls on the ability of the company to sustain the right kind of profitability.

#4: Long-term value sharing promotes an ownership mindset

Businesses need employees in leadership roles that understand “what’s important.”  Such individuals must be able to embrace a stewardship role in aligning their focus with that of shareholders. They need to define what’s important in the same terms as ownership when they go about fulfilling their responsibilities.  For most companies, a list of “what’s important” would include, but not be limited to, the following:

• Drive growth (revenue, net income, EBIDTA or other measures)
• Improve margins/profits
• Manage costs

Each of those areas of emphasis has long-term implications.  In that context, value sharing plays a key role in communicating “what’s important” and aligns key producers with ownership thinking.

#5: Value Sharing Builds Trust and Trust Accelerates Results

At its core, value sharing is about turning a company’s workforce into partners in building the future company.  A culture of confidence is rooted in an environment of trust.  Value sharing communicates and builds trust because, in part, it is a fair approach to rewarding those responsible for value creation—and trust is the key to accelerating results.  In his book The Speed of Trust, author Stephen M. R. Covey makes the case this way:

“Whether it’s high or low, trust is the “hidden variable” in the formula for organizational success.

“ …A company can have an excellent strategy and a strong ability to execute; but the net result can be torpedoed by a low-trust tax or multiplied by a high-trust dividend.  This makes a powerful business case for trust, assuring that it is not a soft, ‘nice to have’ quality.”  (The Speed of Trust, Stephen M. R. Covey, Free Press, February 2008)

When you pay people in a way that communicates you want them as partners in building the future business, you are, in essence, saying: “I have confidence in you and trust your ability to get results.  To prove it, I’m willing to share the value you help create.”

Start with a Clear Philosophy

Before considering which plan is “right,” wise leaders will begin with the development of a compensation philosophy that addresses how the company will nurture a culture of confidence through its approach to rewards. Such a philosophy should address the balance the company will maintain between short and long-term value sharing, and guaranteed versus at risk compensation.  Determining the plan that will best reflect that philosophy then becomes much easier.

Last week I attended a fabulous event put on by Chief Executive Magazine in New York at the Stock Exchange.  It was a meeting designed to help CEOs connect with their peers and discuss the issues relevant to their roles in business right now, in this financial and political environment.  If you haven’t attended one of their events in the past, I would highly recommend doing so in the future if you lead a business.  Here are just a few highlights from the New York Conference, in no particular order:

Achieving Growth in a Low-Growth Enrironment

Bob Nardelli, CEO Cerberus Capital (former Chair and CEO at Chrysler and Home Depot)

• Enhance the Core (drive innovation in core business)
• Extend the Business
• Expand the Market

Lynn Tilton, CEO Patriarch Partners

• Break every business down to its variables
• Companies that get left behind are those that don’t innovate
• Companies are just people–you have to have the right talent
• Create a culture of innovation
• Create a culture of appreciation
• Do what’s right; key quote: “Too often we’re thinking about our business interests instead of what’s right and wrong. Doing what’s right will more often than not serve our long-term business interests.”

Fred Hassan, Chairman Bausch & Lomb & Senior Partner, Warburg Pincus

• Some companies get so good they forget to keep getting better
• Look at your trust index; foundational customer question–”would you recommend this company?”

How to Grow When Markets Stall

Ram Charan, Author, Strategist, Former Professor at Harvard Business School

• Put people before strategy–people need to know what’s required to be done
• Remain sensitive to customer–need to be connected to the ground floor of the person that buys your product or service
• Work from the outside in, not inside out–look at the need that must be fulfilled and then work backwards at what needs to be done to fill it
• Devote disproportionate management attention to differentiation
• Remember to pay attention to the basics–look at external trends; remember that the consumer experience is the key differentiator

Next week, I will share some more.  All for now.

The heart of a competitive advantage in an organization is a culture of confidence.  Such an culture emerges in companies that have developed success patterns to a point of such sustainability that the “flywheel effect” has kicked in, as Jim Collins describes in his book Good to Great.  There is momentum and your people know it; they know it because they are in the midst of it–in fact, they are the ones making it happen.  Such a business has a competitive advantage because a culture of confidence is not “copyable.”  It is an outgrowth of having all the human elements working in a unified, passionate fashion within a company.  Think Disney. Think Apple. Think any great company.

The best word to describe the mindset of the workforce within organizations that have developed such a culture is stewardship.  The dictionary describes a steward as “a person who acts as the surrogate of another or others.”  In business, it implies that employees act in the best interest of owners; more than that, they do the things ownership would do because they think like owners.  They think like owners, in part, because they are treated like owners–not because they necessarily own stock but because they have some kind of stake in the company’s success and a shared value system.

Organizations that adopt a stewardship approach to managing their people nurture trust and confidence in their employees by focusing more on  desired outcomes and results than methods and behaviors.  They communicate standards and values, vision and strategy, roles and expectations.  Then they communicate a sense of partnership in the way they share value with those that create value.

Such businesses inherently understand that they can’t use incentives as a tool to manipulate behavior or to reinforce methodology.  It’s not that they ignore those things, rather they recognize that pay is not the way to enforce the spirit of stewardship they want to engender.  To use incentives to “force” certain behaviors is the ultimate act of mistrust.  It undercuts the core sense of personal responsibility and accountability that a workforce must achieve if the “flywheel effect” is going to be realized.  Mistrust erodes a culture of confidence and pay, done improperly, creates mistrust.

To take it one step further, companies that have a culture of confidence don’t even think in terms of rewards as incentives.  Instead, they set up short and long-term value sharing agreements with their associates and consider their relationship to be a partnership, not employee or employer.  Value sharing is about reinforcing outcomes, not forcing behavior.  It’s about recognizing the contribution of all stakeholders in an organization’s success through effectively crafted pay programs.  It’s about stewardship not just employment.

So, as you consider where you are in your journey towards a future company that is not just good but great, avoid eroding your culture of confidence through any act of mistrust–especially as you build rewards strategies. Instead, use them to reinforce the line of sight you want to create between vision, strategy, roles, expectations and pay.

To learn more about a specific type of value sharing program that will encourage the stewardship mindset just discussed, tune into our next webinar broadcast entitled: What Think Ye of Phantom Stock–Does it Work?

Great compensation solutions come to those who ask the right questions.  It’s as straight forward as that.  And there is a cascading sequence to an effective questioning process as it relates to compensation development and design.  Let’s explore what that might include.

Stage One

The first level of inquiry has to do with broad strategic issues.  Since compensation is a “strategic” tool, not a “tactical” one, the questions must start here.

1. What is the vision of ownership for the “future company?”  In what ways will the company be different three years from now than it is today?  (Be as specific as possible.)
2. What are the potential barriers that could keep that vision from being fulfilled (external and internal)?
3. What key opportunities and initiatives have to be seized and effectively implemented if that vision is going to be realized?
4. Who are the  people that will drive those opportunities and are key to overcoming the barriers described?
5. Do you have all the people in place now you will need to realize the vision you have described or will new people be recruited?

Stage Two

With a clear and compelling vision in mind, you are ready to address level two questions.

1. What is the business model of the company; the performance engine that keeps revenue flowing and will fuel growth?
2. What roles are in place to support that business model and what expectations have been set for those roles?  (Presumably these are some of the same people mentioned above.)
3. If you implement a compensation strategy that works, how should the outcomes produced by this group be improved or changed?

Stage Three

Now that we have addressed the vision and business model, we’re ready to talk more specifically about compensation related issues.

1. What do you believe people should  be paid for primarily?  Time spent working? Outcomes (if so which?)?  Knowledge and experience?
2. In what ways are you paying people now that is supportive both of that philosophy and the business model you described in stage two?
3. How and to what extent should people be paid for maintaining the present performance engine of the company?
4. How and to what extent should people be paid for innovation and contributing to the future growth of the company?

Stage Four

With a working pay philosophy established in stage three, we’re now in a better position to be more granular in our compensation questions.

1. Where do we want to set salaries vis a vis market pay?
2. Where do we want total compensation to be vis a vis market pay?
3. Are those answers the same for each tier of employee in the company?
4. Do we want to share equity?
5. If we don’t want to share equity, do we want some level of pay to be reflective of company value?
6. If we don’t want to tie pay to company value, what financial metrics do we want it tied to?
7. What balance should there be between short-term value sharing (performance over 12 months or less) and long-term (performance over 12 months).

Certainly, there are still many more questions to be asked and answered before your compensation strategy will be ready and complete.  However, hopefully this list gives you a sense for the train of thought that should inform the compensation discussion in a company that wants to grow and realize ownerships’ vision for the future.

I’m departing from my normal “educational” blog today and will be waxing more “informational” this time. Please forgive the slight deviation.

Many who have visited our blog or website have inquired whether we ever speak publicly on any of the topics we blog about.  We do.  In fact, Tom Miller and I have spoken in a number of forums nationally on a range of compensation topics and other themes that relate to driving business growth.  Here is just a partial list of the forums and events at which we’ve spoken:

• CFO Magazine Convention
• Inc. 500 Convention
• Board of Directors Forum
• SHERM Crossroads Convention
• Pershing LLC INSITE™ Conference
• M Financial National Conference
• American Bar Association Tax Conference
• Vistage Groups

If you belong to an assocation or other group that needs  speakers on topics that relate to rewards programs or other compensation issues, we are happy to entertain such invitations. Our presentation approach is educational but dynamic.  It is intended to help the audience understand that compensation is one of the largest and most important investments a company makes—and should generate a measurable return for shareholders.

In our presentations, Tom and I help paint a picture of how rewards programs can be used as strategic tools to help fuel growth in a business.  Special emphasis is placed on addressing compensation and business growth issues for business leaders such as the following:

• The proper role and scope of incentive plans
• How to measure the return on a company’s compensation investment
• How to develop an “ownership mentality” within the workforce
• What alternatives to sharing equity exist for private companies
• Determining the right amount of compensation and how it should be paid
• Which type of long-term incentive plan is right for a company

In addition to our speaking engagements, VisionLink broadcasts a monthly webinar nationally that any are invited to attend. Our next one will be held next Tuesday, September 27 (8:30 a.m. PDT) and is entitled: Sales vs. Performance vs. Growth Incentives. Feel free to register for that event or view our catalogue of previous broadcasts.

Thank you for indulging me in this departure and soft plug.  I hope knowing this will be useful to many of you.

I have recently become somewhat a student of innovation; particularly looking at how great companies and individuals manage to get ideas and products implemented while others stop and stall.  Among the things I’ve assimilated in that learning process are the following:

1. Great innovators associate. Those that are prone to effective innovation are constantly associating one idea or experience with others.  They also systemitize the association process so that it occurs regular and naturally.
2. Great innovators question everything.  Their curiosity is insatiable and they want to get to the bottom of things.  Why are things the way they are?  Do they need to be like that?
3. Great innovators network. They want to associate with people that have a broad range of backgrounds and experiences so their life view is expansive and their feedback loop is broad.
4. Great innovators seek feedback. They want to know what others think before they introduce a product to market.  They want it tested.  It doesn’t have to be perfect, but it has to meet the right need in the right way.
5. Great innovators have a bias towards action. Innovating is not dreaming or wishing or even just being creative.  It is about getting ideas implemented and working in a way that transforms the end user’s experience.

There’s more I’ve learned, but let’s work with that list for now.  As we examine it in the context of compensation there are some important issues to consider.  A company’s approach to building effective rewards needs to follow a similar process:

1. Those that develop compensation programs need to be able to view compensation as a dynamic tool and ”associate” each component both with other elements of pay and with the business model of the company.  As the company’s innovation cycle continues and expands, the approach to rewards needs to be able to reflect that new reality.
2. If individuals are going to create an “innovative” rewards structure, they have to be willing to question everything.  What is the outcome we’re trying to drive?  Why is that important?  How should that outcome be rewarded?  When should it be rewarded?
3. Innovative companies look beyond the “network” of their own industry in seeking creative ways to properly reward people for value creation.  They don’t think in terms of what the peer companies in their “space” are doing.  They look at what great, innovative companies are doing and then take lessons from their approaches to everything, including pay.
4. Businesses that are effective at every level have a continuous feedback system in place.  They measure and assess.  They look at data and make decisions based on what that data reveals. Similarly, they seek feedback from their workforce about whether they are succeeeding at creating a sense of partnership, painting a compelling vision and building a sense of unity about the outcomes being pursued.  If they aren’t, they use pay as one of their strategic tools to target a better result.
5. Companies that get compensation right usually get a lot of other things right because they are prone to act.  They don’t let the pursuit of the perfect paralyze them from taking action.  They get close enough, they stay focused, they get it done, roll it out and then make adjustments as they need to.

As you approach bettering the compensation strategies you wish to adopt, hopefully you will likewise become a student of innovation.  If you do, the horizon of possibilities will expand and your ability to drive results will be magnified.

Engagement is one of the Holy Grails in business.  Every organization seeks it in its workforce.  Most company leaders can’t define it, but they know it when they see it…and they know it’s what’s missing when the business fails to reach its potential.  Engaged employees are like fuel to company growth and those who aren’t make everything move in slow motion. 

For an employee to become “engaged,”  a company must address what I refer to as “The Three ‘Cs’.”  They go like this. 

Engagement emerges when an employee feels:

1. Compelled–the business has a compelling future and the employee sees how his unique ability can contribute to its fulfillment.  This is about shared vision and values.
2. Clarity–leadership gives the employee a clear understanding of the business model and strategy what will fulfill the vision, what role he has in that plan and what’s expected of him in that role, and how he will be rewarded if he fulfills those expectations.
3. Connection–the employee feels a sense of partnership with company owners.  Whether or not equity is shared, he  understands there is a philosophy about value creation and value sharing that is fair.  As a result, all stake holders feel connected.

Well, if that’s what it takes to secure an engaged employee, what will the result look and “taste”  like once it’s achieved?  In my experience, companies that nurture engagement end up with employees that manifest that quality in each of  three ways:

1. Focus–more time is spent on the “best” results that can be achieved, not just good or better.  There is an outcome rather than a task orientation that is evident. The employee “gets” what result the company is looking for and displays a sense of stewardship about it.
2. Commitment–company leaders see that the employee has taken ownership of the future in a similar way that shareholders have.  It is apparent that it is meaningful to him for the company to achieve its vision because he knows what it will mean to him personally.
3. Shared Purpose–an engaged employees demonstrate a contribution ethic that extends beyond his specific role in the company.  It is a manifestation of the shared purpose he has with co-workers, other  teams or departments and with ownership.  This means he behaves in a way that demonstrates his understanding of  the interdependent nature of the independent roles throughout the organization.  He understands that today he may depend on someone else, but tomorrow that same associate may depend on him to achieve a desired result in which all have a stake.

In my experience, companies that use compensation as the strategic tool it is intended to be see rewards as one means of smoothing if not reinforcing the path to engagement.  For example,  they offer employees a long-term incentive plan that fosters the shared purpose indicated above.  It’s payout metrics are tied to a combination of company-wide performance, team or department performance and individual performance.  Such an approach nourishes a culture of contribution–because all have a financial stake that evokes a kind of “moral” bond with their associates.  If I fail in my stewardship, it doesn’t just impact me and if you slow down, I am also affected.

Leadership, then, should examine its current practices through a kind of reverse engineering process.  It starts by asking whether the workforce is currently, as a whole, manifesting outward signs of engagement (focus, commitment, shared purpose).  If not, it should then ask what can be done to promote a compelling vision, create greater clarity and enable the sense of connection and partnership that are foundational to engagement.  In the process, it should be sure to ask itself whether current compensation practices are more likely or less to promote the outcomes just discussed.

It is realistic to anticipate a fully engaged workforce?  It is.  I’ve seen it first hand.  For one example, see my blog entitled: “What a Competitive Advantage Sounds Like.”  The concept is further developed in another blog posting entitled: “Compensation and Trust.”  Finally, to learn how to get from an entitlement mentality to engagement, view our recent webinar entitled: “What to do When your Employees Act Entitled.” 

Many of the business leaders we work with struggle to find the right metrics for measuring acceptable growth in their companies.  In a recent article at Strategy+Business entitled “Total Shareholder Returns”, authors Ken Favaro and Greg Rotz offer some great insights in this regard.  Although the article addresses issues primarily relevant to public companies, the principles discussed have broad application.  It’s worth the read so check it out.

 Towards the end of the article, the authors make this point as it relates to managing strategy and execution towards improving Total Shareholder Returns:

 “Only two factors determine the value creation path of any company: the distinctiveness of its strategies and the execution of those strategies. We often hear statements such as, ‘A great strategy is worth nothing without great execution’ or ‘I’d rather have great execution with a mediocre strategy than the other way around.’ The reality is that strategy and execution are two sides of one coin. Is Southwest Airlines or Tesco or Wells Fargo the product of great execution or of great strategies? Yes. Both are needed to produce consistently superior shareholder returns.

“What, then, will enable your company to have and sustain distinctive strategies and execution? In our experience, this achievement requires proficiency in both the formal and the informal aspects of a company’s management. On the formal side are corporate strategy, business strategies, strategic planning, resource allocation, performance management, incentive compensation, organizational design, and role of the corporate center. On the informal side are leadership behaviors, peer-to-peer networks, teaming norms and skills, nonfinancial motivators, pride, and a strong sense of the business’s purpose.”

 As it relates to VisionLink’s approach to compensation, we refer to the formal and informal aspects as the “structural” and “mindset” impact of pay decisions.  Much of what this article discusses helps identify the kind of structural issues that need to be properly defined if a strong rewards strategy is going to be tied to them.  If the structure is not properly built, it will  be difficult for employees to understand that to which they are devoting their minds and hearts, and how it will be measured.

For more help on this topic, check out our webinar recording entitled: “How Shareholders Should View Compensation.”

Such is the question posed in the lead editorial of the July/August 2011 edition of  Harvard Business Review. It comes on the heels of a report by Equilar, an organization that tracks executive compensation, total pay packages for CEOs at S&P 500 companies.  According to its data, CEO pay rose 28% in 2010, to a median of $9 million.  This brings it back to pre-recession levels.

HBR Editor in Chief, Adi Ignatius, offers some interesting observations in response to this report.  Here, in part, is what he says:

“It’s hard to know exactly how to take this news. On the one hand, it’s a positive economic indicator of sorts, in that a CEO’s compensation tends to be linked to the company’s stock price. The markets saw a strong recovery in 2010; the S&P 500 index, for example, rose 13%. On the other hand, there’s something unsettling about this development. In the immediate wake of the financial crisis, nearly everyone agreed that we had gotten into trouble partly because tying compensation to short-term performance had enriched individuals while putting institutions—and the overall system—at risk. In an interview that begins on page 112, Disney CEO Robert Iger addresses the problem. He made $28 million last year in salary, bonus, and stock options. But Iger concedes that there is too much emphasis, in his and other CEOs’ pay packages, on short-term stock results, and he urges compensation committees to rethink their approach.”

I tend to agree with Ignatius’s thinking on this issue.  The 2010 results certainly reveal that executive pay is a kind of double-edged sword in what it reflects.  At a minimum they demonstrate that any executive pay strategy that doesn’t take a balanced approach to compensation (tempering short-term earnings capacity for key people by placing some long-term compensation at risk) can ultimately be considered “unfair” by some constituency.  Public companies have a harder time with this than private organizations, primarily because of the need to focus on quarterly results.  Meeting the expectations of the analysts is almost their sole focus. 

Both public and private companies need a compensation philosophy and strategy that is consistent with building both short and long-term value.  As I have discussed previously in these blog pages, such an approach keeps a business focused on good profits instead of bad profits.  The latter are earnings that come at the ultimate expense of both the customer and shareholders.  Good profits sustain value and multiply wealth for all stakeholders.

In our approach to compensation design, we recommend companies place a substantial amount of executive pay “at risk” through well designed incentives.  We encourage growth oriented-organizations to offer top tier employees as much as 80 to 100% of salary in incentive earning capacity.  The key is to have approximately half of that amount paid out in short-term incentives (pay for results generated in 12 months or less) and the other half in long-term incentives (pay for results generated past the one year mark, and usually three years or more later).  Salaries should be modest by market standards–usually between the 40th and 50th percentile of market pay.

Such an approach creates a truer sense of partnership between company ownership, key employees, customers and the market in general.  When each of those stakeholders’ interests are represented in the way employees are compensated, greater balance is realized and the compensation wars can subside if not be eliminated.

For more information on the role of compensation in driving shareholder value, view our webinar entitled: “Does Your Compensation Strategy Drive or Hinder Growth?”

CEOs have a lot to worry about.  (Okay, forgive my stating the obvious before even gettng started!)  As a result, effective chief executives provide strategic oversight but empower others to make decisions and carry out the company’s business model and plan.  Ideally, that person has set up accountability systems that are both effective and efficient in their ability to provide relevant feedback to guide him or her in making adjustments and course corrections as necessary. 

I recognize there’s nothing new in that introduction.  However, it’s an important foundation for setting up a discussion about the CEO’s role in compensation development and management.   Here’s why.

The leadership orientation  just described, while typical and necessary, often puts the CEO too far out of touch with an essential role he or she needs to play in the compensation discussion.  Pay is a strategic tool, not merely an expense that needs to be contained.  It is an investment that needs to be properly allocated and the CEO should assume as much responsibility for the return the company achieves on that capital commitment as any that is made in the enterprise.  In fact, given that compensation and benefits are usually the largest budget item on any company’s financial statements, one could argue that the CEO should pay even more attention to ROI results being generated  in this area than almost any other the company measures and manages.

At the end of the day, the person at the helm is primarily  responsible for making sure that both financial and human capital are generating an appropriate return for shareholders–and then holding people accountable for performance levels that will ensure that outcome.

If this is true (and I submit it is), then exactly what role should the CEO play in the compensation discussion–and where (if anywhere) should  handoffs (delegation) occur?  Here are some suggestions and guidelines:

1. Establishing Pay Philosophy.  A chief executive officer must lead the philosophical discussion about pay.  Given the performance outcomes demanded of that role, the person at the helm must make clear what the company will pay for–and how that philosophy will be manifest in practice.  Where should company salary levels be vis a vis market pay?  What balance should the company strike between guaranteed and at risk pay? How much of performance-based pay (incentives) should reward for short-term results (monthly, quarterly or annual) and how much should be tied to long-term results (more than 12 months)?  Certainly, a CEO can solicit imput from key leadership members in this discussion (as well as outside consultants), but this is a core issue for which he or she must assume primary responsibility.  Every other discussion about pay will cascade from this foundational stage and the groundwork that is laid by establishing a clear pay philosophy.
2. Defining Strategic Outcomes. Specific pay programs may be developed under the direction of individuals given that stewardship by the CEO.  However, in making that handoff, the person ultimately responsible for the “bottom line” must be able to clearly define the strategic outcomes and priorities the company is focused on.  Every rewards plan that is developed must have a purpose statement–and that purpose must be tied to a specific, measureable result the business seeks to achieve.  What is the role of the pay plan if not to drive the business model and strategy of the company?  CEOs will be left wondering why they aren’t getting better results from their people if they aren’t paying attention to and fully engaged in this part of the process.
3. Establishing Framework for Discussion.  Compensation development and management is not a static activity.  A company can’t develop a plan, role it out and then “let it ride” forever more (although some companies do, by default, adopt this approach).  As a result, the CEO needs to provide the organizational framework within which best practices for envisioning, creating and sustaining world class compensation strategies can emerge and thrive.  He or she should decide who is essential to the compensation discussion, organize a committee to fulfill the oversight role and (with the help of those committee members) establish a schedule and agenda for ongoing management and monitoring.
4. Determining Roles and Responsibilities. Related to area number three above, this category implies that those involved with developing a best practice approach to building and sustaining world-class compensation strategies for their company understand their specific stewardships.  For example, who is ultimately responsible for administering a given plan?  Who will take the lead in developing a promotion and communication strategy for the overall rewards strategy?  Who will make sure successes are celebrated appropriately and in a timely fashion?  Who will monitor any legal requirements associated with the plan(s)?  How and under whose direction will the success of given pay programs be measured and monitored?  What financial information, requirements  and procedures have to be tracked and managed–and who will assume that responsibility?  And so on.  The CEO doesn’t have to make everyone of these assignments, but he or she does need to ensure that these roles get defined and that there is accountability for their fulfillment.
5. Approving Metrics and Measures.  Compensation design is an outcome based endeavor.  In many ways it’s also an exercise in reverse engineering.  We project forward certain results we anticipate achieving based on certain assumptions (revenue growth, expenses, manpower, etc.).  We determine how such growth will impact shareholder value.  We then determine what amount of that additional value we are willing to share to achieve that outcome.  We then “reverse engineer” that future value to a present context so we can clearly state how employees will participate in the value they help create.  In that process, the CEO must help define thresholds of performance (revenue growth, profit margin, ROE, etc.)  that need to be achieved before the company will be comfortable sharing value.  Specific measures and metrics for company wide performance, department or team performance and individual performance will ultimately need to be determined.  While the CEO won’t independently  set the levels in each of these areas, he or she cannot disengage from the decisions that have to be “signed off on” if the plans developed are going to be financially viable and protect shareholders’ interests.
6. Insisting on a Clear Message.  CEOs set a tone.  They can make or break a meeting or announcement based on the level of attention it receives, the passion that surrounds it and the clarity that is provided.  Likewise, a CEO must ensure that any message involving any aspect of the largest budget item on the company’s financials (compensation and benefits) is clear and helps reinforce the organization’s vision and mission as well as it’s business model and plan.  This doesn’t mean the CEO needs to deliver every message about compensation.  It does mean, however, that he or she knows what messages are being communicated and they are consistent with the compensation philosophy statement that was established and articulated at the start, under the chief executives direction.
7. Leading the Celebration.  While managers at all levels of a business should help their teams celebrate the successes they experience, the CEO needs to be the cheerleader in chief.  That role carries a weight that can’t be duplicated by others.  When employees hear from the person at the top, there is a different priority level that message attains.  CEOs should “pick their spots” but then be sure their voices are heard when good things happen.  This can be done in writing, in meetings, on intranet postings, on Facebook pages and through “tweets.”  Whatever the channel, the CEO must engage in this activity.
8. Measuring Productivity.  Perhaps the most important question to be asked about a given compensation strategy is whether or not it made the workforce more productive.  Did people become more engaged as a result of how they were being paid?  Is execution improving.  If so, are there measurable results to prove it?  Having mechanisms in place that isolate the return on investment that the company is achieving  through its human capital are critical to evaluating the effectiveness of its rewards strategies.  While a CEO does not have assume the task of coming up with the specific means of making a productivity assessment, he or she must insist it be measured and consistently review the trends the analysis portends.
9. Holding People Accountable. If a rewards strategy isn’t working, the CEO needs to know that.  And someone has to be accountable for the lack of results being generated.  If the other areas outlined in this article are properly addressed, this will be an easy step to take.  Roles and outcomes will have been clearly defined.  Accountability in this arena means that everyone in those roles understands what will happen if the outcomes intended aren’t being realized through the specific pay programs for which they have charge.  When results fall short, it will not always mean that the specific plan in question is bad or not performing properly.  However, those responsibile need to be able to “account” for why results are what they are.

Our experience has been that in companies where this level of engagement (in the compensation discussion) from the CEO exists, performance occurs at an accelerated pace.  Presumably, this happens because alignment has a greater possibility of occuring in organizations where the person at the top understands the essential and strategic role of compensation in creating a unified financial vision for growing the business.

To learn more about this issue, please view our webinar recording entitled “Why CEOs Should Drive Compensation Strategy.”