April 8th, 2013 by Ken Gibson
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:
- 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)?
- 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?
- 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?”
- 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.
Tags: compensation, compensation philosophy and strategy, Employee Trust, Growth, incentive plan, Incentive Plans, incentive programs, incentives, long-term shareholder value, Pay for performance, Sustained Results
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February 21st, 2013 by Ken Gibson
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.
Tags: breakthrough success, compensation, compensation philosophy and strategy, Culture of Confidence, Employee Trust, Growth, incentive plan, incentives, Pay for performance, phantom shares, phantom stock, profitability, Sustained Results
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 »
January 24th, 2013 by Ken Gibson
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.
Tags: compensation and the recession, compensation philosophy and strategy, Culture of Confidence, Employee Trust, Growth, incentives, key people, long-term shareholder value, Pay for performance, Sustained Results
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January 10th, 2013 by Ken Gibson
There is no constitution that dictates how compensation should be designed. Nor is there a “one size fits all” approach to building pay strategies that will help a company succeed. However, there are what might be considered self-evident principles that businesses should use when they approach the development of rewards strategies. I call them self-evident because companies that have succeeded in their approach to compensation have applied these principles and seen positive results; the principles have been tested.
So, not in any particular order, here are the guiding principles that any company wishing to develop an effective compensation strategy should follow:
- Know Your Philosophy. Every company needs to be able to articulate what it believes about pay and value sharing. This should be in writing.
- Define Outcomes. This means a company knows the results its looking for and how to prioritize those results. All leadership needs to be in agreement about those outcomes and that they are achievable.
- Envision the Future. A business must be able to effectively model what the future will look like if the defined outcomes are achieved. It needs to be able to envision what will happen to shareholder value if certain assumed results are achieved.
- Define Value Creation. This should technically be part of the compensation philosophy. A business must be able to articulate the point at which additional value has been created beyond that attributable to the financial and physical capital at work in the business.
- Identify Clear Roles. An organization needs to link outcomes and value creation to people. What functions need to be performed to achieve the results that have been identified? Are the right people filling those roles now? Are additional or different people needed?
- Share Value–Especially Long-Term Value. There needs to be a relationship between value created and value shared. Key producers want to know that there’s a mechanism for participating in the growth they help create.
- Adopt a “Total Rewards” Approach. Financial rewards is only one of four reasons individuals join and then stay with an organization. Pay is a critical component but premier talent also wants to know that the company has a compelling future, that a positive work environment is being nurtured and that there will be opportunities for personal and professional development.
- Market a Future to Your People. At a minimum this means a company has to have a clear and compelling means of communicating its value proposition to its people. But it has to more than communicate how a bonus plan works. It has to create “line of site” between vision, strategy, roles, expectations and rewards. Innovative leaders such as Steve Jobs, Mark Zuckerberg and Jeff Bezos have developed ways of transforming the way both their employees and their customers view the future. Compensation has to be framed in such a context for it to have impact.
Well, there you have it. Now you’re equipped and should never fail in your development of effective pay strategies. Okay, you should have smaller failings at least. No one gets it all right at the outset, but if sound principles are being applied, making adjustments will be much easier. Your people will also sense there is a fairness to your approach and will help you get it right.
In the end, growth companies know that if they don’t get rewards right, there is a high likelihood they will fall short of the results that hope to achieve. Correct principles will help make sure you get it “right.”
Tags: compensation, compensation and the recession, compensation philosophy and strategy, Culture of Confidence, Employee Trust, Growth, Pay for performance, profitability, Sustained Results
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December 12th, 2012 by Ken Gibson
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.
Tags: compensation philosophy and strategy, Culture of Confidence, deferred compensation, Employee Trust, Growth, incentives, rewards, Sustained Results
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 »
November 6th, 2012 by Ken Gibson
That’s a question that is felt at a visceral level by anyone trying to drive growth in a business. Intuitively, most CEOs know they should have a better handle on how much their key producers are being paid and why. They’ve looked at market pay data and thought strategically about the role each person is playing in the company’s growth plans. At the same time, they would be hard pressed to articulate why a given employee group received an increase in compensation this past year and what standards had to be met to merit that improvement.
As this issue is examined in company after company we meet with, we suggest that a ”value matrix” be developed that will articulate the standards each compensation plan must meet to be justified. This exercise should be done in conjunction with the development or evaluation of the company’s written compensation philosophy statement that articulates what the company believes it should “pay for.” We recommend the value matrix incorporate and define the following components. Down the vertical axis, each piece of the compensation package is listed: salary, annual bonus, qualified retirement plan, long-term incentive plan, group benefits, executive benefits, etc. Across the horizontal axis, the following standards should be defined for each plan:
- Purpose–This is a brief statement that should answer the question: “Why do we have this plan; what outcome is it intended to drive?” For example, the purpose statement for a short-term incentive plan might say something like: Enhance current cash payments to executives for achieving top and bottom line annual goals.
- Standard--Here we want to define what measure will be used to define how the plan value will be targeted. For example, the salary standard might be articulated as the 50th percentile of market pay. A standard for a long-term incentive plan might be defined as 20 to 30% of salary. Even if something like Phantom Stock is being used, it should be quantified other than by just the number of shares being distributed. Group benefits would typically be stated in terms of a percentile of market standards, as salary is.
- Investment–This figure is a dollar amount the company anticipates investing in the pay program on either a per employee basis or for the group as a whole (that is to be included) and the period being evaluated. Each form of compensation needs to be calculated and the company commitment quantified. To come up with this figure, the company will need to make assumptions about the level of results it anticipates will be achieved to trigger incentive payments in particular. It may decide to tie the assumed dollar volume to a base, targeted or superior level of business performance.
- ROI–This is a standard that identifies performance thresholds the company needs to be achieving to merit the pay investment that has been allocated. Salary levels, for example, may be tied to an ROA target the business needs to achieve while short-term incentives might be based on a combination of revenue growth and margin (or other key performance indicators).
When a company goes through this kind of analysis, it is forcing itself to think about compensation as an investment that is being allocated rather than merely an expense to be contained. It creates a standard against which it’s pay allocation can be measured. If companies want to get serious about growth, their leaders must think about compensation in these terms and understand the extent to which this deployment of capital is contributing to growth. Pay for performance in this context is not just a fancy term for having a bonus plan. It’s a strategic approach to the decision making process that impacts what, for most companies, is the largest budget item on their financial statement.
To learn more about where compensation will be headed in the future, tune in to our webinar on December 4 entitled, “The Future of Compensation: What’s Next and Why?”
B8VVKUVES2EF
Tags: compensation, compensation and the recession, compensation philosophy and strategy, Culture of Confidence, Growth, incentives, Pay for performance, profitability, Sustained Results
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Return on Compensation Investment, Uncategorized | 1 Comment »
October 26th, 2012 by Ken Gibson
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?”
Tags: breakthrough success, compensation and the recession, compensation philosophy and strategy, Culture of Confidence, employee stock, employee stock owenership, Employee Trust, Growth, incentives, key people, Pay for performance, phantom shares, phantom stock, profitability, rewards, Sustained Results
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, Recession Strategies, Uncategorized | No Comments »
August 24th, 2012 by Ken Gibson
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.
Tags: compensation, compensation philosophy and strategy, Culture of Confidence, Employee Trust, Growth, key people, Pay for performance, Sustained Results
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 »
June 29th, 2012 by Ken Gibson
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.”
Tags: breakthrough success, Company stock options, compensation, compensation philosophy and strategy, Culture of Confidence, Growth, incentives, long-term shareholder value, profitability, rewards, Sustained Results
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 »
June 14th, 2012 by Ken Gibson
Keith Williams took over leadership of Underwriters Laboratories in Northbrook, Illinois in 2005 at a time the company was not doing well and significant changes needed to be made. The company was carrying a high amount of debt and it was losing market share to competitors. In addition, the organization had become “siloed” and different divisions were literally undercutting each other. Williams made a number of moves to “right the ship.” What caught my eye in a recent article in Chief Executive Magazine (describing the transformation the new CEO took the company through) was the steps he initiated to “realign” compensation–and the impact those changes had on subsequent company performance. Quoting from the article, here’s what took place:
“Williams also changed the compensation program to align everyone behind the company’s success. ‘I call it ‘pay the company first,’ he says. ’Basically, up to the company’s operating profit target, all of the profits go to the company; and only after that target is met, do we start funding the incentive pool.’ For example, if UL’s target is $80 million, 100 percent of the first $80 million in profits goes to the company, the next $20 million to the incentive pool, and from there on, funds are split 50/50 between the company and the incentive pool. ’A lot of companies think, ‘I’ve got $1 million left in my budget, I should spend it,’ says Williams. ‘What we’re saying is ‘If you really need to spend that $1 million on our future, please do, but if you don’t spend it, half will go into the incentive pool.”
There are so many things right with this approach that it’s important to break them down. Let’s consider what was accomplished by the approach Williams took to compensation:
- Shareholder interests were protected
- The “silo” approach was dismantled (division had to support each other to maximize incentives)
- The workforce was taught where value sharing comes from–it comes from economic value added
- Everyone was clear on what the profit target was ($80 million), which means they had to understand when and how the company was profitable
There’s more, but that’s a pretty good list. And the result? UL had one hiccup in 2006 when it missed its earnings projections but hasn’t missed one since. Revenues were at $1.25 billion in 2011.
As I’ve often asserted, compensation is certainly not the only issue that impacts growth and performance in a company. And I’m not suggesting that is the case here either (nor is Williams). The point is that without this realignment of compensation, the way people were being paid would have been at odds with the strategic changes the new CEO was trying to initiate. How people were rewarded needed to be aligned with the overall plan to set the company on a different path.
Three cheers for a CEO that gets it.
Tags: breakthrough success, compensation philosophy and strategy, Culture of Confidence, Employee Trust, Growth, incentives, long-term shareholder value, Pay for performance, profitability, rewards, Sustained Results
Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent | 2 Comments »
