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Ken Gibson
January 31st, 2012 by Ken Gibson

Why Long-Term ‘Value Sharing’ Matters

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.

 

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Ken Gibson
November 21st, 2011 by Ken Gibson

Keep Incentive Plan Design Simple

Complexity can kill any value sharing arrangement.  Some reading that sentence are nodding their heads knowingly right now.  They’ve experienced that complexity and watched failure overcome what seemed in the beginning like just the right solution to plan design.

Companies run into the complexity problem most commonly when they try to manage behavior through the incentive plan.  They construct metrics and measures that are intended to focus the employee on specific business drivers.  By the time they construct those metrics for every category and tier in the company, they have a monster on their hands.  It’s usually about that time that our phone rings.

As you approach incentive plan design, keeping it simple has to be an overarching aim that guides the process.  To accomplish this, think in terms of deciding between two basic plan types and three basic measurement categories.  Then plan to “weight” the measurement categories by tier of employee to address the variance in impact at each level of the workforce.  Here’s what I mean.

Two Plan Types

When building a short-term incentive, a company will need to decide whether they want to use a profit-based allocation model or a targeted KPI approach.   In simple terms, a profit-based approach will focus everyone in the workforce on the profitability of the company and a pool will be used to generate payouts once a certain threshhold of profitability is achieved.  The KPI approach focuses the attention of an individual or team on defined performance indicators or intiatives which, if achieved, will drive greater profitability, revenue, EBITDA or whatever other key outcome you measure.

Each of these approaches are discussed more thoroughly in an article and/or webinar on our website.  I will refer you there for greater detail.

Three Measurement Categories

Most plan types can be managed well by “weighting” how much of an incentive will be tied to company performance, how much to team or department performance and how much should be based on individual performance.  The weighting each of these is given depends on the sphere of influence of the participating employee.  For example, tier one employees (executive level) might have a weighting something like the following: 75% company, 0% team, 25% individual.  A second tier (directors) might be allocated as follows: 25% company, 50% team, 25% individual. And so on through the tiers.

The three measurements approach allows you to have one plan while making room for adjustments to be made by category of employee based on its ability to impact company, department or individual outcomes.

Long-Term Incentives

Just a word about long-term value sharing.  The approach described above can apply to LTIPs as well, but is most commonly used for short-term incentive plan design (payouts for performance in a period of 12 months or less).  To effectively design a long-term value sharing arrangement, you will need an additional planning tool; a decision tree process that helps you ask the right questions and arrive at a suitable plan model. Ultimately, there are about nine different long-term value sharing approaches you could adopt.  Questions such as “are you willing to share equity?” lead to one conclusion or another about which plan type will be most suitable for your organization. To learn more about the decision tree process access the VisionLink article entitled: “Long-Term Incentive Plans–Which is Right for your Company?”

Once a long-term plan design is determined, a “simple” approach should still be applied.  The three measurement categories approach will help you do that.

In the world of compensation design, as in so many other things, “less” is often “more.”  Keep it simple.

 

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Posted in Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Uncategorized | 2 Comments »

Ken Gibson
August 17th, 2011 by Ken Gibson

What, Exactly, is an “Engaged” Employee?

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.” 

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Ken Gibson
July 31st, 2011 by Ken Gibson

Why a Long-Term Incentive Plan Matters

The full title of this article should really read, “Why a Long-Term Incentive Plan Matters…MORE than Other Types of Incentive Plans.”  However, I didn’t want you worn out before even starting the article–so forgive the abbreviated headline.

I recognize that’s quite a claim, but hear me out. My premise is based, in part, on what recent HBR authors Paul Adler, Charles Hecksher and Laurence Prusak have discovered about institutions that have sustained records of both efficiency and innovation.  Among other things, these organizations excel at achieving the following three things:

  • A Shared Purpose.  An effective shared purpose, the authors indicate, “articulates how a group will position itself in relation to competitors and partners–and what key contributions to customers and society will define its success.”
  • An Ethic of Contribution. Collaboratives communities generate accelerated results. Such organizations instill a bias towards contribution which in turn ”accords the highest value to people who look beyond their specific roles and advance the common purpose,” according to Adler, Hecksher and Prusak.
  • Interdependent Processes. In their article, the HBR authors quote a project manager from Computer Science Corporation as follow: “People support what they create…As a project manager, you’re too far away from the technical work to define the [processes] yourself…It’s only by involving your key people that you can be confident you have good [procedures] that have credibility in the eyes of their peers.”

At this point you may be saying to yourself, “This is all very interesting, but what does it have to do with long-term incentive plans..and why they matter more than any other rewards plan within our business?”  In a word, everything.

For a business to grow, it depends upon the collaborative efforts of a workforce that shares in the purposes and ends to which the company is working.  By nature, organizations are made up of interdependent teams and individuals whose motivation for building cooperative processes depends upon buying into a shared ethic of contribution.  In an ideal environment, employees recognize the value that grows out of a sense of partnership with those to whom they are “tethered” in the work that fulfills the shared purpose.  When this can be harnessed and perpetuated, there is a magnified fulfillment experienced by everyone collectively and individually.

The role, then, of the Long-Term Incentive Plan is to define the financial nature and benefit of engaging in the three elements outlined above.  Said another way, if all I experience from a pay program is a salary and annual bonus, there is no financial mechanism fostering in me the role of a shared purpose, the ethic of contribution and the interdependent processes that must be sustained for growth to emerge and then be sustained.  While it isn’t the only piece of the equation that allows these things to take root, if a long-term component isn’t there, it is difficult for people to trust that a true partnership has been entered into with those who control the financial future of the business.

This is one of the primary reasons we tell our clients that they must make it a priority to introduce the long-term component in their rewards gameplan.  When coupled with the short-term incentive, it balances the focus of participants between generating results right now with building and protecting  long-term value .

For more information on the role long-term incentives can play in your company, check out our webinar entitled: How to Build Long-Term Value for Key Producers.

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Ken Gibson
July 8th, 2011 by Ken Gibson

CEO Pay is Up! Is that Good?

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?”

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Ken Gibson
February 25th, 2011 by Ken Gibson

Compensation and Creating Change

It is certainly cliche to say that change will be an ever present part of business life in the 21st century–and beyond.  However, cliche or not, many businesses haven’t surrendered to this truth enough to create a plan for managing change and finding the appropriate role of rewards in that process.  The reality is, most business leaders know how to talk about change, but don’t know how to build an integrated approach to addressing it through all levels of the organization.  And when it comes to compensation issues, these same leaders either put too much of a burden on rewards strategies to engineer the new culture they seek or they isolate the issue so completely that it can have no real measureable bearing on execution and results. 

In a recent article in Booz & Co.’s Strategy + Business Magazine entitled “Making Change Happen and Making it Stick,” authors Ashley Harshak, DeAnne Aguirre, and Anna Brown posit five key success factors to making change work in an organization.  I find this list to be in harmony with VisionLink’s philosophy about all of the elements that have to come together if any kind of purposeful, productive transformation is going to take hold in a company’s culture. Let’s look at their list and the corresponding role rewards should play in bringing about the improved outcomes you seek.

Five Key Success Factors

  1. Understand and spell out the impact of the change on people.  Good leaders know how change impacts individuals and can speak to how a course alteration or revision will affect different populations within the organization. Creating clarity around this issue and relating it to the personal visions of employees is essential to alignment.  Leadership must must also communicate how the proposed changes relate to the shared vision and values of shareholders and other stake holders.   Similarly, rewards strategies that are introduced need to be relevant to the core philosophy guiding the change; and, if the new direction impacts pay, employees need to know how the new approach will affect their cash flow, security and/or wealth accumulation opportunities.
  2. Build an emotional and rational case for change.  Most CEOs are pretty good at conveying the rationale behind the change that is being initiated.  They are less effective, however, at appealing to the emotional reasons employees should embrace a new direction. In their book Switch, the Heath brothers use the analogy of an elephant, a rider and a path to make a similar point. The rider is the rational part of our reaction to change, the elephant is our emotional core and the path is clarity about the course we need to follow.  In a compensation context, we encourage companies to make sure they build a rewards gameplan that will address both structure issues (impact on strategy, cost, productivity) and mindset issues (impact on clarity, partnership and engagement).  By doing so, they appeal to all three elements: the rider, the elephant and the path.
  3. Ensure that the entire leadership team is a role model for the change. If companies want to nurture a performance culture, they must make sure that it starts at the top.  That’s why when we speak with companies about building a pay for performance approach to rewards, we suggest it begin with leadership and cascade down from there.  Change, if it is effectively engineered, should improve a company from being merely a wealth creator to becoming a wealth mulitplier, one where it becomes clear to everyone how value is magnified then shared.  This can’t happen if leadership doesn’t hold itself accountable, and management won’t feel fully accountable unless a good portion of their pay is subject to clear performance standards. Ultimately, those performance standards need to be aligned with the new course the company needs to take.
  4. Mobilize your people to “own” and accelerate the change. Here, I quote from the authors directly: “The blunt truth is that most change initiatives are done ‘to’ employees, not implemented ‘with’ them or ‘by’ them. Although executives are pushing behavior change from the top and expecting it to cascade through the formal structure, an informal culture left to instinct and chance will likely dig in its heels.”  I can’t imagine how an organization can expect to affect meaningful change if its rewards systems and strategies make no attempt to help the workforce think more like owners.  This doesn’t mean equity needs to be shared.  It does mean, however, that how employees are paid should help them better understand what’s at “stake” and how they should think and execute as a result.
  5. Embed the change in the fabric of the organization.  In this step, leadership needs to communicate the various people-oriented elements of the change and not just the structural components.  Continuity maps are good for this–charts and explanatory material that draw clear relationships between the different parts of the change effort and the role each person has in that process.  Compensation’s role in this is to help employee’s understand the complete value proposition that is associated with the “future organization” so there is a sense of partnership about bringing about its fulfillment.  We encourage companies to construct a Value Statement for key people in particular that brings together in one place all of the elements of their pay package (salary, short-term incentive, long-term incentive, retirement plan, etc.) with a five to 10 year projection of the opportunity.  This helps cement the concept of partnership and provides real clarity about what the future holds.  Such an approach embeds a vision of “what’s coming” in the minds and hearts of the company’s human resource.  Meaningful and measurable change will not occur if this vision doesn’t take hold.

As you consider the multitude of changes your business will need to live with over the coming years, I recommend you consider these guidelines in navigating your course.  I don’t promise it will be easy, but my experience is that world class performers learn to integrate this kind of approach consistently and effectively. In the words of Machiavelli: “Whosoever desires constant success must change his conduct with the times.”

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Ken Gibson
February 4th, 2011 by Ken Gibson

Are Your Employees as Good as they Think They Are?

The answer is yes…and no.  Some interesting research outlined in two recently published books offers evidence that key talent might not be so great were it not for the environment and resources offered by the company for whom they work.

In their book Clever, authors Rob Goffee and Gareth Jones make the point that talented people are as dependent upon the organizations in which they work as those entities are on them.  Their premise is that while premier people are not easily replaced in an organization, those individuals often fail to recognize that it is the company’s resources–other team members, intellectual capital, research access, etc.–that allows them to perform at the level they are and to find the fulfillment they enjoy.

In his book Chasing Stars, The Myth of Talent and the Portability of Performance, Boris Groysberg embellishes on this point with even more detailed research.  His findings indicate that performance is not as portable as individual talent sometimes thinks and a key employee’s results often sharply diminish when he or she  leaves the business for “greener pastures.”

Therefore what?  What influence should such findings have on the way companies approach their rewards systems?

I believe these findings support the VisionLink premise that all good compensation strategies should address the two, interdependent visions that exist within every business.  There is an ownership vision and an employee vision.  Because both have to be realized for the company to experience sustained success, high performing companies develop compensation strategies that build a sense of partnership with employees.  These organizations have a philosophy statement that indicates how value that is created in the organization will be shared and what balance will be struck between guaranteed and at risk pay, and short-term versus long-term incentives.  Specific plans growing out of such an environment reinforce the interplay between talent, resources and results, and tie rewards to appropriate outcomes that can’t be achieved solely through individual performance.

For more information on how to address the question posed here from a compensation perspective, tune into our upcoming webinar entitled, “How to Build Long-Term Value for Key Producers.”  The webinar will be broadcast on February 22.  Click here to enroll.

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Ken Gibson
December 22nd, 2010 by Ken Gibson

The Three Comp and Benefits Essentials

 I would like to make a plea before we close out 2010.  As you examine your compensation and benefit strategies for the new year, please consider three outcomes your approach should (dare I say, must?) include.  I would even go so far as to call these imperatives for any company hoping to have a workforce that drives growth in 2011 and beyond.

  1. Strategy–ask yourself this question: “Do our compensation and benefits strategies drive execution of key strategic initiatives and make the achievement of the company’s growth goals more likely?”  For this to happen, at a minimum there must be alignment between the business plan of the company and rewards.  Your pay and benefits strategies should also reflect a philosophy that creates appropriate ties between pay and performance in a way that nurtures a sense of partnership with the workforce and instills an ownership mindset.
  2. Cost–in this regard, the question to be asked is: “Do we institute practices  that ensure we create greater compensation and benefits efficiencies and lower or eliminate unnecessary expense?”   Here the issue is establishing the means by which a company routinely examines the cost structure of all its plans, introduces appropriate cost sharing arrangements, expands/inplements flexibility of benefits, increases education on fiscal practices and institutes “well-being” initiatives that help lower overall health benefit costs and decrease time away from work.
  3. Productivity–with this final imperative, the critical question to be answered is: “Do we generate a measurable, positive return on the company’s human capital investment?”   To accomplish this, companies should ensure that their approach to incentive planning is self financing,  involves sound metrics and that programs are only implemented once they have been appropriately modeled and tested.  The company must then institute appropropriate measurement tools to track its real return on the compensation and benefit dollars that have been paid out.

As you examine these areas and institute changes accordingly, please share your successes and frustrations in the comments section of this blog so others can benefit from your experience.  You can also email me with your thoughts at kgibson@vladvisors.com.

For more information on how some of these things can be successfully accomplished, please check out the Information and Resources section of our website or the  webinars we have archived on our site.

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Ken Gibson
May 3rd, 2010 by Ken Gibson

One Quarter of Your Highest Potential People Plan to Leave in the Next Year

That is not a VisionLink claim.  It’s the claim of Jean Martin and Conrad Schmidt, both of the Corporate Executive Board’s Corporate Leadership Council in Washington, DC, as reported in their Harvard Business Review article–May 2010 edition.  The claim is based on research done by the Leadership Council in September of 2009.  It’s a staggering statistic.

Following that claim, the authors proceed to delineate the six most common errors their research produced that  contribute to this outcome: 1) Assuming that high potentials are highly engaged; 2)Equating current high performance with future potential; 3)Delegating down the management of top talent; 4) Sheilding rising stars from early derailment; 5) Expecting star employees to share the pain, and; 6) Failing to link your stars to your corporate strategy.

That last mistake (not creating links between key people and strategy) is also the basis for three of the 10 core set of best practices  the article goes on to define for identifying and managing key talent.  It is likewise reflective of the central philosophy VisionLink espouses relative the development of World Class Compensation.  Creating great rewards strategies does not begin with a discussion of compensation.  It begins with a discussion of vision, strategy, roles and expectations.  Rewards should be an extension of that train of thought.

Here are three of the best practices identified in the article, and VisionLink’s observations about each.

  • Create individual development plans; link personal objectives to the company’s plans for growth, rather than to generic competency models.

    VisionLink Observation: Compensation in high performing organizations is one of the tools that forges this link and advances a unified financial vision for growing the business.  Employees will understand this connection (between personal objectives and the company’s growth plans)  if they feel a sense of partnership in their business relationship–financially (through pay) and otherwise.

  • Reevaluate top talent annually for possible changes in ability, engagement, and aspiration levels.

    VisionLink Observation: Performance is not static and pay for performance isn’t either.  A compensation philosophy should clearly define what a company will “pay” for and practices must bring that philosophy to life.  Evaluation tools should be employed at least annually to assess engagement and aspiration levels to determine the level of alignment that is taking place.

  • Offer significantly differentiated compensation and recognition to star employees.

    VisionLink Observation: This is the basis of a pay for performance philosophy and the heart of world-class compensation.  Star companies are fueled by star employees. If the business is performing above the market, premier talent will know that, and will expect to be paid accordingly.  If star performance isn’t being achieved, review the previous bullet point.

As companies begin to emerge from the deep sleep imposed by the recent economic slump, they would do well to make sure they are avoiding the mistakes Jean Martin and Conrad Schmidt have identified.  Equally, they should ensure they are well poised to employ the critical components of a world class talent-development program.

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Ken Gibson
March 31st, 2010 by Ken Gibson

Strategic not Tactical

One of the biggest mistakes most organizations make is to treat compensation as a tactical, expense management issue.  In some respects, this is a natural inclination.  Compensation is customarily the largest budget item on the company’s financial statements.  As a result, most organizations look at it as a cost to be managed. 

However, high performance companies see everything through a strategic lens, including and especially compensation.  As a result, they see pay as an extension of the company’s business plan, not just a  line item on the income statement.  For such organizations, decision making regarding rewards can’t be and isn’t dealt with in tactical terms.  Every rewards program they roll out has a strategic purpose that is grounded in a well defined compensation philosophy.

Businesses that treat compensation strategically commonly employ the following practices:

  • The CEO  establishes the strategic direction for rewards and drives the priorities surrounding compensation planning and decisions
  • The organization employs mechanisms to measure alignment between workforce performance and practices, and the business plan of the company
  • The company has a compensation committee that meets regularly (preferably quarterly) to make rewards decisions and assess progress of existing strategies based on a written philosophy statement that clearly defines what the company “pays” for
  • The compensation committee employs processes for the consideration, development, implementation and ongoing management of its rewards strategies
  • Specific rewards programs are only implemented once their strategic purpose is clearly stated and their impact on both shareholder and employee wealth accumulation value has been modeled and tested
  • The company establishes a means of measuring the productivity of its people; it isolates the return that comes to the business through financial capital at work versus human capital at work
  • The organization develops a rewards reinforcement strategy and management system  for the ongoing promotion and communication of its compensation plans
  • Shareholders are routinely informed of the relationship between rewards and additional value being created through the execution of an effective and focused workforce.

Such an ideal isn’t achieved overnight.  However, no one achieves it until they buy into the relationship between vision, strategy, roles and expectations, and rewards–and then commits to a process that links those interdependent issues.  Such an approach is only adopted by organizations that want compensation to become a key driver of growth in their business, and not just one more cost that has to be contained.

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