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.

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.

Pay can either be an asset or a liability to a company.  Stated another way, it can either drive growth or hinder it– fuel performance or diminish it.  Is that placing too big a burden on compensation to produce results?  I don’t think so.  In fact, my experience and observation has been that most businesses don’t set high enough expectations for their rewards programs.  The evidence is they don’t invole compensation in other strategic discussions.  The result is there is little to no link established between pay and the key success measures the company needs to reach.

To change this outcome a company must alter how it makes compensation decisions.  Here I would like to suggest five of the key issues a business must include and successfully address in its decision making process if it wants to drive better results in the execution, productivity and performance of its people.  Here are the five presented in the form of questions to be answered:

1. How can we reinforce our business model through the way we pay our people?  Implied in this decision is a company’s ability to clearly articulate its business model and distinguish it from it’s business strategy. (For more information on this distinction, view our recent webinar entitled: Compensation Strategy and Business Strategy, An Interdependent Relationship.)  Walmart and Four Seasons Hotels have very different business models, so their approach to pay would need to reflect that difference.  Presumably, your business will be equally distinct.  So in this category two essential issues need to be addressed: A)What outcomes reinforce the core virtuous cycles of your business model?  B)What kind of pay strategies will best reinforce those outcomes?
2. What kind of value-sharing approach best reflects the kind of partnership we want to have with our employees? I prefer the term value sharing to incentives because the latter implies that someone needs a carrot to become motivated.  Value sharing, on the other hand,  implies all stakeholders deserve to participate in the value they help create.  Company leaders must think in these terms as they approach the building of short and long-term rewards programs.  Such programs must be self-financing (no dollars paid unless results are produced at a sufficiently high level) on the one hand and yet meaningful to participants (employees want to see them achieved because the payout helps them fulfill their personal financial needs and goals) on the other.
3. What pay components will best foster a unified financial vision for growing the business?  This issue has to do with how employees will be paid as opposed to how much.  Addressing this issue forces a company to develop a basic rewards philosophy.  Where do you want to be vis a vis market pay for salaries?  How about for total compensation?  It asks a company to think about the elements of pay that will best foster an ownership mentality throughout the organization, so employees are empowered in their decision making and more instinctively act in the long-term interests of shareholders and all other stake holders.
4. What structure do we need to maintain to ensure our compensation strategies produce the desired results?  Structure has to do with organization and process.  A company needs to have a systemitized means of assessing performance and productivity and then “pivoting” in a different direction if necessary. The structure continues to keep strategy front and center with a constant eye on cost and productivity.  For most companies, this means there should be a compensation committee established with a regular meeting schedule (no less than twice a year) to review and make decisions about these issues. 
5. How can we communicate our rewards strategies in a way that best impacts the mindset of our employees?  If effective, a strategic approach to building rewards programs should result in more engaged employees.  This does not come by simply rolling out a great compensation plan.  Engagement is built over time through a reinforcement process that integrates the discussion about pay into an overall strategy and business plan review to which all stake holders are exposed. As employees come to work each day, there should be a clear connection in their minds between the following: A) The vision of the company–where it’s headed; B) The business model and strategy of the company–how it’s vision will be fulfilled; C) The role and expectations of the employee within that model and strategy–defining the stewardship, and; D) How the employee will be rewarded if he or she meets the expectations–including the range of pay potential.

Certainly, more could be added to that list.  However, if a company attempts to address even one of the five decisions summarized here they will naturally be lead to the other four.  You will see that they are really interdependent in nature.  Likewise, other core decisions will emerge such has what balance should there be between short and long-term value sharing plans, and what type of long-term rewards ”incentive” should a company adopt (equity sharing, profit pool, phantom stock, stock appreciation rights, etc.)?  Most will need help answering all of the questions that will emerge, but it must start with a foundational commitment to becoming more strategic in your approach to rewards development.

The promise is that, if incorporated, this list of five core decisions will help ensure that compensation will become an asset rather than a liability in your organization.

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.

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.”

It’s summer and we’re all ready for simple solutions to things.  Easy meals to fix. Inexpensive ways to entertain our kids.  Fastest routes out of town for long weekends. And so on.  In that same spirit, here are a few suggestions to simplify your company’s compensation life this season and have significant impact in the process.

1. Form a Compensation Committee. Include members of the leadership team best positioned to impact decisions related to compensation. Make sure it is headed by the CEO of the company.  Establish as its charter to treat compensation as both an investment that generates a measurable return and a strategic tool that  impacts company growth.  Establish a regular meeting schedule.
2. Create and Publish a Rewards Philosophy Statement. You don’t have to be able to fulfill the philosophy with concrete programs yet, but it will communicate the direction you plan to go and get you moving in the right direction.  Consider having a philosophy statement that commits the company to being at somewhere between the 40th and 50th percentile in terms of guaranteed compensation (salaries) but perhaps at the 70th percentile or above in total compensation.  In other words, commit to a philosophy that will begin putting a larger amount of compensation at risk.
3. Innumerate 4 to 5 Results Your Company is Seeking to Realize. These might be divided between short-term (12 months or less) and long-term (over 12 months).  They could be revenue or sales goals, profit or margin targets, new product development, market expansion or any number of key performance factors your company is seeking to improve.  Ask the committee to consider how, if at all, any of the present compensation strategies of the company are reinforcing those results as priorities to employees right now.
4. Identify the Individuals or Groups Best Positioned to Impact those Results. As you examine that list, begin formulating in your mind the “type” of compensation that will best communicate to employees their role in achieving those results.  Think in terms of how much of their compensation should be tied to those outcomes and how much should be short-term versus long-term.
5. Make a List of the Obvious Missing Pieces in Your Comp Strategy. The previous four steps should make this apparent.  For example, if you determine one of the key results you are seeking is to double revenue in the next three years, but your compensation package includes only salary and a quarterly bonus, then a long-term incentive plan is an obvious missing component at this stage.

Now, going through this exercise will not (yet) alter your overall rewards approach.  What it will do, however, is transform your thought process. And changing the way you think about pay is the first step in transforming compensation in your organization.

If you can engage in these simple steps over the course of the summer, by the fall you will be positioned to begin developing specific strategies that will bring your rewards philosophy to life and fulfill the results your company seeks to realize.  Compensation will then become a strategic tool helping to drive growth rather than an impediment to the sustained success you desire.

Here’s to a simplified summer.

For more information on this topic, view our webinar broadcast entitled “How Do I Create a Competitive Advantage with Our Compensation Programs.”

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.”

Okay, let’s get something out of the way at the outset.   At VisionLink, we don’t consider wealth to be a dirty word. Nor do we believe that those who pursue it are somehow less noble than the rest of humanity. 

In fact, most of our client interaction is with financially successful people.  We have found that the majority of them (yes, there are exceptions) view wealth creation as a means of serving multiple “worthy” ends, expanding their ability to “make a difference” in people’s lives and to otherwise have a postive impact within their sphere of influence.    At a minimum, because some actively pursue a superior level of economic well being (wealth), many others (employees, suppliers, customers, communities and so on) are able to meet their cash flow, standard of living, security and/or wealth accumulation needs and goals. 

In short, wealth creates opportunities and options where the lack of it diminishes them. So…let’s hear it for wealth.

Given that view, we conisder our core work at VisionLink to be one of enabling business leaders to grow from being simply wealth creators to becoming wealth mulipliers.  A wealth creator is really anyone that is running a profitable business. Wealth multipliers, on the other hand, are those that are able expand both the level of economic benefit that is created and the number of people that participate in it. In simple terms, this means that not only shareholders but all stakeholders in an organization participate in the benefits of expanded value creation.

Done correctly, this is a key role that  compensation can and should play in an organization.  It is a strategic tool that a business owner or CEO should be using to create a more unified financial vision for growing the business.  If this is going to occur, the rewards strategies–especially incentives–should be constructed in a way that communicates the following to all who have a vested interest in the company’s success:

• Growth.  We see tomorrow’s company as bigger and better than today’s.  It will be different in size and scope and influence.
• Meaning. We recognize that you have a personal vision for the future that is bigger and better than today’s as well.  We don’t expect you to be interested in helping us fulfill our vision if we don’t help you fulfill yours.
• Partnership.  As a result of our interdependent visions, we see you as a key partner in what we are creating. We recognize that the combined unique abilities and visions of each of our employees is what creates the unique culture that makes us successful.
• Clarity. Because our goals are connected, we need to have a shared vision of what it means to create value.  As a result, we want you to have a clear perspective about the outcomes we must achieve and the results we need to drive to get there.
• Value Creation.  Finally, we will adopt a rewards philosophy that communicates our commitment to share value with those who help create value.  We recognize that this commits us to a self-reinforcing cycle of growth.  The greater the value we are able to share, the more evidence we have that our shared vision has been achieved.

It is our strong view that companies that work from this core, philosophical premise find dealing with compensation issues a completely different experience.  The process of developing specific metrics and measures for a given pay plan are easier to navigate if we understand that, at the end of the day, we are simply trying to move from being mere wealth creators to becoming wealth multipliers.  When that occurs, everyone wins.

If this concept appeals to you, you should sign up today for our webinar next Tuesday entitiled: “Does Your Compensation Strategy Drive or Hinder Growth?”  I hope you can join us.

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.”

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.