Building Unified Financial Visions

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Ken Gibson
March 18th, 2011 by Ken Gibson

Compensation as a Wealth Multiplier

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.

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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
July 26th, 2010 by Ken Gibson

Sales vs. Performance vs. Growth Incentives

Periodically, we will receive a call from a business leader seeking our help to build a more effective incentive plan.  Often, it takes a while to determine whether what is being sought is a sales plan or a broader performance-based reward.  The difficulty in decifering which kind of approach is needed stems from the fact that many businesses don’t yet know what outcome they are trying to influence through their incentive plan(s).

With that anecdotal evidence in mind, I assume many struggle with this issue.  As a result, I offer here  some general things to consider when thinking about incentives:

  • Sales Incentives–Compensation programs for sales people are typically a distinct “animal.”  Their purpose and form are centered solely on increasing sales.  Although a sales incentive might be in the form of a commission or bonus (or both), it’s focus is strictly on rewarding a certain desired sales result.  They are intended to address the following performance factor: “What the company wants sold, to whom and in what volume.”Those participating in a sales incentive could, conceivably, also receive a performance or growth incentive.  However, it is less likely they will receive the former since their sales incentive rewards short-term performance results .  A long-term incentive, however, creates a different focus and could more commonly be paid to those responsible for sales functions, particularly those whose stewardship it is to accelerate top-line growth. (See Growth Incentives below.)
  • Performance Incentives–Companies that want to create focus on key performance indicators or profitability standards measured in increments of 12 months or less are looking for this type of reward.  Performance incentives seek to communicate the following to participating employees: “This is the outcome we need you to focus on during this period of time and how it will be measured and rewarded.”  Performance incentives help participants understand their role in this year’s strategy, what’s expected of them in that role and how they will be remunerated for fulfilling those expectations.  The overall incentive may reward something for company performance, team or department performance, individual performance or all three.  The “weighting” of those factors may be different for various “tiers” of employees.  Annual, semi-annual or quarterly bonus arrangements are types of performance incentives.As with sales incentives, participants in a performance incentive plan may–and commonly do–participate in a growth incentive as well.
  • Growth Incentives–Organizations that seek to align the company’s reward’s strategy with its business plan should have some kind of growth incentive.  Such a plan communicates where the company is headed in the future (beyond the next 12 months) and how those that help to fuel growth will participate in that increase.  Growth incentives seek to create a unified financial vision for growing the business and send the following message to participants: “You are an important partner in our growth plans and this is how we intend to have you participate in the value you help create.”  Stock, stock options, phantom equity, SAR, Performance Unit Plans and Profit Pools are examples of growth incentives that companies commonly use to fulfill this part of their overall rewards strategy.

Most companies think in terms of specific types of plans instead of the kind of performance they seek to drive as they approach the design of their incentives.  Instead, we recommend you isolate the performance category you are trying to address as indicated above and then begin thinking of the compensation s0lutions that will drive the outcomes you seek.

At a minimum, now if you call us, we will perhaps be speaking the same language!

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Ken Gibson
May 12th, 2010 by Ken Gibson

What Makes Premier Talent Join an Organization..and Stay?

Every business wants the best–the best product, the best customer service, the best possible profit margin, the best market position, and the best people.  Some actually achieve it.  How do they do it? 

From VisionLink’s point of view, there are four  essentials that a company must get right if it hopes to attract and retain a level of talent that can drive all the other “bests” it is trying to achieve.  We call these the Four Pillars of Total Rewards.  In summary, they are as follows:

  • Compelling Future
  • Positive Work Environment
  • Opportunities for Personal and Professional Development
  • Financial Rewards

 

Compelling Future

A compelling future assumes, of course, that those in company leadership know where the business is headed and how its going to get there. They have a vivid and clear vision.  They consistently communicate that vision and the strategy that is needed to fulfill it.  They have reduced the business plan of the company to an easily understood, focused strategy statement that all of the principal players in the company can articulate.   Everyone throughout the organization understands the vision and how the company is going to fulfill it. 

But this is not all.

The “best” companies have an ability to make “compelling future” come alive for their workforce.  They enable their employees to see themselves in the future of the business.   The company and its employees have a shared value system.  There is a unified financial vision for growing the enterprise that is understood by all.  Premier talent are allowed to think and believe that the business cannot achieve its vision without them.  They are allowed this view this because its an accurate one–not just something leadership says to rally the troops.  As a result, they nuture a partnership relationship with employees–particularly key producers.  Those the company needs to drive results see their unique ability as an essential ingredient to the company realizing its vision of the future.  In essence, this is why employees consider the future to be “compelling.”

Positive Work Environment

World class organizations create a culture and environment that nutures individual unique abilities within the framework of unique teams.  This means that people are placed in roles where their talent, experience, skill and wisdom allow them make the best contribution.  Their distinctive ability blends with and compliments others in their sphere of influence to create a highly productive outcome for the company and an enriching experience for the employees. The whole becomes greater than the sum of its parts.

In such an environment, innovation is encouraged and thrives.  There are open channels of communication for problem solving with company leadership and people feel empowered as stewards over their work.  Roles and expectations are clear, fair and synchronized with the company’s business plan.  A culture of execution, sustained success and confidence is nurtured, celebrated and rewarded.

Opportunities for Personal and Professional Development

Central to the definition of ”meaningful work” for employees is the ability they have to improve and advance.  Organizations that want to attract “the best” must make sure there are clear opportunities for employees to magnify their unique abilities as a result of their affiliation with the company.  This relates to everything from career path development to training and supplemental educational opportunities.  However, it also relates to challenges employees are given, a sense of stewardship they are allowed to have in their roles and the feeling of confidence that is communicated to them about their ability to make a contribution. 

 At its core, this category has to do with building trust.  The roles employees are given, how they are managed, and the way they are ultimately paid ties them to the business plan of the company and creates a sense of collaboration with ownership.  Such a relationship breeds mutual respect and unity, which are foundational to a relationship of trust.  In organizations where trust is high, results are accelerated.  As the speed of performance increases, costs go down and revenues increase.  If compensation is effectively engineered, all win and a positive, self-sustaining momentum is set in motion.

Financial Rewards

Many assume pay is the core issue for employees in determining whether to join or leave an organization.  It’s not that simple.  All of the factors described here play a role. 

At issue with pay is not usually how much someone is getting but how they are being compensated.  In other words, the best employees recognize and respond to the concept of valuation creation.  If a business creates value for its customers, the marketplace rewards that company financially by buying its product or service.  Value is received for value created.  Similarly,  employees recognize that if they create superior value, some part of their pay should reflect that.  Conversely, if they don’t create additional value, they likewise shouldn’t be paid as if they did.

Great organizations understand that value creation has both a short-term and a long-term component– for employees as well as for the company.  The business is interested in generating results today, tomorrow and through the remainder of the year. However, it is also interested in sustained results–those that will drive shareholder value over the next two to five years–even the next decade.  Consequently, they are interested in  good profits (those that come by virtue of benefiting the customer)  and not bad profits (those that come at the expense of the customer and erode good will and long-term business value).

Employees are no different .  They have short and long-term financial objectives–and look to their employment as the primary vehicle to achieve both.  In this context, employees are primarilly interested in their pay program addressing three key priorities:

  • Cash Needs/Standard of Living–this priority is typically met through salary and some type of annual incentive plan that gives the employee some control over short-term earning capacity
  • Security–this area of emphasis has to do with protecting against financial risk through adequate insurance coverage and opportunities for employees to mitigate potential risk issues in their lives
  • Wealth Accumulation–this area of focus has to do with participating in the long-term value employees help the business create and feeling empowered to “reap what they sow”; it goes beyond mechanisms such as 401(k) or pension plans that are purely retirement focused

 

These Four Pillars of a Total Rewards strategy can be a useful way to evaluate how your company is doing in positioning itself to attract the best and, as a result, become the best.  It is our experience that the businesses that “get” this also end up ”getting” the results they are looking for on their pathway towards World-Class Performance.

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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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Ken Gibson
February 26th, 2010 by Ken Gibson

Why isn’t our Compensation Strategy “Working”?

That question probably crosses the mind of a CEO at least a couple of times a year–perhaps when a salary increase has been approved or a bonus is paid out.  What he or she means by the question is essentially this: “Boy, collectively I’m paying my top people over $1 million a year; what am I getting for it?”

Whether or not a compensation strategy “works” is a subjective measure I suppose.  To say it’s not “working” assumes we know what things would look and feel like if they were working.

From our view, a compensation program is “working” when it is drives business growth and the company can attribute that result to the productivity of its people.  A high standard?  Well, yes–but should something less be expected of the largest budget item a company will find on its financial statement? 

In that context, if a compensation strategy is not “working,”  its usually for one of the following reasons:

No Sense of Partnership–the company has not yet engineered  compensation strategies that instill an ownership mentality and engender a unified financial vision for growing the business.

Lack of Clarity–employees do not yet see where the company is headed, how it is going to get there, what their role is, what’s expected of them in that role, and how they will be rewarded for fulfilling those expectations.

Ineffective or Unclear Standards and Practices–the company has no established mechanisms for defining a compensation philosophy, building a “game plan” that strategically reflects that philosophy and then turning that plan into concrete rewards strategies that are measured and managed.

Lack of Engagement–the compensation programs of the company do not yet promote a level of execution that only comes once employees feel passionate about their contribution and what it will mean to them if the company achieves its goals

Lack of Productivity Measures–the company is paying out compensation but has no means of determining how much of the business’s collective ROI can be linked to its human capital as opposed to its financial capital. 

In summary, for a company to ever know whether or not its compensation strategy is “working,” it must first begin to treat it as an investment and not just an expense–and then be able to measure the effective return it is getting on that investment.

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Tom Miller
August 14th, 2009 by Tom Miller

Strategic Compensation Equal to Holistic Compensation?

Recently I received a request to submit an article to a newsletter about “Holistic Compensation.” Well, that’s a new one, I thought. I’ve used lots of terms to describe the uses of compensation systems, but that’s one I missed. We prefer the term “strategic compensation.”

Because of a tight deadline I sent along an article I already have ready to go. I didn’t even add the term “holistic.” I hope they won’t mind.

Now that I have a little time I started to think about the term. Webster’s online dictionary defines “holistic” as relating to or concerned with wholes or with complete systems rather than with the analysis of, treatment of, or dissection into parts. All of a sudden, I’m in love with the term. That’s exactly how compensation should be looked at by senior management company.

Most don’t. The salary budget isn’t connected to the short-term incentive plan isn’t connected to the long-term incentive plan isn’t connected to the hip-bone… (you get the idea). The CEO assumes that the HR leaders will handle all “basic” compensation issues and he or she will handle the senior management negotiations with the board or owners. This goes on in other areas. The CFO may handle the long-term plan. The Sales VP may handle her commission systems. It’s not coordinated. It’s not integrated. It’s not holistic. It’s dissected into parts.

The reality is that all elements of compensation and benefits reflect an investment by shareholders that is worthy of a measurable return. If so, they should be carefully orchestrated according to a central, guiding philosophy that is tied to the company’s strategic plan (thus “strategic compensation). All pay components should be accountable to the strategic plan. The bonus plan for the lowest eligible employee should be constructed with the same conditions and goals in mind as the CEO’s incentive plan. After all it’s one “complete system.”

Why isn’t this done? Traditions and bias. Unfortunately, it’s a waste of energy, direction and money. Holistic compensation is exactly how all companies should approach their biggest investment–at least if they want to attract better employees, build an ownership mentality, and improve overall results. I may have to go back and write a new article.

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Tom Miller
June 18th, 2009 by Tom Miller

Federal Regulation of Incentives–Baaaaad Idea!

The administration proposes that “federal regulators should issue standards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value and to prevent compensation practices from providing incentives that could threaten the safety and soundness of supervised institutions.”

Oh, where to begin?

You’ll think this is a good idea if you agree that government lawyers are the best judge of long-term performance of a business.  Five years ago Congress added section 409A to the IRC. Its purpose was to eliminate rare abuses in deferred compensation plans. It only took government lawyers 3+ years to publish the final rules for 409A–all 397 pages. Of course, that was before another several hundred pages of clarifications. Now hundreds of thousands of businesses are impact by the micromanagment built into 409A rules.

The moral of the story is that when the government pokes its head into business the law of unintended consequences runs rampant.  Now government lawyers will decide what it means to create long-term value for shareholders.

How exactly shall shareholder value be judged? By stock price growth? Against what benchmark: peers? industry average? market average? And why should it be stock price? What if earnings grow steadily but the market punishes the stock for unrelated reasons? Should the management team be penalized? Maybe the government should select growth in earnings as the benchmark for creating value. Hmm. Which earnings component? PTI? Net Income? EBITDA? But these numbers are available for manipulation by any bright management team–if they want to.  If that happens, we’ll need some more rules, no doubt.

Let’s not forget that different institutions set different objectives. One might be growing assets. Another might be looking to improve return on equity. It would be interesting to know how the regulators will determine alignment with goals when they vary from firm to firm. Pay-for-performance begins with establishing clear objectives that are unique to each organization.

Here’s an idea: let shareholders decide if the management team is doing a poor job and/or is overpaid. If they think so, they can sell their stock. Sounds too simple.

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