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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

#5: Value Sharing Builds Trust and Trust Accelerates Results

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

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

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

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

Start with a Clear Philosophy

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

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

Achieving Growth in a Low-Growth Enrironment

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

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

Lynn Tilton, CEO Patriarch Partners

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

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

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

How to Grow When Markets Stall

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

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

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

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.

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.”

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.”

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!

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.

Certain words and phrases become part of a kind of  business “pop lexicon” as they are used and repeated incessantly over an extended period of time.  When they do, their meaning often becomes diluted.  As that happens, businesses sometimes assume “it must have been a passing fad”–so think they can now ignore the issue.

We fear “Pay for Performance” is in danger of becoming just such a phrase.  So many use it, but so few can tell you what it actually means.  Fewer still employ this philosophy, even when they outwardly espouse it.

We believe any company that wants to achieve World Class Performance must have World Class Compensation. As a result, it must understand and embrace a pay for performance philosophy and plan. Because we believe that, we’d like to tell you what we think it means.

A company is employing a pay for performance strategy if its rewards programs are structured as follows:

1. The company ties awards to shareholder financial objectives. In a true pay for performance environment, incentives drive value for shareholders and the company is able measure the impact their rewards strategies are having in this regard.
2. The business employs the right “mix” of compensation elements. Organizations that tie compensation to performance standards understand that how they pay people has a bigger impact on results than how much they pay them–although both are important.  Pay for performance means the company strikes the right balance between guaranteed and at risk compensation, and short-term versus long-term incentives.
3. Payouts result in meaningful dollars. Employees want to feel a sense of partnership with owners in achieving company goals.  This creates a unified financial vision for growing the business.  Such a unity can only happen when value sharing reaches a threshold that is “meaningful” to employees. In organizations that achieve this, employees are thinking (and hopefully saying) the following: “It’s important to me that the company achieve its goals because what I receive if it does is meaningful to me.”
4. Performance expectations are tied to factors  employees can impact. It doesn’t matter how much employees have the potential to earn if they don’t feel they can impact the outcome that triggers their award.  In too many cases, what is supposed to be an incentive turns into a credibility problem for the company.  “Sure, you tell me this is my award, but I’m not really in a position to earn it.”
5. Rewards are consistently communicated, reinforced and celebrated. This is a primary way a partnership mindset is nurtured.  Individual, departmental and company wide achievements are celebrated and employees sense they are participating in something great they helped create.  Sustained success and a culture of confidence grow out of such an approach. 

These guidelines will never go out of style, regardless of the popular lexicon that is in vogue at a given moment in time.

Okay, so Peter Drucker never really knew VisionLink.  That’s a detail.  However, his philosophy about pay at the executive and management level was “spot on” with what we believe should be a core tenet of rewards design:

Build world class compensation strategies that are rooted in pay for performance and drive measureable results.

In her November, 2009 HBR article entitled, “What Would Peter Say?” Rosabeth Moss Kanter shares the following insights into Drucker’s thinking regarding the recent executive pay brouhaha.

“Drucker would not have been surprised that incentives to take excessive risks contributed to the recent global financial meltdown.  Back in the mid-1980s, he warned about a public outcry over executive compensation…More than 20 years ago, Drucker pointed to a top-to-bottom ratio that was then rushing past 40 to 1.  Just before his death, the ratio was greater than 400 to 1.

“Drucker was not against wealth accumulation, but he was pragmatic about the work of organizations and society.  He held that the role of executives was to coordinate the actions of others whose motivation (and thus compensation) was necessary to get the job done.  But he also held that pay should be associated with performance; that was a major point of management by objectives, perhaps his most practical management contribution. Listening to Drucker might have headed off some of the excesses associated with Wall Street…in which bonuses not only were decried for their amounts but also were uncorrelated with company results…”

I suspect that most company leaders would find themselves in agreement with much if not all of the issues Drucker raises.  However, although many agree with a performance/pay correlation philosophy in principle, few are translating that belief system into consistent compensation practices.  Fewer still achieve a rewards strategy that could be considered “world-class”; one that places them in the competitive advantage driver’s seat.  A world class pay plan is one that fully integrates compensation into the business plan of the company and creates a seamless link between vision, strategy, roles, expectations and rewards.

What most companies need to bridge the gap between where they are now and where they should (and, hopefully, want to) be is a Missing Structure; a system or process that helps them effectively engineer compensation strategies that impact execution and results.   In our experience, that Missing Structure needs to include the following comp0nents:

• CEO/Board Level Leadership and Involvement
• A Clear and Written Pay Philosophy
• A Comprehensive Compensation Gameplan
• Fully Integrated and Correlated Pay Strategies and Plans
• Consistently Executed “Line of Sight” Review

These steps ensure a cohesive, consistent approach to talent attraction, retention and development.  Likewise, they provide checks and balances that protect the company from sacrificing good profits for bad or that substitute short- term performance bursts for sustained results.  When properly executed, these measures make sure that all incentive plans are self financed and pay benefits that are correlated with increased shareholder value, and other critical measures.

Many of the companies that have made headlines in recent years lost sight of these important principles as it relates to compensation development and management.  Again, Peter Drucker’s observation is a correct one.  He stressed that:

“…ensuring the long-term health of the company–and eschewing short hits that jeopardize the future–is executives’ primary job.”

We are happy to know that Peter Drucker agrees with us.