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Ken Gibson
January 31st, 2012 by Ken Gibson

Why Long-Term ‘Value Sharing’ Matters

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

#5: Value Sharing Builds Trust and Trust Accelerates Results

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

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

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

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

Start with a Clear Philosophy

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

 

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Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent, Phantom Stock | No Comments »

Ken Gibson
December 21st, 2011 by Ken Gibson

CEO Summit

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.

 

 

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Ken Gibson
November 21st, 2011 by Ken Gibson

Keep Incentive Plan Design Simple

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

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

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

Two Plan Types

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

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

Three Measurement Categories

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

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

Long-Term Incentives

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

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

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

 

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

Ken Gibson
November 11th, 2011 by Ken Gibson

Incentives as an Act of Mistrust

The heart of a competitive advantage in an organization is a culture of confidence.  Such an culture emerges in companies that have developed success patterns to a point of such sustainability that the “flywheel effect” has kicked in, as Jim Collins describes in his book Good to Great.  There is momentum and your people know it; they know it because they are in the midst of it–in fact, they are the ones making it happen.  Such a business has a competitive advantage because a culture of confidence is not “copyable.”  It is an outgrowth of having all the human elements working in a unified, passionate fashion within a company.  Think Disney. Think Apple. Think any great company.

The best word to describe the mindset of the workforce within organizations that have developed such a culture is stewardship.  The dictionary describes a steward as “a person who acts as the surrogate of another or others.”  In business, it implies that employees act in the best interest of owners; more than that, they do the things ownership would do because they think like owners.  They think like owners, in part, because they are treated like owners–not because they necessarily own stock but because they have some kind of stake in the company’s success and a shared value system.

Organizations that adopt a stewardship approach to managing their people nurture trust and confidence in their employees by focusing more on  desired outcomes and results than methods and behaviors.  They communicate standards and values, vision and strategy, roles and expectations.  Then they communicate a sense of partnership in the way they share value with those that create value.

Such businesses inherently understand that they can’t use incentives as a tool to manipulate behavior or to reinforce methodology.  It’s not that they ignore those things, rather they recognize that pay is not the way to enforce the spirit of stewardship they want to engender.  To use incentives to “force” certain behaviors is the ultimate act of mistrust.  It undercuts the core sense of personal responsibility and accountability that a workforce must achieve if the “flywheel effect” is going to be realized.  Mistrust erodes a culture of confidence and pay, done improperly, creates mistrust.

To take it one step further, companies that have a culture of confidence don’t even think in terms of rewards as incentives.  Instead, they set up short and long-term value sharing agreements with their associates and consider their relationship to be a partnership, not employee or employer.  Value sharing is about reinforcing outcomes, not forcing behavior.  It’s about recognizing the contribution of all stakeholders in an organization’s success through effectively crafted pay programs.  It’s about stewardship not just employment.

So, as you consider where you are in your journey towards a future company that is not just good but great, avoid eroding your culture of confidence through any act of mistrust–especially as you build rewards strategies. Instead, use them to reinforce the line of sight you want to create between vision, strategy, roles, expectations and pay.

To learn more about a specific type of value sharing program that will encourage the stewardship mindset just discussed, tune into our next webinar broadcast entitled: What Think Ye of Phantom Stock–Does it Work?

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Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent, Uncategorized | 1 Comment »

Ken Gibson
October 21st, 2011 by Ken Gibson

Complexity and Compensation

Let’s face it, business life is accelerating in its complexity.  Denial won’t help us overcome it; we must embrace it and learn to manage it.  As some organizations attempt to “rein it in,” they find themselves making things worse rather than better.  A recent Harvard Business Review article makes the point this way:

“In and of itself, this complexity is not a bad thing—it brings opportunities as well as challenges. The problem is the way companies attempt to respond to it. To reconcile their many conflicting goals, managers redesign the organization’s structure, performance measures, and incentives, trying to align employees’ behavior with shifting external challenges. More layers get added, more procedures imposed. Then, to smooth the implementation of those ‘hard’ changes, companies introduce a variety of ‘soft’ initiatives designed to infuse work with positive emotions and create a workplace where interpersonal relationships and collaboration will flourish.”

Our experience has been similar when we are engaged to help companies design incentive plans.   Value sharing arrangements such as bonus programs, phantom stock, profit pools, performance unit plans, etc.  should bring greater clarity not complexity.  Too often, business leaders want their rewards programs to achieve more than they are designed to and become a substitute for performance management. As a result, they add layers of metrics and measures that are intended to micro manage the results the company wants employees to achieve.

If a value sharing program is going to offer more clarity than complexity, what is that it should make clear?  Here’s our list:

  • It should make clear that the company considers the employee a key partner in the achievement of its growth goals.
  • It should reinforce the company’s business model and the strategy employed to roll it out to the marketplace.
  • It should help clarify the role of a given employee in the business model and strategy.
  • It should make clear the outcomes the employee is responsible for within that role.
  • It should create line of sight between the employee’s personal financial vision and the company’s growth goals and vision.

If a company will use compensation as a clarifier and reinforcer of “what’s important,” it will take a big step towards better managing the complexity that inevitably will continue to grow.

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Posted in Business Growth & Compensation, Business Growth and Rewards, Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Managing Talent | 1 Comment »

Ken Gibson
September 21st, 2011 by Ken Gibson

“Speaking” of Compensation

I’m departing from my normal “educational” blog today and will be waxing more “informational” this time. Please forgive the slight deviation.

Many who have visited our blog or website have inquired whether we ever speak publicly on any of the topics we blog about.  We do.  In fact, Tom Miller and I have spoken in a number of forums nationally on a range of compensation topics and other themes that relate to driving business growth.  Here is just a partial list of the forums and events at which we’ve spoken:

  • CFO Magazine Convention
  • Inc. 500 Convention
  • Board of Directors Forum
  • SHERM Crossroads Convention
  • Pershing LLC INSITE™ Conference
  • M Financial National Conference
  • American Bar Association Tax Conference
  • Vistage Groups

If you belong to an assocation or other group that needs  speakers on topics that relate to rewards programs or other compensation issues, we are happy to entertain such invitations. Our presentation approach is educational but dynamic.  It is intended to help the audience understand that compensation is one of the largest and most important investments a company makes—and should generate a measurable return for shareholders.

In our presentations, Tom and I help paint a picture of how rewards programs can be used as strategic tools to help fuel growth in a business.  Special emphasis is placed on addressing compensation and business growth issues for business leaders such as the following:

  • The proper role and scope of incentive plans
  • How to measure the return on a company’s compensation investment
  • How to develop an “ownership mentality” within the workforce
  • What alternatives to sharing equity exist for private companies
  • Determining the right amount of compensation and how it should be paid
  • Which type of long-term incentive plan is right for a company

 

In addition to our speaking engagements, VisionLink broadcasts a monthly webinar nationally that any are invited to attend. Our next one will be held next Tuesday, September 27 (8:30 a.m. PDT) and is entitled: Sales vs. Performance vs. Growth Incentives. Feel free to register for that event or view our catalogue of previous broadcasts.

Thank you for indulging me in this departure and soft plug.  I hope knowing this will be useful to many of you.

 

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Ken Gibson
September 15th, 2011 by Ken Gibson

Innovation and Compensation

I have recently become somewhat a student of innovation; particularly looking at how great companies and individuals manage to get ideas and products implemented while others stop and stall.  Among the things I’ve assimilated in that learning process are the following:

  1. Great innovators associate. Those that are prone to effective innovation are constantly associating one idea or experience with others.  They also systemitize the association process so that it occurs regular and naturally.
  2. Great innovators question everything.  Their curiosity is insatiable and they want to get to the bottom of things.  Why are things the way they are?  Do they need to be like that?
  3. Great innovators network. They want to associate with people that have a broad range of backgrounds and experiences so their life view is expansive and their feedback loop is broad.
  4. Great innovators seek feedback. They want to know what others think before they introduce a product to market.  They want it tested.  It doesn’t have to be perfect, but it has to meet the right need in the right way.
  5. Great innovators have a bias towards action. Innovating is not dreaming or wishing or even just being creative.  It is about getting ideas implemented and working in a way that transforms the end user’s experience.

There’s more I’ve learned, but let’s work with that list for now.  As we examine it in the context of compensation there are some important issues to consider.  A company’s approach to building effective rewards needs to follow a similar process:

  1. Those that develop compensation programs need to be able to view compensation as a dynamic tool and ”associate” each component both with other elements of pay and with the business model of the company.  As the company’s innovation cycle continues and expands, the approach to rewards needs to be able to reflect that new reality.
  2. If individuals are going to create an “innovative” rewards structure, they have to be willing to question everything.  What is the outcome we’re trying to drive?  Why is that important?  How should that outcome be rewarded?  When should it be rewarded?
  3. Innovative companies look beyond the “network” of their own industry in seeking creative ways to properly reward people for value creation.  They don’t think in terms of what the peer companies in their “space” are doing.  They look at what great, innovative companies are doing and then take lessons from their approaches to everything, including pay.
  4. Businesses that are effective at every level have a continuous feedback system in place.  They measure and assess.  They look at data and make decisions based on what that data reveals. Similarly, they seek feedback from their workforce about whether they are succeeeding at creating a sense of partnership, painting a compelling vision and building a sense of unity about the outcomes being pursued.  If they aren’t, they use pay as one of their strategic tools to target a better result.
  5. Companies that get compensation right usually get a lot of other things right because they are prone to act.  They don’t let the pursuit of the perfect paralyze them from taking action.  They get close enough, they stay focused, they get it done, roll it out and then make adjustments as they need to.

As you approach bettering the compensation strategies you wish to adopt, hopefully you will likewise become a student of innovation.  If you do, the horizon of possibilities will expand and your ability to drive results will be magnified.

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Ken Gibson
September 9th, 2011 by Ken Gibson

What Your Employees Would say about their Compensation…if they Thought they Could

You have smart people working for you.  For the most part, they believe in the company and where it’s headed.  Because they are thoughtful and intelligent, they are willing to learn about the role you want them to play in creating value for the business.  The better ones had options when they chose to work for your company.  The best ones have other options now. 

So, if  what I describe above is familiar to you–if you have one or more person like this working for you right now–what would they say to you about compensation if they were honest about their expectations? 

In the course of our work with clients, we have interviewed hundreds of just such individuals within successful businesses.  In composite terms, I’d now like to share what we’ve heard.  I’ll categorize the responses in three groups and then lay out the expectations of those we’ve spoken to in the first person; speaking as if I were that smart, thoughtful employee who did and does have options.

  • Sustainable Cash Flow–”I recognize that my experience and skill level merit a certain level of pay.  I’m not stupid; I’ve done some research, asked around and I know what most people in my position earn. I’ve built a certain lifestyle around that expectation.  Now I just want to know that as long as I perform–and the company continues to do well–I’ll have enough guaranteed and incentive income to keep me and my family in our ‘world’ and still be able to plan for the future.  As a result, it would be helpful to know what philosophy the company has going forward for how much of my earnings will be guaranteed and how much upside potential there will be through “value sharing” if I help the company meet its growth targets.  To the extent some of my compensation  will be ‘at risk,’ I’d like to be clear on the measures being used to determine payouts and know that those metrics are based on something I have control over.  I would also favor something that isn’t ‘all or nothing’; if we achieve a superior result, it would be nice to know even more would be available.  That would be meaningul to me–and seem fair.”
  •  Security– “There are certain risks that could change my world pretty quickly.  If a member of my family becomes seriously sick or injured, or if I die or become disabled, I need some means of protection.  Likewise, I need to be able to plan properly for retirement, education for my kids and so on.  I certainly don’t expect the company to foot the bill for every type of risk I’m trying to plan for or protect against.  At the same time, I recognize the business is in a unique position to use the size of its workforce as leverage to obtain certain benefits and that’s it’s also in the company’s best interest that its key people not be too vulnerable. So, I hope I can have some flexibility in my benefit options that will allow me to address my circumstances in as customized a manner as possible.  I’m willing to share in the cost of doing so–I just want to make sure consideration is being given to the range of issues that could impact both me and the company if proper planning isn’t done.  Here are some of the things the ideal arrangement would include:
    • Medical Insurance—options for PPO, HMO, catastrophic coverage (dental, vision, long-term care options are a plus and having some options even at my cost would be helpful in this regard)
    • Life Insurance—options for additional coverage at a group rate are ideal; some kind of permanent coverage the company pays for while I’m employed is better (I’ve heard of things such as ‘split dollar’ arrangements where the company gets its money back when I leave)
    • Disability Coverage—this one worries me the most; so it would be great if there was either a group plan or individual coverage that replaces my income if I’m not able to work; again, I’m willing to share in the cost of this but I also recognize it takes the company off the hook for having to decide what to do if I am out with some kind of long-term condition
    • Retirement Plan—a 401(k) is great, I’d just like to make sure you’re looking out for me in the investment options I’m given and that you are making sure  hidden costs are being squeezed out so I can maximize my benefit.  If the company makes a contribution to the plan, it tells me they value a long-term relationship with me and want to help me plan for my future
    • Supplemental Retirement Plan—it’s a bummer that the government restricts my contributions to the 401(k) plan; what I put in is based on what people earning less than me put in.  As a result, having a supplemental plan to allow me to set aside more for the future and on a tax favored basis would be ideal.  I know many companies provide this through some kind of deferred compensation arrangement”
  •  Wealth Accumulation—“It’s nice having a retirement plan, but it’s not what I mean by having a wealth accumulation opportunity.  I’m talking about having the means to share in the ‘wealth’ I help create in the business.  If my commitment of time and talent means the company achieves something it wouldn’t have achieved without that contribution, is it not fair to want to participate in the value I help generate?  It seems like a win/win to me if it’s set up properly.  I don’t care whether I get equity or not—I just want to know that there is a long-term mechanism in place that makes the achievement of the owners’ vision a financially meaningful event for me.  I’d be motivated by that and it would seem like more of a partnership arrangement if I can  participate in something like that.”

So, there you have it.  That’s what your best employees are thinking and what they’d like to say if given the chance.  Now you know.  You’re welcome.

For more information on this topic, view our webinar entitled: “What Your Employees are not Telling  You about your Current Rewards Programs.”

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Posted in Compensation Planning, Current Pay Trends and Topics, Incentive Planning, Key Talent Compensation, Managing Talent | 1 Comment »

Ken Gibson
August 17th, 2011 by Ken Gibson

What, Exactly, is an “Engaged” Employee?

Engagement is one of the Holy Grails in business.  Every organization seeks it in its workforce.  Most company leaders can’t define it, but they know it when they see it…and they know it’s what’s missing when the business fails to reach its potential.  Engaged employees are like fuel to company growth and those who aren’t make everything move in slow motion. 

For an employee to become “engaged,”  a company must address what I refer to as “The Three ‘Cs’.”  They go like this. 

Engagement emerges when an employee feels:

  1. Compelled–the business has a compelling future and the employee sees how his unique ability can contribute to its fulfillment.  This is about shared vision and values.
  2. Clarity–leadership gives the employee a clear understanding of the business model and strategy what will fulfill the vision, what role he has in that plan and what’s expected of him in that role, and how he will be rewarded if he fulfills those expectations.
  3. Connection–the employee feels a sense of partnership with company owners.  Whether or not equity is shared, he  understands there is a philosophy about value creation and value sharing that is fair.  As a result, all stake holders feel connected.

Well, if that’s what it takes to secure an engaged employee, what will the result look and “taste”  like once it’s achieved?  In my experience, companies that nurture engagement end up with employees that manifest that quality in each of  three ways:

  1. Focus–more time is spent on the “best” results that can be achieved, not just good or better.  There is an outcome rather than a task orientation that is evident. The employee “gets” what result the company is looking for and displays a sense of stewardship about it.
  2. Commitment–company leaders see that the employee has taken ownership of the future in a similar way that shareholders have.  It is apparent that it is meaningful to him for the company to achieve its vision because he knows what it will mean to him personally.
  3. Shared Purpose–an engaged employees demonstrate a contribution ethic that extends beyond his specific role in the company.  It is a manifestation of the shared purpose he has with co-workers, other  teams or departments and with ownership.  This means he behaves in a way that demonstrates his understanding of  the interdependent nature of the independent roles throughout the organization.  He understands that today he may depend on someone else, but tomorrow that same associate may depend on him to achieve a desired result in which all have a stake.

In my experience, companies that use compensation as the strategic tool it is intended to be see rewards as one means of smoothing if not reinforcing the path to engagement.  For example,  they offer employees a long-term incentive plan that fosters the shared purpose indicated above.  It’s payout metrics are tied to a combination of company-wide performance, team or department performance and individual performance.  Such an approach nourishes a culture of contribution–because all have a financial stake that evokes a kind of “moral” bond with their associates.  If I fail in my stewardship, it doesn’t just impact me and if you slow down, I am also affected.

Leadership, then, should examine its current practices through a kind of reverse engineering process.  It starts by asking whether the workforce is currently, as a whole, manifesting outward signs of engagement (focus, commitment, shared purpose).  If not, it should then ask what can be done to promote a compelling vision, create greater clarity and enable the sense of connection and partnership that are foundational to engagement.  In the process, it should be sure to ask itself whether current compensation practices are more likely or less to promote the outcomes just discussed.

It is realistic to anticipate a fully engaged workforce?  It is.  I’ve seen it first hand.  For one example, see my blog entitled: “What a Competitive Advantage Sounds Like.”  The concept is further developed in another blog posting entitled: “Compensation and Trust.”  Finally, to learn how to get from an entitlement mentality to engagement, view our recent webinar entitled: “What to do When your Employees Act Entitled.” 

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Ken Gibson
August 10th, 2011 by Ken Gibson

5 Strategic Compensation Decisions Every Business Must Make

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.

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