How do you know whether your pay strategy is successful? It is a simple question but most organizational leaders struggle to find an adequate answer. Some think in terms of performance metrics, others emphasize cost containment measures. All would like to find the ideal rewards formula that pays the least amount possible while still driving maximum productivity and performance. (Who doesn’t want that?) So where do we find success? What is the measure?
I suppose there are a range of means by which pay strategy success can evaluated. However, in my mind, there are three that your rewards approach must fulfill before it can be considered successful. Stated another way, if your compensation plan doesn’t achieve these outcomes for your company, it probably still needs work. And yes, it must fulfill all three.
1. It Increases Productivity Profit
As a business leader, you need a means of evaluating the economic benefit being driven by your company’s pay programs. One of those methods is to calculate your organization's productivity profit--the amount of net operating income that is attributable to the contributions of the company's people rather than other capital assets at work in the business. When productivity profit becomes the source for paying out incentives, for example, those rewards become self-financing. They are only paid out of value that has been created. If sufficient productivity profit hasn't been generated, then that reward should not be paid out--or at least the benefit should be reduced. This protects shareholder interests and value. Productivity profit is a key measure of whether or not “performance” is occurring at the level it should be with your employees. This approach treats all non-guaranteed compensation as value-sharing. This term is important because it eliminates the idea of cost from the pay equation and puts the focus squarely on what it should be—driving value.
2. It Gives You a Recruiting and Retention Advantage
According to LinkedIn’s Report, Recruiting Trends for 2017, the top three reasons candidates accept job offers are: challenging work, personal and professional development and better compensation and benefits. The best way to meet each of those expectations and differentiate your company from the competition is to have a “complete” value proposition—one that adopts a Total Rewards approach. In a Total Rewards construct, equal attention is paid to:
Compelling Future. This means the company paints a clear and persuasive picture of where the organization is headed and why it is meaningful. More importantly, it communicates why a given employee (in the context of his or her role and unique abilities) is critical to the fulfillment of that vision.
Positive Work Environment. This means employees are working within the realm of their unique abilities, that other team members have complimentary capacities, that they are sufficiently empowered to produce the outcomes for which they have responsibility and that they share the values of the organization. It also means that their work has strategic purpose and they are clear about the strategic ends for which they are responsible within their role.
Personal and Professional Development. Premier talent wants to feel as though it is working in an environment that accelerates its ability to improve. This usually happens when the combination of resources to which an employee is exposed within the organization creates a unique learning experience—one that allows him or her to excel. You need to determine whether your best people are having that kind of experience in your organization. How? Ask them.
Financial Rewards. Value-sharing is the heart of a competitive pay strategy. Value-sharing means the organization ensures that those who help drive business growth participate in the value they help create. It is paid out of the productivity profit described above. When a company adopts a value-sharing philosophy, it sends the following message to success-oriented potential employees: “We consider you to be an essential growth partner in this company and have confidence in your ability to help us achieve the future business we’ve envisioned. As a result, we want you to be clear about the financial nature of our partnership and what it can mean to you as we achieve sustained success.”
3. It is Aligned
An aligned pay strategy means two things: 1) It has the right components in the right proportion, and; 2) that combination of rewards elements drives a collective focus on the right priorities and goals. To make this clearer, think about your compensation package as you would an investment portfolio. Effective investing begins by articulating a philosophy statement that defines what your portfolio is designed to achieve. Asset classes are then chosen on the basis of that philosophy and the outcomes you want your investments to serve (retirement fund accumulation, retirement income generation, college funding, etc.) Once your portfolio is created, it is managed and rebalanced periodically. You do not typically reinvent your portfolio every year or change an asset class without considering how it will impact the overall portfolio.
Compensation strategy development should be no different. You must start by articulating a philosophy that defines what you want your pay “portfolio” to do. Different components of pay are essentially your portfolio “asset classes”—salaries, short-term incentives, long-term incentives, sales incentives, benefits, retirement plans and executive benefits. Your focus should be on picking the right “asset classes” in the right proportion. You should then develop a Total Compensation Structure that allows you to evaluate and manage your pay “portfolio” on a composite basis—so you don’t start making changes in specific compensation programs without considering their impact on the overall rewards strategy you have constructed.
Under an “aligned” pay strategy, every plan that is offered has an articulated purpose, a standard that drives its value (percentage of salary, percentage of profit, etc.) and a means for evaluating its impact on productivity profit. This can only be achieved by asking the right questions when considering each type of rewards element and making sure you are satisfied with the answers. (As with an investment portfolio, for this reason many companies engage professionals to help them construct and manage their pay “portfolio.” Compensation is a huge investment and so it is important that it be designed and managed effectively.)
Ultimately, individual companies may have different criteria they use to measure the success of their pay strategies. However, if it isn’t fulfilling these three measures it shouldn’t be considered successful.