5 Signs a CEO Needs to Change the Company’s Pay Strategy

Once upon a time, business planning was pretty straight forward.  You set growth targets, developed KPIs and budgets, fired up your people and then launched a new and improved business strategy laced with optimism and high expectations.  In today’s environment, strategy building must be much more fluid.  Planning processes have to be adaptable.  The pace of change requires CEOs to be nimble; able to “turn on a dime” when necessary to alter the trajectory of the businesses they lead.  All of this makes the chief executive’s response to compensation planning more important than ever.  Here is why.

 CEOs must pay attention to the signs that their pay strategy has become inadequate.

An approach to pay that doesn’t match the current “arc” of the business can hinder instead of help drive performance.  In the process, the success patterns that are at the heart of a culture of performance and confidence slow and stall.  What’s lost, as a result, is a competitive advantage.

So what signals tell a CEO that it’s time to change the pay strategy?   How does a business leader know when a rewards approach has outlived its usefulness and there is a need for something not just new but better? 

Here are five signs that the moment has arrived for you to alter your compensation course.

1. Employees Act Entitled.  This manifests itself in multiple forms.  Sometimes it shows up at bonus time, when employees express disappointment that the payout isn’t more.  Your plan is highly discretionary—and your people don’t agree with the discretion you are exercising.  Other times, entitlement rears its head in a salary discussion, when an employee suggests she’s underpaid for the job she is performing.  Often, it’s a legacy issue, with long-term, “tenured” associates reasoning they are “entitled” to certain levels of pay by virtue of their time with the company.

Regardless of the exact way entitlement is manifesting itself in your organization, this signal should prompt you to take a broader look at how you’re defining value creation for your business and what your philosophy is about how much of that value should be shared—and with whom.  You need to begin an education process with employees about what it means to add value in their roles and execute a compensation philosophy that accurately reflects what the company is willing to “pay for.”

2. You’re Not Attracting Premier Talent.  This has to do with the competitiveness of your value proposition.  Organizations that want to accelerate growth need to attract great people.  They need to be able to identify the specific kind of talent they need, have a recruiting strategy for finding and attracting them and then be able to offer those recruits a rewards package that conveys the unique nature of the financial partnership the company offers.   This requires a strategic approach to pay planning that reflects and reinforces the three-dimensional performance framework of the company:  the business framework, the compensation framework and the talent framework.  These three areas are interdependent and rewards strategies need to be formed and measured in that performance context if a company is going to win the increasingly competitive talent wars. 

In a nutshell, what this means is that growth-oriented companies cannot rely on “old-school,” stale approaches to pay and expect to become magnets for highly-skilled people.  There is a scarcity of that kind of talent in the marketplace and so attracting it requires a value proposition that reflects a wealth multiplier philosophy and opportunity (growth benefits all stakeholders, not just shareholders).

3. Your Rewards Strategy is Out of Balance.  Most companies have a compensation offering that is heavily weighted towards guaranteed pay.  They try to attract people by paying higher salaries and attempt to contain their compensation expense by minimizing “incentives.”  This approach will never cut it in the business environment in which we all now operate.  Organizations need a total compensation structure that allows them to evaluate their overall rewards offering by tier or salary band and to examine the “asset classes” (range of specific pay strategies) that make up their compensation “investment.”  This kind of structure helps a CEO identify what pay programs might still need to be needed to reinforce his business model and how to effectively balance guaranteed versus variable compensation and short versus long-term value-sharing.  A pay structure helps the chief executive evaluate whether what is being offered through the company’s pay approach properly reflects its compensation philosophy.

Building and managing a total compensation structure requires an investment of time at the outset.  However, once completed, the CEO will be equipped with a tool that facilitates decision-making about rewards.  He has a mechanism that is compatible with the adaptable way he has to approach all other company strategy planning and implementation.  He can quickly see the whole compensation picture and make educated decisions about pay within a holistic framework. 

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4. Employees or Recruits are Requesting Equity.  When one of your key producers or a new, high-value recruit asks if he can have stock in the business, and you don’t have a good answer, it tells you a couple of things.  First, it signals that employees expect to participate in the value they help create.  Second, it reveals that you have no real pay mechanism for keeping your key people focused on the long-term growth plans of the company.  It’s a bad combination.  In today’s environment, “catalysts” (people who can come in and positively impact the trajectory of your business) expect to have a compensation arrangement that enables them to participate in the benefits of company growth the same way owners do, if they were instrumental in producing that success. 

 The mistake too many CEOs make in this regard is assuming that because people ask for equity that means the business has to offer it to retain them.  Ultimately, there are about nine different kinds of long-term value-sharing plans a company can use to meet this kind of demand.  Most employees are more concerned about having a means of participating in the growth they help fuel than they are about whether or not they actually receive stock.  If people are asking for equity, it’s time to implement some kind of long-term value-sharing plan.

5. Performance is Lagging.  Daniel Pink will tell you that if your people are underperforming it’s not a compensation issue, it’s a motivation issue—and that motivation is intrinsic.  You can’t pay people to perform.  And that’s true.  However, compensation in general—and incentives in particular—is not about manipulating people into a higher level of performance.  It’s about effectively framing a financial partnership that creates line of sight and unity of vision for growing the business.  Line of sight means employees have a clear understanding of the relationship between the vision of the company, its business model and strategy, their role in those two things and what’s expect of them in that role, and how they will be rewarded for fulfilling those expectations.  Employees will then evaluate whether the rewards attached to their “partnership” with the company will adequately fuel the wealth creation standard they’re trying to achieve and allow them to make the life contribution that financial well-being enables them to make.

 So, CEOs need to consistently and frequently measure the level of line of sight they are achieving in their organization and adjust their value proposition accordingly.  Increased line of sight translates into increased accountability when accountability is an integrated part of the rewards structure of the business.  Pay that reinforces line of sight reflects organizational continuity and integrity.  It demonstrates that every aspect of the employees’ relationship with the company reflects consistency and fairness.

It’s a new business age we’re operating in; one that requires chief executives to think differently about all issues that impact the competitiveness of their companies.  Compensation cannot become a strategic stepchild as CEOs address the relentless pace of change they face.  As a result, they must respond to these five signs by being willing to alter the pay strategy they’ve been using.

To dive deeper into this topic, attend our upcoming webinar: Pay's Role in a Performance Culture.

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