If you lead an enterprise, you want your rewards strategy to be an asset and not a liability to your business model and growth goals. If that’s going to occur, your planning team will need to provide satisfactory answers to some important questions. The responses you get will tell you much about whether you’re positioned for success or heartache—and what role you'll want to assume in the compensation development process of your company.
Here are six key questions I suggest you ask about your company’s pay strategy. If the answers you receive are inadequate…well…you will have some work to do.
1. Does it reflect our values and philosophy? Any compensation plan that isn’t rooted in a clear statement of principles that articulate what the company believes about pay is destined to fail. A pay philosophy defines what value creation means for the business and how it will be shared. It expresses what the organization is willing to “pay for” and why. An ideal statement will spell out where the business wants to be relative to market pay, what balance it wants to draw between guaranteed and variable compensation, and how it will prioritize short versus long-term performance in its value-sharing.
2. Does it attract the right kind of people? Your value proposition should be married to your recruiting strategy. Both should be part of your company’s performance framework that links business goals, compensation and recruiting. Your organization must be able to identify the kind of talent it wants to attract and know what kind of financial partnership it will need to attract, develop and retain those people. Premier talent doesn’t gravitate to companies that haven’t thought clearly about this issue.
3. Does it create a unified financial vision? This is about using pay as a strategic tool to link employee and shareholder visions. It’s about turning your key people into growth partners who take ownership of the outcomes and results you’re trying to achieve. This only happens when employees see the relationship between the company’s growth targets, its business model and strategy, their role in that framework and how they will be rewarded for fulfilling the expectations associated with that role. This is called line of sight. When it is achieved, accountability becomes self-reinforcing.
4. Does it reinforce the right kind of performance? Each pay plan you introduce is, in large measure, a communication tool. It communicates shareholder priorities. How much do you want your people to focus on driving short-term results versus long-term? How does that differ by department or tier? What outcomes are worthy of value-sharing? These are issues that your compensation strategy needs to successfully address. If you are trying to double revenue over the next three years but your top people are being paid a salary and an annual bonus, then your rewards strategy is not reinforcing the kind of performance you say you want. Therefore, your employees will likely be tugged in a strategic direction at odds with the focus you need them to have.
5. Does it generate a positive return on our compensation investment? Compensation is likely the largest budget item on your P&L. As such, it should be responsible for a positive ROI as much as any other deployment of company capital or profits would be. Do you know what return you’re getting on your pay investment? As you consider salary or incentive increases, have you “justified” them financially in terms of their contribution to productivity and performance? Do you know how much of your organization’s net operating income is attributable to the contributions of your people and not just shareholder capital and business momentum already at work in the business? There are ways to measure these things and you must pursue them if you want pay to be held accountable.
6. Does it improve shareholder value? This is the real test of effective pay, is it not? If the way you’re compensating your people isn’t helping grow shareholder value, then how do you justify it? Pay improves shareholder value when the right philosophy and practices about value sharing are in place. Value is shared with those who help create it—but only once a well-defined value creation threshold has been reached. Value-sharing should be occurring out of productivity profit, which is “what’s left” of net operating income after a capital “charge” is assessed to account for return on shareholder investment (capital) already at work in the business. This makes “incentives” self-financing; you are paying benefits out of a superior value that has been created. When this occurs, it turns your organization into a wealth multiplier, where both shareholders and all other company stakeholders benefit from the growth performance of the business.
I’m sure there are other questions that you should be asking about your company's pay strategy. However, if you don’t receive adequate answers to these six, it won’t really matter.
To dive deeper into this topic, attend our upcoming webinar: Pay’s Role in a Performance Culture.