CEO Playbook: 5 Steps to Building a Killer Pay Strategy

It’s hard to believe, but year-end is upon us.  You are likely making plans to ensure 2017 will be a bigger and better year than 2016.  Chances are you are assessing your talent, appraising your company’s performance, setting budgets, defining targets and otherwise making sure all forces are aligned to ensure a record year.  And oh yeah, there’s also the compensation plan.  Hmmm…it’s getting similar scrutiny, I assume?  You’re confident it’s going to help drive the growth you’ve envisioned and not be an impediment, right?  RIGHT? 

There are 5 steps to developing a killer pay strategy.

Well, now’s the time to figure it out if you haven’t already.  Pay is a strategic tool that should support the performance culture you are trying to build and turn your employees into growth partners.  To help you achieve that, here are 5 steps you should take to organize an effective pay strategy for the new year—and beyond.  Here, I’ll just provide a highlight of each step, however each is linked to previous posts or reports that provide more detailed information about what you should address in each of these areas. 

1. Construct a Performance Framework.  An organization’s performance framework has three dimensions: The Business Framework, The Compensation Framework and the Talent Framework.  These three parts are separate but interdependent—like connective tissue in your body.  Any organization expecting to improve results must ensure that each element of the overall framework is working properly and is supportive of the other components.

2. Articulate a Pay Philosophy.   A pay philosophy is a written statement that company owners and senior strategy leaders draft to spell out a rewards value system that articulate how people will be paid in the company and why.  It is written so it can be easily shared and referenced both when leadership makes decisions about specific pay strategies and when it communicates the nature of the organization’s pay system and its components to employees.  It acts as a kind of compensation constitution for those charged with envisioning, creating and sustaining the rewards strategy of the company.

3. Define Value Creation and Productivity Profit.  Your business must find a means of evaluating the economic value being driven by your employees.  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.  Corporate "wealth sharing," then, should always be a function of value creation.  For that to happen, you must define what that means for your business and what thresholds have to be reached before value-sharing will occur.

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4. Build a Total Compensation Structure (TCS) A TCS is a framework you build for managing and analyzing all the components of pay and benefits you are offering.  Ideally, it gives you an “all in one place” view of every employee tier, what salary band they fall in, which plans they’re eligible for at each level and so on.  It allows you to evaluate your employee value proposition instead of looking at each individual component in isolation.  Within a TCS framework, it is easier to make decisions and adjustments in specific pay plans because you can measure each against its impact on the overall compensation picture.

5. Organize around Line of Sight This concept has to do with the ability of the people working within your business to see the relationship between certain interdependent elements that drive the company’s success.  Specifically, it’s about consistently marketing a future to your workforce that reinforces the alignment you want between your company’s vision, its business model and strategy, the roles and expectations associated with that vision, model and strategy and how your employees will be rewarded for fulfilling those expectations.  When individuals come to work every day with a clear view of how those components are connected—and can relate them to their personal vision and motivation—they find meaning in their work.  Engagement follows.

As you engage in those 5 steps, you will discover other compensation and rewards issues that will need to be addressed to build out an effective and comprehensive pay strategy.  You will want to know what role a market pay study should play in your effortsYou will need to determine how to balance long and short-term performance in your value-sharing approachYou will want to know how to construct an annual incentive plan that forges a better growth partnership with your employeesYou will need a process for determining which long-term value sharing plan is best for your company.  

Many organizations need help with one or more of those issues and seek outside experts to help them with that process.  For more information about when it’s appropriate to engage that kind of assistance, see my previous post entitled When to Hire a Compensation Consultant.   

The important thing to recognize about these 5 steps is that they don’t simply help you organize your approach to building a pay strategy.  Instead, they guide you in developing a rewards approach that will be an ally in reinforcing the growth goals you have set and communicating the kind of partnership you want to have with your people towards their fulfillment.  As a result, they should be considered a critical a part of your strategic planning as you envision and begin shaping your future company for 2017 and beyond. The CEO's Role in Building a Pay Strategy

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