If you lead a company, pay strategy issues will demand more and more of your attention in the future than they have in the past. This is because compensation has become as strategic an issue as any other aspect of your business—and strategy requires leadership. Rewards approaches of the future need to align with the reinventions taking place in performance management and must incorporate the right combination of agility and stability. That will be easier to achieve if some foundational groundwork has been laid. So, as you head into the new year, you would do well to address three critical pay issues that will require CEO leadership—and that will ensure greater CEO success.
1. Defining Value Creation
Yes, this is a topic I’ve been harping on for a long time now. But it is only becoming more important as the pace of change in business accelerates. No matter how much your business model or strategy evolves, how you define value creation should not vary significantly. This strategic issue requires you to identify the threshold at which you attribute the value being created to the contributions of your company’s human capital. When you define value creation, you assume that a certain amount of the profitability of the business is driven by capital assets shareholders already have at work in the business. Stated another way, by virtue of their investment, owners are entitled to a certain return on their capital before value is shared with other business growth contributors (such as employees).
At VisionLink, we call the value attributable to the performance of employees “productivity profit.” It is part of a larger calculation we help companies make to determine the return they are getting on their total rewards investment. But whether you call it productivity profit or something else, it is important to know what kind of ROI your rewards investment is generating—and making this kind of calculation helps you determine that.
2. Articulating a Pay Philosophy
A pay philosophy is a written statement that company owners and senior strategy leaders draft to spell out a value system and construct that guides 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.
Employees may or may not relate to your philosophy about pay—and that is okay. You do not want people on your team who are not aligned with your beliefs about how value is created, with whom it should be shared and what form that sharing should take. People may disagree with your philosophy, but they cannot say it is unfair. Claims of compensation unfairness only emerge in companies that do not have a governing belief system about pay.
3. Determining Performance Standards
Performance standards should naturally flow from a Performance Framework business leaders develop. This construct is made up of three areas of performance focus: The Business Framework, The Compensation Framework and the Talent Framework. These are separate but interdependent parts—like connective tissue in your body. Any chief executive expecting to assume control of his or her company’s growth destiny in the present environment of high competitiveness and uncertainty must ensure that each element of the overall framework is working properly and that it is effectively linked to the other two.
Business Framework: In this first category, enterprise leaders must envision the future company, define its revenue engine and standards and then identify the roles needed to execute that strategy and business model.
Compensation Framework: With the business framework in place, a compensation framework is easier to contruct. Your company’s pay structure should help align roles and expectations (identified within the business framework) with the business vision, model and strategy. It does this by framing the financial partnership that will exist between ownership and the workforce.
Talent Framework: The final piece in your performance framework is talent. This area of focus has to do with identifying your key producers and defining where you have potential talent “gaps.” With both existing talent and that being recruited, your talent framework must include a plan for communicating role expectations and the rewards associated with their fulfillment.
Get those three priorities right and watch how many pay issues seem to fall into place. Ignore them and watch how hard it is to create a compensation strategy that drives the results you are expecting. CEO success in this arena will be a function of the amount of CEO leadership that is provided. Just remember, it is the CEO's role in building a pay strategy. Pay requires a strategy and strategy requires leadership. Your leadership.