The Compensation Portfolio

Language is important. The words we use to describe efforts, intent, purpose, outcomes and so on create images in the audience's mind and will either enhance or diminish the ultimate message we mean to send. That's why, when talking about compensation issues, language creates a mindset from the top down in an organization about what rewards are all about.

In my view, the best way to talk about compensation is in terms of an investment. All that we do in business is investment and return related. Cost is a term that should be reserved for those items that are purchased in the context of a company's overall investment in its business model and plan. Understood this way, salaries, bonuses, benefit plans and other aspects of a rewards strategy are not costs--even though they might be "expensed" on the company's P&L. This may seem like a minor issue, but it's not. Words matter--and once a mindset settles in an organization it is very difficult to uproot or alter it. Mindsets determine the trajectory of an organization. Watch (listen to) the language people use in a business and you'll know what direction an organization is headed.

So, if all we do in business is investment and return related, then what we really have are a series of "portfolios" we are managing in the business. We have an innovation portfolio. We have a product portfolio. We have an R&D portfolio. And we have a compensation portfolio.

If this is the case, what are the asset classes in our rewards investment portfolio? It's an interesting question, isn't it? If our investment in compensation is intended to produce a positive return and contribute to growth, how might we best evaluate our allocation? We might consider thinking in terms of these three compensation "asset classes":

The Performance Class

This asset group is designed to maintain the performance engine of the company. It is focused on sustaining the virtuous cycle of the business model and optimizing what needs to be done to secure the current customer or client base. This level of compensation is paid for helping the company meet its "budgeted" or targeted level of performance each year and to sustain a hopefully growing revenue stream. It is also designed to appropriately address the need a superior level of talent requires to maintain confidence in the lifestyle it feels is commensurate with its level of skill, experience and unique abilities. It seeks to protect the financial environment for key people and help them feel a level of security. This class includes salaries, short-term value sharing arrangements such as annual bonuses, health and welfare benefits (group medical, dental, disability insurance, etc.) and basic retirement plans.

The Growth Class

Growth is future-based and this asset class is designed to encourage, nurture and reinforce future thinking. It is intended to protect "good" profits in the organization and reward the fulfillment of the future company vision. Rewards in this category are paid for helping the company achieve superior levels of performance. In addition, its intent is to be a magnet for a type of employee that can adopt a stewardship approach to protecting shareholder interests. This quality of employee is also attracted to the idea of participating in value that he helps create. He is confident that when his unique abilities are combined with the company's resources, the future company will be realized. This asset group includes investments such as stock or stock option plans, phantom equity or SARs, profit pools and supplemental executive retirement plans such as deferred compensation. Companies sometimes invest in other executive benefits for this class such as car allowances, executive disability plans, etc. to secure the financial environment of key producers. Ultimately, this asset class should make employees feel like growth partners in the organization and invested in the future business.

The Transformation Class

Ambitious companies seek to fundamentally alter the course of their industries by creating unique breakthroughs. Think Apple, Disney, Amazon and other companies that have changed the "universe" so to speak by engineering a different and better consumer experience as well as uniquely great opportunities for their employees. Businesses don't achieve this kind of revolutionary change by simply paying competitive salaries and bonuses--or even by offering stock. They may include many of the elements of the other two classes, but their investment strategy is much more ambitious in all aspects of their business, including compensation. Companies that work on compensation in their transformation portfolio have a wealth multiplier and not just a wealth creator mindset. They envision people--both the customers they serve and the workforce they employ--experiencing life in a whole different realm. As a result, they don't just create compensation programs. They market a future to their employees on all levels--product development, market penetration, innovation expectations and yes, rewards--so that company "portfolios" are completely aligned. Every person in the organization, especially those responsible for driving results, knows the relationship between the company vision, its business model and strategy, roles and expectations, and rewards. When this is achieved, new horizons of performance are attained that were never thought possible.

Hopefully, in reading some of the language used to describe each of these asset classes, you are persuaded by what I said at the outset. Language is important. Words matter. Whether you decide to use the terminology I employ here or something else, don't expect to see any quantum changes in organizational performance until you transform the way you speak about all investments within the company, including and especially compensation.

If you like the concepts presented in this posting, you should also check out our article entitled "Why Long-Term Value Sharing Matters."

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