Compensation and a Competitive Advantage

Everything related to a competitive advantage begins with hiring and keeping the right people—then making sure they are focused on the right performance factors. If you think otherwise, then perhaps you can identify a company that has the wrong people focused on the wrong issues and is somehow sustaining a competitive advantage. It just doesn’t happen.

Your people and their distinctive abilities are the soil that must be prepared and cultivated before a competitive advantage harvest can be reaped. This conclusion is born out in real (business) life over and over again.

However intuitive this may seem, it is interesting to observe how many companies focus on peripheral issues before looking at this foundational starting point in their competitive advantage quest. Two well-known authors have noted this fundamental truth.

First, Jim Collins in Good to Great explains:

“When we began the research project, we expected to find that the first step in taking a company from good to great [another way to frame the concept of competitive advantage] would be to set a new direction, a new vision and strategy for the company, and then to get people committed and aligned behind that new direction.

“We found something quite the opposite.

“The executives who ignited the transformations from good to great did not first figure out where to drive the bus and then get people to take it there. No, they first got the right people on the bus (and the wrong people off the bus) and then figured out where to drive it.

“…The good-to-great leaders understood…simple truths. First, if you begin with ‘who,’ rather than ‘what,’ you can more easily adapt to a changing world. If people join the bus primarily because of where it is going, what happens if you get ten miles down the road and you need to change direction?” (Good to Great, Jim Collins, Harper Collins Publishers, Inc. 2001, pgs. 41-42)

Under this premise, one could almost reduce the criteria for competitive advantage to one issue—getting and keeping the right people. If you have the right people, you can carve out whatever strategy is needed for success and know that it will happen.

However, a second issue is equally important. Once you have the right people and have developed a compelling vision, purpose and strategy, how do you keep those people productively focused on the roles and expectations that will lead to success?

In his book Winning, Jack Welch had this to say in answer to that question.

“Hiring good people is hard. Hiring great people is brutally hard. Yet nothing matters more in winning than getting the right people on the field, then guiding them on the right way to succeed and get ahead.

“…If you want people to live and breathe the vision, ‘show them the money’ when they do, be it with salary, bonus, or significant recognition. To quote a friend of mine, Chuck Ames, the former Chairman and CEO of Reliance Electric, ‘Show me a company’s various compensation plans, and I’ll show you how its people behave.’ (As quoted in Newsweek, April 4, 2005, pgs. 47, 46, emphasis added)

So then, am I really saying that having the right people and giving them the right compensation is all that is needed to attain and sustain a competitive advantage? Not exactly. Certainly, there are capital, operations, product, marketing, customer service and performance management issues that have to be addressed. That is understood and no one could reasonably argue otherwise. However, what I am saying is that none of the fruits of a competitive advantage will be realized if people and rewards issues aren't addressed properly. It’s just not possible to achieve great things as a business unless you have great people who feel a sense of partnership and can become stewards of the owners' vision.

Given the evidence just summarized, one might consider the attainment of a marketplace competitive advantage as the culminating effect of a series of “bite-sized” competitive advantage successes being attained. And the first of these must be the creation of a rewards strategy that meets the following standards:

  1. Attracts and retains the right people.
  2. Focuses those people on the right issues—the key performance factors for your company.
  3. Provides rewards (motivating and attainable value sharing) for those individuals to perform at the highest level.
  4. Generates an appropriate return on the company’s compensation investment; pay is linked to a performance philosophy and standards where incentives are paid out of a greater whole that the organization’s talent helps create.

To read more on this topic, download our white paper entitled Creating and Sustaining a Competitive Advantage.

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