Outcome-Based Compensation Design

Too often a company's compensation strategy discussion begins in the wrong place. It starts with questions about design or amounts. This occurs because, in most instances, the company is just trying to solve a problem. And usually, its hope is that there is a way to simply "plug the hole" that's making the "dam leak" so they can move on to what's really important. When someone in such a circumstance calls us, this tendency is manifest pretty quickly. Once we've listened to the issue and explained our process, the potential client reveals their frame of mind with a question that is set up something like this:

"So, how long will it take to work through your process? We are coming up on our employee reviews in four weeks and we told them a while back we would be introducing a new bonus plan at that time. Can we get this done by then?"

Such a question, while asked innocently enough, reveals much about how that company views compensation. It is an issue to be managed, not a strategic tool to drive certain results in the business. Seldom is the core problem a design issue. It's an alignment issue. This is because rewards planning is an outcome-based endeavor that needs to reinforce the strategic focus of the company. A four-week excercise in re-engineering the bonus plan is not going to drive a different outcome for the business ,and year or two later the company will be back at square one trying to solve the problem all over again--and probably asking the same questions. (What did Einstein say? "We cannot solve our problems with the same level of thinking that was used to create them.")

To avoid this tendency, let me suggest six steps that an outcome-based approach to compensation planning should include.

  1. Identify your company's core strategy. Reduce it to a one paragraph statement that everyone in the organization can recite.
  2. Define three to six strategic intiatives that have to be achieved if the strategy statement is going to be fulfilled.
  3. Identify where in the organization key decisions need to be made relative to those intiatives (department, team, pair, unit, division, subsidiary).
  4. Model what financial value (for shareholders) will be created if those initiatives are successfully carried out.
  5. Align the organizational roles with the strategic intiatives that have to be carried out if the value modeled is going to be achieved.
  6. Now approach compensation development in the framework of that broader strategy discussion.

Certainly, there are other pieces that need to be managed for the outcomes in question to be fulfilled. A company needs to be able to identify key decisions the company needs to make. It needs to organize its macro structure around sources of value. It must figure out what level of authority decision makers need. It has to align other elements of the organizational system, such as information flow and processes, with those related to decision making. It must ultimately nurture a sense of stewardship and help those responsible develop the skills and behavior necessary to make and execute decisions quickly and well. Incentives, then, and other elements of compensation, must become mechanisms for structuring the kind of "partnership" you will have with those responsible for the outcomes and how a unified financial vision within the company will be defined. (For more information on the examples given in this paragraph, please see The Decision-Driven Organization in the June 2010 edition of the Harvard Business Journal. Marcia W. Blenko, Michael C. Mankins, and Paul Rogers, all of Bain and Company, are the authors.)

We are living in a business age of rapidly changing cycles where flexibility and decision making skills will make the difference between thriving, surviving and dying. Compensation must be discussed in a framework that acknowledges that reality. If it is, a company will find itself with a powerful rewards program that will allow it to attract the decision makers described above and move the company from a reactive problem solving mode to outcome-based achievement.

Article Categories: Compensation And Performance
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