In my conversations with CEOs, owners and other business leaders I hear a fairly consistent theme. They are frustrated and that discontent is usually articulated as something like the following: "I have good people, but they just don't understand the business the way I do. Therefore, they aren't consistently focused on the things I consider most vital."
Organizations need employees in leadership who understand “what’s important.” Such individuals must be able to embrace a stewardship role in aligning their focus with that of shareholders. In other words, they need to define what’s important in the same terms as ownership as they go about fulfilling their responsibilities. For most companies, a list of “what’s important” would include, but not be limited to, issues such as:
- Drive growth (add revenue sources, improve operating income, increase EBIDTA, etc.)
- Improve margins/profits
- Manage costs/lower expenses
Each of those has long-term implications. As a result, executive and management level employees must be able to focus on maintaining the company’s performance engine in each of those categories while moving the organization to its next level of growth. In other words, they must be able to sustain and improve the business model...simultaneously. In such a context, compensation plays a key role in communicating “what’s important.” To the extent key producers are incented in the same way shareholders are (which doesn’t necessarily mean equity participation), they are more likely to think in strategic instead of just tactical terms in their approach to getting results.
Aon/Hewitt makes this point in their report (written by Johanna Zemmelink-Pope) entitled Performance and Rewards: Broad-Based Incentive Plan Design:
"An incentive plan is successful only to the degree that it supports the strategic imperatives of the organization…Understanding the nature of the talent needed to deliver on the strategies and how, as part of the total rewards offer, an incentive plan can serve to attract, retain and motivate that talent is also important. This knowledge is necessary in order to identify and prioritize the key objectives of the incentive plan. For example, an organization's key objectives may be to:
- drive growth;
- motivate individual and/or collective performance;
- focus behaviors;
- share organizational success; or
- meet the attraction and retention challenge posed by talent competitors.
"After reviewing strategy, a number of metrics that could serve as markers for successful execution will surface…It is essential to choose and prioritize …[those] metrics taking into consideration and balancing:
- long-term impact/sustainability vs. short-term results;
- income statement vs. balance sheet outcomes;
- expense vs. investment;
- individual vs. group performance;
- corporate vs. business (or smaller) unit performance;
- revenue growth vs. profitability; and/or
- organic growth vs. growth by acquisition.
"In balancing comprehensiveness vs. simplicity, carefully consider whether to incentivize:
- a greater number of metrics (scorecard) or a more comprehensive metric (one with more variables,such as return on capital) versus
- a single or simpler metric, such as earnings before interest, taxes, depreciation and amortization (EBITDA).
"The former will require more effort on the part of leaders in building the associated business acumen. The latter may make it difficult to encourage the longer-term view."
Such metrics and measures reflect strategic, ownership thinking. And a business can’t expect the key part of its workforce to think long-term if the company’s compensation strategy tells it to focus its attention strictly on the next 12 months or quarter. As a result, an approach to compensation that includes a long-term value sharing component creates alignment between ownership and employee thinking. The default position of most employees is to think short-term. However, if there is a meaningful, vested interest in balancing short and long-term results, because of how individual producers are paid, those same people will more naturally evolve to a stewardship thought process.
To learn more about the importance of long-term value sharing, download our white paper: "Why Long-Term Value Sharing Matters."
To learn what steps you can take next year to otherwise improve your approach to compensation, attend our upcoming webinar entitled: "5 Ways to Transform your Pay Strategy for 2015." Register today. Space is limited.