Compensation Trends: Where Pay is Headed and Why

If you’ve been following this blog for any length of time, you know that the word I would use to describe today’s business environment is transformation.  The focus on building or expanding creative capabilities within organizations is greater than it has ever been–and will only increase in the years to come.  One would be hard pressed to find any current business publication or journal that doesn’t have multiple articles on this subject: how transformation occurs, who should drive innovation in an organization, the exponential impact of technology on business growth, and so on.  It has become a ubiquitous topic at virtually every business conference as well. 

Compensation trends are tied to the exponential rate of transformation in business.

Competing on this transformation playing field relies heavily (if not entirely) upon having the best “players.”  This requires that a company have the ability to identify the roles and skills it will need to fuel the accelerated transformation that will keep it competitive.  That process needs to also compare those needs with the skills and roles already being filled in the business so leadership can identify talent gaps.  

This kind of analysis reveals what’s missing and helps define who the people are that should be recruited to the organization.  In an examination of future compensation trends and potential strategies, this step is critical because it gives context to the kind of value proposition that will attract the talent being sought.  And, what’s becoming clear is that most skill gaps are or will be in the form of talent that can fuel the innovation engine we’ve been talking about.  Scott Anthony addressed this issue in his Harvard Business Review article on the subject this way:

It’s early days still, but the evidence is compelling that we are entering a new era of innovation, in which entrepreneurial individuals, or ‘catalysts,’ within big companies are using those companies’ resources, scale, and growing agility to develop solutions to global challenges in ways that few others can…These companies have pushed into territory that was once the province of entrepreneurs, NGOs, and governments—from delivering health care technology, clean water, and new agricultural capabilities in developing countries to managing energy, traffic, public transit, and crime in the world’s major cities. (“The New Corporate Garage,”  Harvard Business Review, September 2012, Scott D. Anthony, 44-53)

 What Anthony seems to be saying is that in the future, existing companies will need to attract individuals who would otherwise be on a path to disrupt the very businesses that hire them.  In the days ahead, those organizations will need the ability to bring talent inside the existing enterprise to help engineer what used to only occur by starting or acquiring a new company. 

If you take a composite view of these elements, how and why compensation needs to support the ability of businesses to innovate and compete becomes clearerPay strategies need to attract people with entrepreneurial capabilities and reward them for leveraging the ability of the company to expand, magnify or otherwise accelerate the virtuous cycles of the company’s business model.

Intuition will tell you this need is not going to be addressed by simply paying competitive salaries or even generous bonuses.  Catalysts are looking for a compensation structure that will reflect the contribution they are making to the business.  They want a stake in the value they help create. The compensation of the future will not necessarily involve new pay “schemes” that have never been used before, although some such plans are emerging. Rather, it will be more a matter of companies paying better attention to the range of pay elements they combine to create a financial opportunity that matches what the innovators of the future seek.  It will become a question not just of how much those individuals will need to be paid but how (in what form) that compensation will come to them.

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The Compensation Landscape

Now that we have examined the business and talent trends that are shaping the future, we should consider what is happening on the compensation landscape.  One of the best descriptions I’ve seen of the current pay environment is in a Workspan article entitled “The War for Stars—How to Keep Your High-Performance Talent.”  In it, authors Myrna Hellerman and Jim Kochanski identify two fundamental approaches and philosophies being adopted by companies in an effort to attract and retain employees in their organizations.  One is referred to as the “expansive” approach and it advocates retaining all but the very worst employees in the organization.  They call the other one the “selective” approach and it “focuses on retaining star performers—a small group of high performers whose sustained, evidenced contributions drive organizational success.”  (“The War for Stars,” Workspan Magazine, May 2012, Myrna Hellerman and Jim Kochanski, 54-59)

Hellerman and Kochanski explain that the theory behind the expansive approach goes something like this: “Everyone in the organization is needed or they wouldn’t be employed here.”  It’s a “why upset the apple cart?” philosophy.  In such an environment, there is a fairly egalitarian approach to rewards and performance messages.  The authors make the point that although this approach is easier to administer (than the selective method), it doesn’t typically enable an organization to raise performance standards and results.

Conversely, companies that adopt the selective approach believe that high performers should be treated differently.  “[The selective approach philosophy] identifies, nurtures and works to retain the high performers at all levels of the organization. It seeks to produce a cycle that, in the long term, will not only retain existing high performers but create and attract more high performers and generate ever-improving standards of performance and organizational results.  Most selective approach organizations set very high performance standards, which typically appeal to high performers who relish the challenge and the recognition associated with achieving tough goals.  They want to win, and when they do, the organization wins through improved results and the continued retention of the high performers who make it succeed,” the authors argue.

So, given the present business environment and trends, which approach makes the most sense? Intuitively, most would say the selective approach.  In truth, every organization has to determine the kind of culture it’s going to nurture and which approach will drive the outcomes it seeks.  It may mean that some organizations adopt some elements of each philosophy.  However, if companies wish to compete in the future—both in the marketplace and in the war for talent—they can’t ignore the fact that high performers will be needed and those employees will have expectations that don’t often fit in the framework of the expansive approach.

Regardless of the approach you ultimately adopt, one thing is clear about today’s compensation trends:  What worked yesterday will probably not work tomorrow.  So, become clear on your pay philosophy, adopt a pay strategy that is agile, build a total compensation structure that helps you manage it and then adapt, adapt , adapt as transformative change continues to accelerate.

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