If you lead an enterprise, it is no secret to you that compensation is a huge investment. For most organizations, it’s the biggest line item on their P&L. So it’s no wonder your blood pressure rises every time an employee asks for a raise or expresses disappointment in the quality of your benefit package. You think you’re being generous with their pay level and they think they’re being undervalued. Let’s face it, compensation is not a core competency for most business leaders. As a result, you’re constantly questioning your pay strategy and whether it’s achieving what it’s supposed to. And if it’s not, why isn’t it?
So let’s try and answer that, shall we? Certainly, a single blog post can’t address all the nuances of rewards planning for the myriad of business types and industries that exist. But we can identify some common denominator issues that should signal to you that your pay approach isn’t working—and that a more comprehensive compensation strategy is needed.
1. Employees are Acting Entitled. This manifests itself in multiple forms. Sometimes it shows up at bonus time, when employees express disappointment that the payout isn’t more. Your plan is highly discretionary—and your people don’t agree with the discretion you are exercising. Other times, entitlement rears its head in a salary discussion, when an employee suggests she’s underpaid for the job she is performing. Often, it’s a legacy issue, with long-term, “tenured” associates reasoning they are “entitled” to certain levels of pay by virtue of their time with the company.
Regardless of the exact way entitlement is manifesting itself in your organization, this signal should prompt you to take a broader look at how you’re defining value creation for your business and what your philosophy is about how much of that value should be shared—and with whom. You need to begin an education process with employees about what it means to add value in their roles and create a compensation philosophy statement that articulates the principles and guidelines that will inform the company’s approach to rewards. Incorporate that philosophy in your education process.
2. You’re Not Able to Secure Premier Talent. This has to do with the competitiveness of your value proposition. Organizations that want to accelerate growth need to attract great people. By extension, they need to be able to identify the specific kind of talent they need, have a recruiting strategy for finding and attracting them and then be able to offer those recruits a rewards package that conveys the unique nature of the financial partnership the company offers. This requires a strategic approach to pay planning that reflects and reinforces a three-dimensional performance framework of the company: the business framework, the compensation framework and the talent framework. These three areas are interdependent and rewards strategies need to be formed and measured in that context if a company is going to win the increasingly competitive talent wars.
In a nutshell, what this means is that growth-oriented companies cannot rely on “old-school,” stale approaches to pay and expect to become magnets for highly-skilled people. There is a scarcity of that kind of talent in the marketplace and so attracting it requires a value proposition that reflects a wealth multiplier philosophy and opportunity (growth benefits all stakeholders, not just shareholders).
3. Your Productivity Profit isn’t Improving. The productivity profit of a business is that amount of net operating income that is attributable to the performance of human capital (as opposed to that derived from other assets at work in the business). A company’s productivity profit is arrived at by first determining a capital “charge” that reflects the return shareholders expect on the capital they have tied up in the company. That figure is a percentage of the company’s capital account (equity, debt, etc.). Subtract that amount from the net operating income of the business and you arrive at your productivity profit. Productivity profit should be increasing if a company is experiencing healthy growth. It should be the source from which all variable pay is derived.
The first step in assessing whether your pay approach is effective is to begin making this calculation. You can extend this measurement to determine the return on your total rewards investment (ROTRI™) by dividing your productivity profit by your total compensation investment. The first ratio you derive is a baseline you can then track to determine whether your rewards strategy is generating a positive return. If your ROTRI™ ration is not improving, you are likely paying too much for the performance you are getting and incentives thresholds should be adjusted accordingly.
4. There is no Line of Sight. One of the keys to greater employee engagement is improved line of sight. This concept has to do with the ability of a person working within a business to see the relationship between certain interdependent elements that drive the company’s success and how they relate to his or her role and rewards. When individuals come to work every day with a clear view of how those components are connected—and can relate them to their personal vision and motivation—they find meaning in their work. Engagement follows.
Pay plays an essential role in creating the "line of sight" needed for a unified financial vision for growing the business to emerge in an organization and is the means of defining the financial partnership a company wants to have with its employees. As a result, compensation needs to reinforce four critical things to members of your workforce: what's important, what's their role, what's expected of them and how they will be rewarded for fulfilling those expectations.
When an employee can relate those four issues to their impact on the company vision, business model and strategy, he or she is much more likely to adopt a stewardship mindset towards shareholder interests. However, without that connection, there can be a conflict between the messages articulated verbally about the strategic goals of the company and the ones communicated in the way people are compensated. As a result, accountability can suffer because employees are tugged in a performance direction through their pay that is at odds with the priorities and focus ownership wants them to have.
So, to determine whether or not your pay strategy is working, you should start measuring line of sight.
5. Performance is Lagging. Daniel Pink will tell you that if your people are underperforming it’s not a compensation issue, it’s a motivation issue—and that motivation is intrinsic. You can’t pay people to perform. And that’s true. However, compensation in general—and incentives in particular—is not about manipulating people into a higher level of performance. It’s about effectively framing a financial partnership that unites the expectations of shareholders with what your workforce anticipates your value proposition will provide. Employees will then evaluate whether the rewards attached to their “partnership” with the company will adequately fuel the wealth creation standard they’re trying to achieve and allow them to make the life contribution that financial well-being enables them to make.
Corporate "wealth sharing" (what most people call “incentives”) must be tied to value creation. It requires an organization's leader to be precise about how value creation is defined within that specific enterprise and what thresholds have to be reached before value-sharing can occur. For example, one company defined value creation and value-sharing this way:
- The first $80 million of net operating profit goes back to the company and shareholders to fuel future growth.
- The next $20 million of net operating profit is shared with employees and is split between short and long-term value-sharing programs.
- After that, all profits are divided 50/50 between company investment and employee rewards (further value-sharing).
Your definition of value creation may be different, but the principle is that rewards (in the form of value-sharing) are not a cost but an investment that is intended to fuel growth. Whether profits are applied to future capital acquisitions or to reward the individuals driving growth, the intent is to improve shareholder value and reward all stakeholders. If the wealth multiplier capability of the company is not improving then performance is lagging and your pay strategy isn’t working.
It’s a new business age we’re operating in; one that requires business leaders like you to think differently about all issues that impact the competitiveness of your company. Compensation cannot become a strategic “stepchild” as you address the relentless pace of change you face. As a result, you must respond to these five signs by being willing to alter the pay strategy you’ve been using.