Most companies have leaders with the strong operational skills needed to maintain the status quo. But they are facing a critical deficit: They lack people in positions of power with the know-how, experience, and confidence required to tackle what management scientists call “wicked problems.” Such problems can’t be solved by a single command, they have causes that seem incomprehensible and solutions that seem uncertain, and they often require companies to transform the way they do business. Every enterprise faces these kinds of challenges today. (10 Principles of Strategic Leadership, Strategy+Business, May 18, 2016, Jessica Leitch, David Lancefield, and Mark Dawson)
These findings reveal several critical issues that today’s chief executives must address if they expect to compete in the transformation business environment that now exists. Achieving and sustaining a competitive advantage requires them to attract, develop and retain people who can provide strategic leadership. To accomplish that, they must be able to frame and articulate a compelling financial partnership; one that will draw superior people to the business, reinforce the performance expectations associated with their roles and then compel them to stay and drive sustained success.
So what kind of pay strategy will accomplish all of that? Before answering that question, let’s first understand more about the nature of this new kind of leader. That will help us better understand what expectations such individuals hold for the kind of value proposition they should be offered.
Who are These People?
In the Strategy+Business article referenced at the beginning of this article, the authors offer this profile of a strategic leader:
The [PwC] study suggests that strategic leaders are more likely to be women (10 percent of the female respondents were categorized this way, versus 7 percent of the men), and the number of strategic leaders increases with age (the highest proportion of strategic leaders was among respondents age 45 and above). These leaders tend to have several common personality traits: They can challenge the prevailing view without provoking outrage or cynicism; they can act on the big and small picture at the same time, and change course if their chosen path turns out to be incorrect; and they lead with inquiry as well as advocacy, and with engagement as well as command, operating all the while from a deeply held humility and respect for others. (10 Principles of Strategic Leadership, Strategy+Business, May 18, 2016, Jessica Leitch, David Lancefield, and Mark Dawson)
A few years ago, in a Harvard Business Review (HBR) article, Scott Anthony put a different label on the kind of leaders businesses need; but one nonetheless consistent with the concept of strategic leadership we’ve been discussing. He called them catalysts:
It’s early 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)
This direction is causing businesses to more carefully assess the roles they have defined for each of their key people. Organizations are hard at work identifying the skill categories that will need to be filled going forward and what capability “gaps” exist. The competitive environment of the future will require that people in key positions in an organization work in roles that maximize their unique abilities and relieve them of responsibilities that impede their capacity to have a more meaningful and strategic impact. Duties and responsibilities that are not within the key skill set of these individuals will be outsourced or filled by another contributor whose distinct proficiencies match that need. In another HBR article, authors Martin Dewhurst, Bryan Hancock and Diana Ellsworth explained this new emphasis:
In today’s knowledge economy, competitive advantage is increasingly coming from the particular, hard-to-duplicate know-how of a company’s most skilled people: talented (and highly paid) engineers, salespeople, scientists, and other professionals. The problem is that across the private, public, and social sectors there aren’t enough knowledge workers to go around. And the situation promises to get worse: Recent research by the McKinsey Global Institute suggests that by 2020 the worldwide shortage of highly skilled, college-educated workers could reach 38 million to 40 million, or 13% of demand.
In response, some firms are taking steps to expand the talent pool—for example, by investing in apprenticeships and other training programs. But a number of companies are going further: they are redefining the jobs of their experts, transferring some of their tasks to lower-skill people inside or outside their organizations, and outsourcing work that requires scarce skills but is not strategically important.
Such moves aren’t new, of course. Firms have long been carving off repeatable, transactional work—such as call center services, payroll, or IT support—and either shifting it to lower-cost locations or outsourcing it. What is new is that companies are now doing this with knowledge-based jobs that are core to the business." (“Redesigning Knowledge Work,” HBR, January-February 2013, Martin Dewhurst, Bryan Hancock and Diana Ellsworth, 59-64)
A Fresh Approach to Pay
Given the leadership talent demand just described, it is obvious that the financial dimension of a company’s value proposition must evolve to meet the unique need at play. “Old school” approaches need to give way to pay strategies that reinforce the strategic outcomes key performers are being asked to help companies achieve. Here are a few of the compensation and rewards trends we’re seeing emerge to address this accelerating development.
Performance agreements attempt to link value-sharing to value-creation in a very direct way for key performers. Participating employees are excluded from company-wide, annual incentive plans. Instead, they individually negotiate a “deal” with the organization’s leaders that defines financial, operational and leadership expectations. It likewise defines the value of the award that will be generated if the results are achieved as agreed upon. The agreement is memorialized in a “deal sheet” that becomes the basis of a consistently scheduled (typically quarterly) self-evaluation the participant engages in with company officers.
An approach that is becoming more popular with smaller companies and start-ups (although not limited to them) is one that offers key employees a choice in their pay arrangement. They are given the option (opt-in or opt-out) of having either a “higher” salary and modest incentive or a “lower” salary with higher, even unlimited upside earnings potential (through short and long-term value-sharing plans). In some organizations, key producers’ entire compensation can be variable, receiving payouts solely based on a formula (percent of revenue, profits, etc.). Opt-in duration may differ from organization to organization or even between employees.
Internal Venture Capital
Internal venture capital is an approach that is used primarily in larger organizations. It is intended to support an entrepreneurial undertaking within an existing business. The concept is self-descriptive. A venture capital “account” is established and criteria for its access are defined. The company makes a point of publicizing that it wants to “fund” great ideas that will bolster its business model and is willing to “finance” them through the organization’s venture capital account. Innovative, creative catalysts and other strategic leaders relate to this kind of opportunity because it’s like running their own business. When this approach is adopted, compensation will often be tied to either a performance agreement or opt-in plan. Commonly, value-sharing will be aligned with the performance criteria that have been set for the venture capital account. The intent is to create a highly entrepreneurial experience within an existing business.
Long-Term Value-Sharing Plans
For years, companies have been using various programs for sharing value with those who help create it. Long-term value-sharing is not a new concept. This includes plans such as stock, phantom equity, SARs, profit pools, performance units and strategic deferred compensation. However, in the future, the ability of a company to clearly define value creation and then have a mechanism for sharing it with key producers (in a way that properly reflects the organization’s pay philosophy) will be more critical than ever. Why? Because in the “new” environment, companies are competing for strategic leaders, and those individuals will be seeking a relationship with an organization that operates under a “wealth multiplier” philosophy. This simply means an organization believes that shareholders will experience a greater wealth multiple for themselves if they create a vested interest for others to participate in the company’s success. And by the way, this is the very kind of people CEOs are trying to attract. Catalysts and others with unique abilities want to be viewed and treated as business partners, not just employees.
In arrangements such as these, can you see the sense of partnership that is formed with key leaders in the business? These approaches reinforce the transformative performance the company is seeking and its willingness to engage financially with those who can produce results that enable growth. These tenets represent a change from “yesterday” in the way companies view and design compensation. They match the business reality CEOs face in trying to attract, develop and retain the kind of talent they need for sustained success.