Not likely. Not because a high performance pay strategy can create a high performance culture by itself, but because without one you discourage your people from fully investing in your vision of the future company you are trying to build. If you want your employees to become growth partners in your business, then you need a pay strategy that communicates that. So, what is a high performance pay strategy and how do you build one?
The concept of developing a rewards approach that is tied to performance standards is not new. Companies have been building incentive plans for years based on growth metrics of various types. However, most are unsatisfied with the results they see from their compensation formulas and conclude pay is really not all that relevant to performance. Well, not so fast. A high performance pay strategy is not created by simply offering incentive plans. And the concept should not be dismissed just because the ones you have tried have not “worked.” There is a broader context that is needed for seeing and using compensation as a strategic tool to reinforce performance priorities at all levels of the organization. To build a pay approach that actually performs, it must incorporate five essential elements.
1. It Must Be Tied to a Performance Framework. An organization’s performance framework has three dimensions: The Business Framework, The Compensation Framework and the Talent Framework. These three parts are separate but interdependent. Within the business framework, a chief executive must articulate the company’s growth expectations (vision), define the business model and strategy, and identify roles and expectations. In constructing the compensation framework, the company leader has to identify a clear pay philosophy, insist on pay strategies that reflect that philosophy and then enable a total rewards approach to the development of a compelling employee value proposition. The final piece in the performance framework is talent. This level of CEO planning has to do with identifying key producers already within the business and then defining where potential talent gaps might exist so a recruiting strategy can be formed. With both existing talent and that being recruited, it includes establishing performance standards as well as the kind of rewards that should be attached to their fulfillment.
2. It Must be Rooted in a Clear Pay Philosophy. A pay philosophy is a written statement that company owners and senior strategy leaders draft to spell out a value system and construct that guides how people will be paid in the company and why. It is written so it can be easily shared and referenced both when leadership makes decisions about specific pay strategies and when it communicates the nature of the organization’s pay system and its components to employees. It acts as a kind of compensation constitution for those charged with envisioning, creating and sustaining the rewards strategy of the company.
3. It Must Incorporate Value Sharing. Most studies in recent years indicate that incentive plans don’t “work” for motivating employee performance. Despite that evidence, we find many company leaders still construct bonus plans and other variable pay programs that incorporate a “carrot and stick” approach: “If you will do this, we will pay you that.” Value sharing is rooted in a different philosophy. Its core premise is that value should be shared with those who help create it. Its success depends upon a model that clearly defines the value creation threshold beyond which profits are attributable to the productivity and performance of employees, not just to other capital already at work in the business. Where incentives rely on a “force” approach (“do this if you want to get that”), value sharing relies on a “reinforce” approach (“here are the outcomes for which you have stewardship and the value that will be created and shared if you help us achieve those results).
4. It Must be Part of a Total Rewards Approach. In a Total Rewards construct, equal attention is paid to:
Compelling Future. This means the company paints a clear and persuasive picture of where the organization is headed and why it is meaningful. More importantly, it communicates why a given employee (in the context of his or her role and unique abilities) is critical to the fulfillment of that vision.
Positive Work Environment. This means employees are working within the realm of their unique abilities, that other team members have complimentary capacities, that they are sufficiently empowered to produce the outcomes for which they have responsibility and that they share the values of the organization. It also means that their work has strategic purpose and they are clear about the strategic ends for which they are responsible within their role.
Personal and Professional Development. Premier talent wants to feel as though it is working in an environment that accelerates its ability to improve. This usually happens when the combination of resources to which an employee is exposed within the organization creates a unique learning experience—one that allows him or her to excel. You need to determine whether your best people are having that kind of experience in your organization. How? Ask them.
Financial Rewards. Value-sharing is the heart of a competitive pay strategy. Value-sharing means the organization ensures that those who help drive business growth participate in the value they help create. It is paid out of the productivity profit described above. When a company adopts a value-sharing philosophy, it sends the following message to success-oriented potential employees: “We consider you to be an essential growth partner in this company and have confidence in your ability to help us achieve the future business we’ve envisioned. As a result, we want you to be clear about the financial nature of our partnership and what it can mean to you as we achieve sustained success.”
5. It Must Be Effectively Communicated and Reinforced. Rewards have to be seen as an integral part of a comprehensive value proposition that defines a partnership relationship between your company and your employees. This means compensation has to be positioned in terms employees find meaningful. Positioning implies that a company’s rewards strategy needs to be marketed and “branded” as a partnership within the framework of the larger marketing effort to build the employer brand. What do I mean by branding a partnership?
Most businesses build rewards strategies, communicate them and then assume employees will absorb the right message from them. They won’t. Rewards must be strategically developed, communicated, promoted, reinforced and celebrated. You have to create the story you want your pay strategy to tell—and then tell it over and over again.
The core message you should want your compensation approach to send is that you consider your employees to be growth partners in the business. And pay is the way you define the financial component of that partnership. This means each specific rewards plan has a supporting role in the economic value proposition you are offering. The foundation of your partnership message should be the clearly defined pay philosophy mentioned above.
To dive deeper into these five principles, attend our upcoming webinar: 5 Keys to Building a High Performance Pay Strategy for 2018.
High performance cultures do not create themselves. They are the product of an intentional effort to make performance a central focus throughout the organization. The pay strategy you incorporate will either promote or hinder that focus. If you want it to be a help, incorporate these five principles.