Is Your Pay Strategy Conventional or Transformational?

Conventional wisdom is a dangerous thing, particularly when it is used as a substitute for strategic thinking.  In their book Freakonomics, authors  Steven Levitt and Stephen Dubner make the point this way: “It was John Kenneth Galbraith, the hyper literate economic sage who coined the phrase ‘conventional wisdom.’  He did not consider it a compliment. ‘We associate truth with convenience,’ he wrote, ‘with what most closely accords with self-interest and personal well-being or promises best to avoid awkward effort or unwelcome dislocation of life.  We also find highly acceptable what contributes most to self-esteem.’ Economic and social behavior, Galbraith continued, ‘are complex and to comprehend their character is mentally tiring.  Therefore we adhere, as though to a raft, to those ideas which represent our understanding.’ ”

tCompanies that adopt a conventional approach to their pay strategy run the risk of becoming uncompetitive.

Business leaders put their companies at risk when they adopt a conventional wisdom approach to problem solving or strategy building.  High performance leaders push against norms and insist on a “higher” or more elevated way of thinking about issues that impact the growth trajectory of their enterprises.  They think in transformational terms, not conventional ones.  This is also true of their approach to compensation.  Their pay strategy reflects the comprehensive vision they have of their organization’s growth and is a key element in their commitment to building a performance culture.

So what does it mean to have a transformational strategy for rewards and how does it differ from a conventional approach?  Let’s contrast the two.

Conventional Pay Strategies

Borrowing from Galbraith’s concept of conventional wisdom, conventional compensation is one that is “convenient “ and “promises best to avoid awkward effort.”  This is typically manifest by an over reliance on market pay data and a heavy focus on pay cost containment.   Organizations that follow conventional wisdom when it comes to pay usually place a high emphasis on making sure salaries are “competitive” with the market and believe how much they pay a person is the primary driver of their success in attracting talent.

In a “conventional” environment, there is a suspicious view of incentives.  They are seen as an additional expense that is a drain on profitability and therefore should be minimized.  As a result, if they pay incentives at all they do so most commonly in the form of an annual bonus that is highly discretionary.  Long-term incentives are usually excluded in this kind of compensation environment because leadership either doesn’t think they are necessary or believes it will be too costly (and therefore unwise) to make payout promises that extend beyond the current year.

When conventional thinking guides a company’s pay decisions, there is little attempt to align the organization’s pay approach with the overall strategic plan of the company.  As a result, there is also very little line of sight.  Employees do not see the relationship between the enterprise vision, its business model and strategy, the roles those employees have in that model and strategy, what’s expected of them in those roles and how they will be rewarded for fulfilling those expectations.  As a result, they experience a certain amount of dissonance about the organization’s operational approach and feel disconnected from its goals and priorities.  The way they are paid is not synchronized with the growth plans that shareholders want them to help drive.

When businesses adopt a conventional approach to pay, there is usually no clear compensation philosophy guiding the process.  As a result, each rewards plan that is adopted is usually examined independent of its impact on the entire compensation investment.  The result is there is no universal understanding of how value creation for the business is defined and how it will be shared with those who produce results.  Instead, decisions about pay are mostly reactive and arbitrary.

Most companies that approach pay design in a “conventional” manner sooner or later end up frustrated.  They feel like they are aligned with market pay standards and yet they are not able to recruit the quality of talent they want—or people join the organization but don’t meet performance standards.  Other times, employees feel as though their earnings capacity is stifled and that it doesn’t really matter how well they perform because their income doesn’t reflect the results they are helping to produce.  When businesses adopt a conventional mindset about rewards, CEOs, owners and others responsible for pay decisions end up feeling like their employees don’t appreciate what they have and are acting entitled.  In short, it becomes a morass of mediocrity and frustration. 

Unfortunately, most companies approach compensation “conventionally.”  And since they have been getting by well enough, they are lulled into thinking that pay is not that big of an issue.  However, the exponential pace of change in business would suggest otherwise and so more transformational thinking is going to be needed when it comes to pay—and sooner rather than later.  So let’s discuss what kind of thinking goes into that kind of approach to pay.

Transformational Compensation

A couple of years ago I heard a CEO speak at a conference of HR professionals who were there to learn how they could add value to the chief executive of their companies.  At the outset of his presentation, the business leader told the audience about a conversation he had with a neighbor who was an unemployed CFO. The friend told him he had recently interviewed with a company that was a good fit for his background and experience and for a position for which he was highly qualified. However, he didn’t get the job and he was perplexed.

“If you were hiring a CFO, what would you be looking for?” the neighbor asked.  The CEO told the audience he was sure his friend expected him to rattle off a list of qualifications that most experienced CFOs would have on their resume—all of which he possessed; thereby affirming that the business made a big mistake in not hiring him.  Instead, the CEO gave an answer that frankly confused his inquirer: “I’d be looking for a growth partner.” “A growth partner?” the CFO responded. “Yes, a growth partner: someone who will see the future of the business the way I do and is willing to take ownership of that vision and do what it takes to make it happen.” 

The message of the CEO was that high performance leaders like him aren’t looking to hire more "employees." They want growth partners.  So how do you turn employees into growth partners and what role should your value proposition play in that process?  That is the question that is asked by business leaders who are committed to transformational thinking.

The answer to the question rests on the acceptance of a certain premise: We live in a business age of transformation, not just innovation.  Look around.  Google’s ambition is to organize the world’s information. TED wants to be the channel for thought leaders to share ideas globally that will improve people’s lives. Disney seeks to develop the most creative, innovative and profitable entertainment experiences and related products in the world. The CEO who was trying to offer some perspective to his neighbor obviously had a transformational view of his organization’s future as well.

If you run a business, you must know and be able to articulate the transformative purpose your company is pursuing. You then must be able to identify the type of talent that relate to that kind of transformation and has the skills, experience and mindset to help you achieve it. The logical next step is to ask yourself a simple question: What will make you a magnet for those kind of people and inspire them to make energetic and enthusiastic contributions to the future of your enterprise?

These issues are what frame the business world in which we now live. It doesn’t matter what industry you’re in or how successful you were yesterday. Tomorrow will require more of you than ever before. You will need the right people and they will want to know what journey you plan to take them on if they partner with you to transform the future. They’ll want to know what it will mean to them to arrive at the destination you have envisioned—and why it will matter. If you don’t create that kind of unified vision for growing the company, you will continue to have mere employees instead of growth partners.

A major component in building that unified vision is creating a value proposition that links the shareholder and employee financial visions.  At a minimum, this means transformative companies spend time figuring out what the right balance is between guaranteed versus variable compensation and between short and long-term value-sharing. However, they also think beyond that and look for unique ways of aligning pay with the transformative results they seek.

Transformative pay, then, is one that reflects the following:

These tenets represent a change from “yesterday” in the way companies view and design compensation.  They align their approach to pay with their current business reality and the kind of talent they need to attract and retain.  They do so by building and implementing a well-defined performance framework.  

A value proposition that has the potential to transform employees into growth partners effectively builds continuity between the vision of the company, its business model and strategy, roles and expectations of key stakeholders and how people will be rewarded for fulfilling those roles and meeting those expectations. Pay in transformative companies is treated as an investment, not an expense, and is held accountable for producing a positive return.  As a result, organizations that pursue this approach take a comprehensive view of the components of pay that will best work together to drive the outcomes the business seeks to achieve.

Businesses that approach compensation in a transformational framework start by identifying a clear pay philosophy.  That guiding document makes clear how the company defines value creation and with whom and in what form it will be shared.  This kind of starting point leads to logical conclusions the company can draw about what the right balance is between guaranteed and variable compensation and between short and long-term value-sharing.  At their core, organizations that think in transformational terms adopt a wealth multiplier philosophy—a belief that the company is more likely to accelerate growth if all stakeholders benefit from the value they help create. 

To determine whether or not your pay strategy is transformational or conventional, you can start by asking some basic questions about your current compensation approach:

  • Does it help employees gain a clear understanding of their role and the outcomes for which they are responsible?
  • Does it instill a sense of stewardship?
  • Does it help you to attract and retain premier talent?
  • Does it reward innovation and creativity?
  • Does it support both shareholder and employee interests and ambitions?
  • Does it reward value creation?
  • Does it reflect a wealth multiplier philosophy?
  • Does it contribute to a performance culture?
  • Does it provide unlimited earnings capacity?

Certainly, more questions could be asked, but you get the idea.  In today’s business environment, enterprise leaders have a core decision to make.  Will they adopt a convenient and conventional approach to building their pay strategies or will they allow transformational thinking to guide their planning.  Businesses with growth ambitions risk much if they allow convention to rule the day.  Instead they must avoid the temptation to pursue a path that allows them to “avoid awkward effort or unwelcome dislocation of life” and embrace a more strategic approach to pay design that aligns with the transformational thinking that high performance demands.

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