Employee engagement is a ubiquitous topic in business. Everyone is in its pursuit and no one feels they are succeeding at it—at least not to the extent they expect to. Surveys are conducted, employer brand strategies are implemented, special employee events and perks are organized and offered and a host of other efforts are initiated in an attempt to elicit passionate commitment from the workforce. So why aren’t more companies seeing the results of that effort? Is it possible that most businesses are making the engagement issue too complicated?
Eric J. McNulty, director of research at the National Preparedness Leadership Initiative, recently wrote about this issue in his blog at Strategy-Business.com. In his article, McNulty talked about the plethora of business books that come out every year on how to improve engagement, build trust, and employ mindfulness—not to mention the barrage of twitter and other social media feeds offering tips, steps and secrets on these subjects. And yet, surveys continue to reveal that employees aren’t feeling any better led and employers aren’t feeling their people are any more engaged. In that context, McNulty offers this insight:
I was stopped cold recently by a simple formula for effective leadership. In the book The Leadership Challenge, by James M. Kouzes and Barry Z. Posner, first published in 1983, a CEO offers this straightforward philosophy: Grow the company profitably. Share the wealth with employees. Ensure that everyone is having fun.
As I reflected on this direct and open prescription, I wondered why anyone has ever felt the need to write anything else on how to run an organization. This seemed like an intensely prudent yet humane approach to business. Growth satisfies investors and provides funds to increase internal rewards, sustain training, and fuel ongoing innovation. Sharing the wealth reflects consideration for the full range of stakeholders: employer, employee, and shareholder. And what better way to measure employee engagement than by people enjoying what they do? If you can pull off all three, it seems logical that the organization will thrive.
At VisionLink, we couldn’t agree more. Complicated, over wrought approaches to developing higher levels of engagement almost always miss the mark—because they miss the power a simple area of focus offers. The three areas of emphasis The Leadership Challenge suggests are ideal: profit, value sharing and fun. It’s the perfect combination.
Pay Practices that Kill Engagement
When it comes to the value sharing part of the formula, our experience is that most organizations struggle to find a pay approach that helps instead of hinders engagement and performance. Here are the four most common mistakes we see business leaders make when it comes to pay.
1. A Wrong or Incomplete Blend of Compensation Elements
In our experience at VisionLink, the biggest compensation mistake made by growth-oriented private companies is not striking an effective balance between short-term and long-term value sharing. Most often, organizations are focused short-term in their pay strategies and either ignore or dilute rewards for sustained performance. In a study VisionLink completed a few years ago of 139 companies with revenues between $250 million and $1 billion, the following observations were made:
- Top quartile companies placed a greater amount of compensation "at risk" - 66% vs 52%.
- Top quartile companies placed greater emphasis on long-term awards - 42% vs 33%.
Why is this important to consider? The right blend of compensation elements is essential to impacting three key outcomes that most growth-oriented companies need to achieve:
- Increased performance
- Meeting the "satisfaction quotient" (fulfilling both owner and employee objectives)
- Attracting and retaining premier talent
In addition to striking the right balance between short and long-term awards, companies must also make sure they have an effective and diversified blend of the following plan components: salary, bonus, long-term cash incentives, equity or phantom equity, retirement, core benefits and executive benefits. Those components, when properly employed in an organization’s compensation strategy, have a similar effect as asset classes that are used to develop a balanced investment portfolio. Each is important in creating an overall portfolio that maximizes return while minimizing or mitigating risk. Because this evaluation is critical but not always easy, many companies seek the help of outside professionals to assist them in this effort.
2. Value Sharing Opportunities that Don't Result in Meaningful Payouts
If a pay strategy is going to positively impact performance and engagement, it must include a means for employees to participate in the value they help create. This means organizations must first identify a pay philosophy that strikes the right balance between guaranteed (salaries) and variable compensation (value sharing)—as just indicated. It needs to then determine how much value-sharing should be devoted to short-term performance and how much to long-term.
But the work doesn’t end there. Business leaders must subsequently engage in the hard work of developing incentive plan models that show what kind of value-sharing would be possible at various company and department performance levels—such as base, target and superior. These then need to be broken down further to address employee tiers or salary bands so a determination can be made whether the payouts at each level will be considered meaningful to those participating.
This kind of evaluation requires a combination of (economic) science and art. Business leaders need to have a “sense” for what their key performers in particular will consider “fair” when it comes to the amount of value they should have a stake in. Certainly, market pay data can provide some guidance here, but chief executives make a mistake when they assume such data should drive their decision-making on incentive pay levels.
The balance you are seeking is to have compensation opportunities that are meaningful and motivational to the participants while being aligned with shareholder (financial, structural and organizational) goals and expectations.
3. Performance Requirements that are Out of Reach or Too Complicated
For compensation to have a positive impact on engagement, employees need to be able to say: "I can see precisely how my performance aligns with my pay!" Employees become frustrated or indifferent if they don't feel they can impact the results they have to achieve to realize the full potential of their rewards package, or if the metrics and measures associated with them are convoluted or too complicated to understand. This is usually where CEO frustration comes in as well. The chief executive feels as though his employees don't "get it" - and don't have the same passion about his vision that he does.
Ultimately, if employees don't feel they can actually impact the performance to which their compensation, there will be no positive return on the pay investment the company is making. Productivity profit—the amount of net operating income attributable to the productivity and performance of people and not just other assets at work in the business—will stagnate and decline.
4. Ineffective Rewards Communication and Reinforcement
Coaching and reinforcement are keys to creating long-term focus and commitment in an organization. In this context, rewards are a means of reminding employees what is expected - but more importantly, why it's worth it to strive for that goal. Each rewards program becomes a kind of covenant between the employer and the employee. It defines an area of stewardship, establishes expectation levels for that area and provides a partnership context for their fulfillment. "If you own these outcomes, here's what it will mean to you."
Each element of compensation communicates and reinforces different aspects of performance that need to be achieved. And the degree to which those performance expectations and their associated rewards are communicated and promoted will in large measure determine whether or not the desired performance is attained. Ultimately, CEOs should insist on a rewards reinforcement strategy that consistently helps employees understand the relationship between the vision of the company, its business model and strategy, the employee’s role and what’s expected of him in that role, and how he’ll be rewarded for fulfilling those expectations. This is what is known as creating “line of sight” in an organization—and without it, there is no engagement.
Building a compensation strategy is not complicated but it is nuanced. It requires attention to these kinds of principles and details if it’s going to have a positive influence on employee commitment and passion. CEOs that put these principles into practice will see the quality of talent they are able to attract and retain will improve, employee engagement will expand, performance will be magnified, business growth will accelerate and shareholder value will increase. Not bad.