If you ask most business leaders to grade their employee compensation offering, they would probably give it a B. They would do so because they realize that if they give it an A…well, they’d essentially be saying it has no flaws. And if they give it a C (or lower), they are admitting that they haven’t really been paying adequate attention to it—and no chief executive wants to admit that. But here is the interesting part. Ask those same company leaders whether or not they consider their pay strategy “competitive” and you will probably get a response that goes something like, “Well, define competitive.” Not a good sign.
The truth is most CEOs have no idea whether their pay strategy is competitive or not. That's why they grade it a B. It’s a simple way to avoid devoting any real strategic time to the issue. They can claim their compensation plan is aligned with market pay data and that they don’t get a lot of complaints about how much they pay—and then shrug their shoulders. Problem is, neither of those rationalizations really works in a talent market where high performers are largely in control of their earnings opportunities.
Defining a Competitive Pay Strategy
So before letting our chief executives off the hook with their “I’d give my plan a B” response, let’s consider the criteria their strategy would have to meet to be considered competitive:
- It allows the company to meet its recruiting goals and attract the talent it wants at least 80% of the time. Same for retention targets.
- It is rooted in a pay philosophy that clearly articulates how the company defines value creation and with whom surpluses will be shared.
- It does not cap the earnings potential of high performers.
- It is communicated in terms that key producers relate to: wealth building opportunity, financial partnership, performance rewards.
- It remains current and relevant to the rapid changing environment.
- It reinforces performance standards and encourages employee engagement.
More could be added to that list, but hopefully it gives you a sense for what your pay strategy should be doing for you to be considered viable.
What Your Pay Strategy is Missing
With that list in mind, let me offer the top three reasons your compensation offering is not likely meeting that criteria.
It’s Inflexible. Today, the approach you take to pay needs to be agile but enduring. It seems like those things cancel each other out but they don’t. Let’s take them one at a time.
An agile approach to compensation does not mean reinventing your rewards offering every quarter or year. Rather, it means you structure your overall offering in such a way that you can give various elements a different “weighting” depending on the outcomes you are trying to produce. For example, you may peg salaries at the 45th to 50th percentile of market standards but provide a robust short and long-term incentive plan with high (perhaps even unlimited) upside earnings potential based on performance. When economic conditions shift (either externally or internally), you don’t throw out the plans you have and plug new ones in. Instead, you simply adjust the weighting—just as you would with asset classes in an investment portfolio.
You make your approach to pay both agile and enduring by building a Total Compensation Structure. This is essentially a framework you put in place that allows you to look at all of the rewards and benefits elements you are offering at once—by plan and tier or group of employees. It allows you to quickly assess whether you have gaps in your pay offering and if you need to change the emphasis you are giving to one plan or another. Which leads us to the next reason your pay strategy is probably not competitive.
It’s Imbalanced. In a compensation context, imbalanced is often synonymous with incomplete. There are either pay elements missing that most high producing employees expect to see in a value proposition, or those elements are minimized so as to be irrelevant. For example, a company may have an annual bonus plan, but the performance requirements are so unrealistic that no one takes the plan seriously. Or, it might be just the opposite; the company makes a bonus payment every year based almost solely on discretionary criteria. As a result, participants see it as an entitlement rather than a performance reward. And commonly, organizations provide a short-term incentive plan (bonus) but have no mechanism for rewarding sustained results over an extended period of time.
Any of these scenarios is symptomatic of a pay strategy that is out of balance. As a result, employees are confused about priorities and how they can maximize their earnings with your company. If they perform well will their compensation reflect that? And does it give proper financial recognition to both short and sustained performance? If employees experience rewards ambiguity, they will ultimately look elsewhere for a “better deal.”
It Lacks Meaningful Value-Sharing Opportunities. Top performers want to know that if they help create significant value for the business, they will participate in it somehow. Most companies assume this means one of two things: 1) they need to pay an annual bonus, or; 2) they need to share stock. Both conclusions are misplaced—or at least incomplete.
Of course key producers expect to participate in some kind of annual incentive plan that recognizes their year to year performance. However, they want that plan to be tiered up or down based on the level of results they produce and not capped due to some arbitrary ceiling that has no correlation to the actual results generated. Additionally, they know that if they sustain great performance beyond consecutive 12 month cycles, they are contributing to the growth of the company's value. Because they helped drive that growth, they expect to benefit from it financially.
Most business leaders conclude this means they will have to share stock to satisfy this expectation. And they are reluctant to do so because they don’t want to dilute owner equity or expand scrutiny in the private company environment in which their business exists. But the reality is there are a variety of ways to share long-term value with value creators without sharing stock. There are at least six other types of plans a company can put in place to effectively reward high-producing talent.
The bottom line is: To have a competitive pay approach, a company will need to expend a lot of strategic energy thinking through the value-sharing philosophy it wants to adopt and then translating it into plans that provide a meaningful benefit to participants. Premier talent expects this and without such plans the people you most want and need to attract will not find your offer particularly compelling.
So, if you want your compensation offering to become and remain competitive, start addressing these three issues.