Pay Strategy Fundamentals: 5 Critical Compensation Questions

Pay can either be an asset or a liability to a company.  Stated another way, it can either drive growth or hinder it-- fuel performance or diminish it.  Is that placing too big a burden on compensation to produce results?  I don't think so.  In fact, my experience and observation has been that most businesses don't set high enough strategic expectations for their rewards programs.  The evidence is they don't involve compensation in other strategy-related discussions.  The result is there is little to no link established between pay and the key success measures the company needs to reach.

 Pay strategy fundamentals require chief executives to confront certain key decisions about compensation.

Don’t get me wrong.  I’m not suggesting that compensation should be seen as the primary driver of performance in the company or that it alone can make a company achieve its growth goals.  What I mean is that rewards are not spoken about in strategic terms within most organizations.  Pay is viewed as an expense that needs to be contained and managed.  It is evaluated in a vacuum and, as a result, compensation can detract from the focus most chief executives want their employees to have relative to the growth goals of their companies. 

The 5 Critical Questions

To change this outcome CEOs must lead the effort in changing how compensation decisions are made.  I suggest there are five questions chief executives must be able to answer if they want to develop pay strategies that lead to greater execution, productivity and performance.   Answering these questions will ensure pay strategy fundamentals are being followed and compensation is being dealt with strategically as a comprehensive rewards approach is developed. 

1. How can we reinforce our business model through the way we pay our people? The implication of this question is that a company has the ability to clearly articulate its business model and distinguish it from its business strategy.  Walmart and Four Seasons Hotels have very different business models, so their approach to pay would need to reflect that difference.  Presumably, your business will be equally distinct.  So in this category two essential issues need to be addressed:  A) What outcomes reinforce the core virtuous cycles of your business model? B) What kind of pay strategies will best reinforce those outcomes?

 
2. What kind of value-sharing approach best reflects the kind of partnership we want to have with our employees? I prefer the term value sharing to incentives because the latter implies that someone needs a carrot to become motivated. Value sharing, on the other hand, implies all stakeholders deserve to participate in the value they help create. Company leaders must think in these terms as they approach the building of short and long-term rewards programs. Such programs must be self-financing (no dollars paid unless results are produced at a sufficiently high level) on the one hand and yet meaningful to participants (employees want to see them achieved because the payout helps them fulfill their personal financial needs and goals) on the other.

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3. What pay components will best foster a unified financial vision for growing the business? This issue has to do with how employees will be paid as opposed to how much. Addressing this issue forces a company to develop a basic rewards philosophy. Where do you want to be vis a vis market pay for salaries? How about for total compensation?  It asks a company to think about the elements of pay that will best foster an ownership mentality throughout the organization, so employees are empowered in their decision making and more instinctively act in the long-term interests of shareholders and all other stake holders.
 
4. What operational structure do we need to maintain to ensure our compensation strategies produce the desired results? Structure has to do with organization and process.  A company needs to have a systematized means of assessing performance and productivity and then "pivoting" in a different direction if necessary. The structure continues to keep strategy front and center with a constant eye on cost and productivity.  For most companies, this means there should be a compensation committee established with a regular meeting schedule (no less than twice a year) to review and make decisions about these issues.

5. How can we communicate our rewards strategies in a way that best impacts the mindset of our employees? If effective, a strategic approach to building rewards programs should result in more engaged employees. This does not come by simply rolling out a great compensation plan. Engagement is built over time through a reinforcement process that integrates the discussion about pay into an overall strategy and business plan review to which all stake holders are exposed.  As employees come to work each day, there should be a clear connection in their minds between the following: A) The vision of the company--where it's headed; B) The business model and strategy of the company--how it's vision will be fulfilled; C) The role and expectations of the employee within that model and strategy--defining the stewardship, and; D) How the employee will be rewarded if he or she meets the expectations--including the range of pay potential.

Certainly, more could be added to that list. However, if a company attempts to address even one of the five decisions summarized here they will naturally be lead to the other four. This is because they are really interdependent in nature.  Likewise, other core decisions will emerge such has what balance should there be between short and long-term value sharing plans, and what type of long-term rewards "incentive" should a company adopt (equity sharing, profit pool, phantom stock, stock appreciation rights, etc.)?  Most will need help answering all of the questions that will emerge, but it must start with a foundational commitment to becoming more strategic in your approach to rewards development.

Answering these five critical questions helps ensure that compensation will become an asset rather than a liability in your organization.

 

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