Private Company Pay: The 3 Most Common Mistakes

If you lead a private company you probably often feel stuck when it comes to pay practices.  It likely starts with the frustration you feel about an inability to accelerate growth as quickly as you think is possible.  And you feel like every time you put your foot on the gas pedal those around you are putting theirs on the brakes. Right?

Private company pay mistakes can be avoided if you develop the right game plan.

If so, this has undoubtedly prompted you to look for an incentive plan that will “ignite” the performance you expect. In an effort to do “something,” you implement a rewards plan—all the while wondering if it will make any difference; if it will actually improve results.  A year or two later you determine the business performance you’re experiencing doesn’t justify what you’re paying your people.  That discovery increases your angst. You realize you initiated what amounts to a negative virtuous cycle (although that, by definition, is probably impossible).  About this point, you pick up your chair and throw it across the room.  

Sound familiar?

Well, there is a better way. To help you with this dilemma going forward, allow me to comment on the three most common mistakes I see private business leaders make when it comes to pay decisions and design. They are things that will pretty much guarantee the outcome I just described. In short, if you want to prevent that scenario, don’t do this.

    1. They rely too much on market pay data. I once participated in a roundtable of CEOs during which we all took turns sharing issues our businesses were facing or asking a “survey” question relevant to our markets.  The question I asked was: “Have you ever gone to the internet looking for information about compensation? If so, what were you looking for…and did you find it?

      The most common response given by those leaders was that they usually went online to view a site such as payscale.com. Their intent was to get a sense of what they should pay for a certain position and how much incentive to offer—particularly if they were hiring a key recruit or trying to retain a critical employee. Some said they likewise checked with peers to see what they were paying.  Most of those commenting also indicated they realized this probably wasn’t the most effective approach to rewards planning.

      Well, they were right about that. In our client work at VisionLink, we certainly do plenty of market pay studies.  And when we do, we usually use three to five reputable sources so we can derive an accurate “average” as a starting point to establish where the competitive range might be for a given position.  However, we see it as just that—a starting point.  Data is not strategic and does nothing to tell you what kind of plans will best reinforce the business model, strategy and long-term growth goals of your organization.  Data is data—and is highly imprecise as a pay measurement, particularly for private companies. With the exception of a report put out by Chief Executive Magazine, most of the compensation data available is from public companies.  It is based on surveys and how the information is “banded” (by company size, geography, etc.) differs from report to report. It should never be relied on as the sole or even primary source for compensation planning and decision making.

      So, if you’re over-relying on market data for most of your pay decisions, stop. Or at least don’t think you’re done with your planning.

    2. They don’t develop a compensation “game plan.” A game plan for rewards is just like a game plan for a football game. It’s the blueprint for how you’re going to win. It starts with a clear vision of the outcomes you’re trying to achieve and prioritization of the performance areas you most need to drive. Ideally, a compensation game plan should include the following:

      a.  A market pay analysis (but using the VisionLink approach just described).
      b.  An appraisal that assesses the extent of line of sight in the organization presently.
      c.  A written compensation philosophy statement which clearly articulates how value is created in the business and under what conditions it is shared.
      d.  An evaluation and prioritization of the kinds of pay plans that should be considered in your comprehensive rewards strategy and what the balance will be between guaranteed versus incentive compensation and short-term versus long-term value sharing.
      e.  A timeline for design and implementation of those plans deemed to have highest priority and relevance to your business plan and goals.

      Instead of that kind of methodology, most private businesses take an ad hoc approach at best in developing their pay plans.  Expediency drives decision making until they wake up one day and realize there is no continuity to their compensation strategy and they have a mess on their hands.

      So, if you don’t have a compensation game plan, don’t make other “plans” until you create one.

    3. They apply a “force” instead of a “reinforce” approach to variable pay. Most private businesses use incentives as a kind of “device” to elicit the behavior they want. The focus is “if you do this you’ll get paid that.”  It’s the carrot and stick method.  You’re trying to manipulate behavior and performance through pay.  This is what I mean by a “force” approach. It doesn’t work. Just ask Daniel Pink. 

      A “reinforce” approach to variable pay is outcome based.  It only works in organizations that are very clear about how value is created in the business and have articulated their vision for value sharing in their written compensation philosophy statement. Such organizations are trying to turn their employees into growth partners who will assume a stewardship role for the shareholders’ vision and the outcomes it will take to achieve it.  They don’t use the term incentives. Instead, they talk in terms of value-sharing. “Here are the outcomes for which you have responsibility and this is how we will share the value you help create by achieving those results.”  It’s the way business partners would approach things, which is exactly the way you want your employees to view your relationship with them.

      In your game plan, you should anticipate a need for both short and long-term value sharing.  Short-term plans are designed to make sure the revenue engine of the company is operating at full capacity, but with an emphasis on how that business model can be leveraged for greater growth. Long-term plans are intended to reward sustained success and protect “good” profits—so that the compensation system isn’t “gamed” for short-term rewards at the expense of long-term business growth.

      So if you’ve adopted a “force” instead of a “reinforce” approach, stop. Share value, don’t pay incentives. Define a financial partnership for your people, don’t just give them a pay package.

In reality, there are more than three mistakes private companies make when it comes to their choices about pay.  I didn’t want to depress you with a longer list—and you’re probably already overwhelmed by these three. However, I will say that if you can correct even those mentioned here, your private company pay results will see significant improvement.

To learn more about how “incentives” can most effectively be used in your business, download our white paper entitled: “Do Incentive Plans Really Work?”

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