It’s an interesting question. And by the way, the answer is yes. Employees should indeed feel a greater sense of accountability as a result of how they are paid--and it's something chief executives should be able to expect. If that notion seems ambitious or out of reach to you, then you are likely restricting the impact a comprehensive pay approach can have. So let’s talk about how to create a greater link between compensation and the level of stewardship your people assume for the outcomes you expect them to achieve.
In this discussion, the first thing we want to understand is that there are two dimensions to the pay and accountability issue. For pay to hold employees accountable it must first hold itself accountable. So what does that mean? How does a CEO hold a pay strategy “accountable?”
Pay is held to account when business leaders do the following:
- Define Value Creation. This simply means the organization is clear about the threshold at which operating income is being generated beyond that attributable to shareholder capital already at work in the business. For example, if a company’s “capital account” (stock, debt, other shareholder contributions) is value at $10 million, that organization needs to account for a percentage “return” on that investment that must be met before people at work in the business are considered to have “added” value. This is typically done by assessing a capital “charge” against the capital “account” before sharing value with anyone else in the business. In our example, let’s assume the capital charge assumption our hypothetical company wants to make is 12%. That would mean the first $1.2 million of operating income is “assigned” to the capital account—because it’s attributable to existing shareholder assets. The difference, then, between the company’s operating income and the capital charge is “productivity profit”—or income attributable to human capital at work in the business.
- Pay “Incentives” only out of Productivity Profit. The next step in holding pay “accountable” is ensuring value-sharing (incentives) are only paid out of productivity profit. This makes incentives “self-financing”; they are only paid when “additional” value has been created in the business. This also means that if the company doesn’t reach an adequate threshold in productivity profit (as determined by owners), then no value-sharing payouts should be made. Similarly, this can also mean unlimited earnings potential can be possible as long as productivity profit is increasing. This kind of measure and application protects shareholder interests, thereby “justifying” pay’s existence at the level productivity profit suggests is merited.
- Measure ROTRI™ (return on total compensation investment). The return you’re generating on your pay investment can be evaluated in many different ways. However, one simple method is to determine and track a ROTRI™ ratio. ROTRI™ is calculated simply dividing your productivity profit by your total compensation investment (salaries, incentives, commissions, benefits, payroll taxes, retirement plans, etc.). If your ROTRI™ ratio is continuing to improve each year, it means the performance and productivity of your people are improving up the investment you’re making in them. This is what it means to hold pay “accountable.”
Pay can also help to hold individuals accountable if it creates greater line of sight in the business. Companies that create continuity between vision, business model and strategy, roles and expectations and rewards are simultaneously building accountability into their pay system. This is because when you achieve line of sight, compensation is given appropriate context. It creates a rewards cycle that is consistent with the performance patterns you want your people fulfilling. It ensures that the pay system is designed to reward outcomes associated with the business model and strategy drivers that sustain the business and provide leverage for growth.
As with the business model, compensation should generate its own virtuous cycle. Roles are aligned with expectations, which are, in turn, attached to outcomes. When those outcomes are rewarded—and those rewards fulfill an employee’s personal income and wealth building objectives—the role’s focus is reinforced, increased execution follows and the cycle continues. That kind of operational integrity breeds trust, a sense of fairness and clarity. If the value proposition also provides meaningful earnings potential, it further secures the level of stewardship you want your people to assume.
Employees assume responsibility (stewardship) for helping a business achieve its growth goals—and are willing to invest their talents to that end—because the following factors have become linked in their minds:
- "I understand the company's goals." This means employees understand all of the implications of the organization’s vision and its potential fulfillment. Therefore, they understand "what's important" to the company’s shareholders.
- "Achievement of the company's goals is important to me." This now makes the link between “what’s important” to the organization and “what’s important” to the employee. Until this occurs, there is no engagement on the part of an individual. Therefore, no sense of stewardship develops.
- "I see how I can make a contribution to the goals of the company." At this stage, an employee's passion begins to be unleashed because he sees the relationship between what he understands, why it's important to him and how he can contribute to the targeted outcomes. This occurs when an employee recognizes that the unique abilities he has are not just being utilized by the business but magnified.
- "I see the connection between the company's goals and the achievement of my own goals." When this occurs, an employee finds meaning in what he is doing. Because that application of his time, effort and talents is fulfilling ends he wants to achieve, he is willing to commit and engage. The more meaning he finds, the more passion he applies to his work. This is particularly true of Millennials—now the largest segment in the workforce.
Line of sight is an extension and natural outgrowth of the level of stewardship employees assume in their roles. Stewardship is accountability—but without the need of oversight. It is self-imposed and self-regulated. It only occurs when employees see that all strategic goals, designs, purposes and tools are aligned within the company. On the other hand, intrinsic motivation is stifled when employees feel there is organizational incongruity between messaging and practices. Why? Because without that consistency, the trust level goes down. And when trust diminishes so does engagement.
Line of sight can be informally measured fairly easily. Just grab a random group of senior and junior level employees and ask them these questions:
- What is the vision of this company? What is it trying to become?
- What is the business model and strategy of the company?
- What is your role in that model and strategy; how do you impact it?
- What's expected of you in your role; how is success defined?
- How are you rewarded if you fulfill those expectations?
Chances are if you ask that question of five different people in your company, you will get five very different responses. This is because most organizations spend very little time talking about and trying to improve line of sight. It's tragic in many ways. Think about it. If you were able to pose those questions to 10 employees within your company, and get consistent, correct answers, what would that say about your culture? Is it not self-evident that accountability would improve and that intrinsic motivators and values would have a higher likelihood of being released in that kind of environment?
In the end, for organizations that have growth ambitions, high accountability is essential. The stewardship mindset that kind of accountability seeks to achieve can't be realized solely through performance management systems and training. It needs the assistance of line of sight and a belief by management that creating it is a high leverage achievement. It will pay dividends of higher focus, consistent execution and sustained results. All of that breeds a culture that embraces accountability in a natural, unforced way. As a result, CEOs should definitely expect pay to help hold employees more accountable.