Too often, business leaders discover their compensation offering is inadequate when it’s too late. They lose a key player to another organization that has offered her a “better deal” or fail to secure a top recruit because their value proposition just isn’t compelling. In short, a pay strategy cannot be an afterthought. It has to be approached strategically and comprehensively or you will fail in attracting, developing and retaining premier talent. So, let’s explore what a competitive rewards offering should include.
Why High Performers Care About Pay
If you are going to build a compensation offering that is compelling, it makes sense to start with why pay matters to the people you would most like to attract and retain in your business. Essentially, its importance is tied to one of the following two issues.
It’s About a Sense of Partnership
The pay strategy of an organization performs an essential role in defining and communicating the financial relationship an organization desires to have with its employees—particularly its key talent.
In our work with clients at VisionLink, we find that when businesses are able to make their employees feel like essential partners in the company’s growth plans, they attract and retain higher caliber talent and secure greater commitment and focus from those people. The root of this approach is to view the company as a “wealth multiplier,” one where all stakeholders—and especially key contributors—participate in the value they help create. The pay strategy, then, becomes the means by which employees can envision how they will share in the wealth multiple the business achieves.
In wealth multiplier businesses, compensation planning is less focused on how much someone should be paid and more on how they should be paid (what forms of compensation they should receive). This issue is easily addressed if leadership takes the time to articulate a clear pay philosophy and then implement a rewards approach that is consistent with that philosophy. Among other things, the compensation philosophy defines how value is created in the business and in what form it will be shared with those who help produce it. The rewards philosophy should also address what the company believes the balance should be between guaranteed and variable compensation and between short and long-term value sharing (incentives).
When a business adopts this approach to framing the financial partnership it wants to have with its people there is greater clarity and line of sight. This is because the pay system becomes a means of reinforcing what is important to company leadership, what role each employee (or employee group) has in the company’s priorities, what’s expected of them in that role and how that person will be rewarded for meeting those expectations. If there is a lack of continuity through all the elements of the partnership relationship, the confidence of employees will waver and wane. When new recruits sense this incongruity, they end up not accepting your offer.
Most growth-centered people aspire to be in a position to make certain contributions in their personal and professional lives. The ability to achieve their contribution goals is the source of their motivation. Those goals are different for every individual. Some want to be able to contribute time and means to causes or charities. Others want the ability to contribute to their children’s future (education, etc.) or their family’s overall well-being. Many want to contribute to their ability to have greater control over how they spend their time and where they devote their energies.
The ability to make a contribution in any of these realms has an economic requirement to it. The point that researchers and authors miss when arguing that pay is not a motivation factor is that these “contribution” ambitions undergird the drive people have for greater economic well-being. As a result, while employees may not be especially enticed by a particular incentive you offer, they do evaluate the overall rewards philosophy and approach your company’s value proposition encompasses. They then determine whether the financial commitment you are making to them will enable the contribution fulfillment they’re seeking. If it does, they feel “motivated” to achieve the outcomes that maximize their earnings.
The ability to foresee this kind of fulfillment in their lives is why economic rewards in business matter. This element is largely ignored by those commenting on pay’s role in motivation and engagement. It’s not about carrot and stick manipulation. It’s about the potential for wealth creation—however employees define that and for whatever contribution purposes they hope to serve.
Now that we understand why those you are trying to attract and retain care about your pay strategy, let’s turn our attention what a competitive value proposition should include.
A Competitive Pay Strategy is a “Complete” Pay Strategy
The word I would use to describe the compensation approach of most companies our firm encounters is—“incomplete.” If they are a successful business, they have inevitably done some good things but they just haven’t gone far enough in their pay offering. For example, they may have a well thought out salary structure, a robust benefit package and a solid annual incentive plan but they have no means of sharing long-term value with those who create it. Or maybe they do have a plan that rewards sustained performance but the company’s 401(k) doesn’t allow highly compensated people to defer as much income as they would like to. As a result, they are getting hit hard by taxes and it’s diminishing their wealth building ability.
So what does a complete pay strategy look like? It’s one that includes four critical parts. Each of these elements assumes the company has already thought through its compensation philosophy and will develop specific plans within each of these categories that reflect the principles to which its leadership has committed in that written document.
1. A Value-Centered Salary Structure. Companies normally tie their salary levels to market pay in one form or another. At VisionLink, we are certainly proponents of looking at market data in making those evaluations and many of our clients engage us to help them with that analysis. However, companies run into trouble if they rely too completely on those surveys to build their salary structure. Heavy emphasis must also be placed on a combination of value creation and internal equity. This means that salaries tied to roles and stewardships which have a direct impact on company or even department performance are defined and adjusted based on the value employees create—or at least should be able to impact. Internal equity means that the company acknowledges certain positions should be measured for their value creation impact and opportunity relative to other positions and not solely based on what market data says that role is worth.
With that understanding in mind, an organization must then decide what salary construct they are going to use. In a traditional approach, positions are organized within many ranges, each with a minimum, midpoint, and maximum. Rewards eligibility and targets are determined by level. In a broadband structure, positions are categorized within a few wider ranges to allow for maximum discretion in pay decisions. Rewards eligibility is flexibly determined by band. A hybrid salary structure allows for broad elasticity inside a progressive pay hierarchy by blending the traditional and broadband approaches.
There isn’t a right or wrong approach to creating salary bands. What’s important is that employees know what the salary hierarchy is and how one moves through it. In addition, they want to understand the company’s philosophy about fixed pay. For example, one company may decide it wants to be at the 45th percentile of market pay for its executive level employees but provide unlimited upside potential through value-sharing. Other organizations may determine they must compete for talent based more on salaries than incentives so will target the 80th to 90th percentile. In either case, the philosophy needs to also articulate the company’s position on the value creation and internal equity elements just discussed.
All of this points to the need for companies to have a system for gathering and evaluating market pay data in a proper context—one where it is given appropriate weight. Because data is imperfect, it’s recommended that three to four surveys be obtained and then averaged to determine a justifiable market level for each category of positions. The organization’s philosophy statement will dictate what roles may fall outside the dictates of the data and where it wants to be relative to market pay for others. That statement should also spell out what balance the company wants to maintain between guaranteed and variable pay.
2. Balanced Value-Sharing. This has to do with how you use pay to reinforce the importance of maintaining the revenue engine of the company while simultaneously focusing on growth—and doing so in a way that helps employees achieve their wealth-building goals while shareholders are pursuing their own. If your compensation strategy rewards only one or the other (short or long-term performance), employees will likely have only half the focus you want them to have. The pay approach you take needs to emphasize both priorities and help the company sustain a kind of performance equilibrium. This allows value-sharing participants to enjoy significant earnings potential by being completely aligned with the growth goals of the company.
Although there is no silver bullet for how to strike the exact right balance between short and long-term rewards in every organization, here are a couple of guidelines to keep in mind.
A. Short-term value-sharing should reward the successful maintenance of the company's revenue engine. In other words, you want a reward system that reinforces the execution of the business model but with an eye on the leverage points that impact the growth trajectory of the business. This will require you to have clear guidelines for defining roles, outcomes and expectations. Since the business model defines how the company generates revenue, if some component of pay is not tied to it you can’t expect it to be an area of focus for your people.
High performers feel empowered by this approach. It affords them a level control over their annual earnings contingent on their ability to impact value creation. They see this component of pay as a means of maintaining the living standard they feel they’ve “earned” at this stage of their careers while also building wealth. And by tying value-sharing to roles, outcomes and expectations, the company is able to provide superior income opportunities without putting shareholders at risk. This is because the value-sharing approach promotes accountability; you share only in the value you create.
B. Long-term value-sharing should reward sustained, "good" profits. When the first guideline (just discussed) is followed, profitability should—at least in theory—occur regularly. However, you shouldn’t be interested in just any kind of profits; you want good profits. Good profits are those that build lasting value. "Bad" profits, on the other hand, come with an offsetting long-term cost—diminished customer or supplier relationships, lowered cultural morale, impaired growth leverage, and so on. The combination of short and long-term value-sharing should create operational integrity and accountability into your pay strategy. This dual approach encourages participants to pay attention to what needs to get done “this year” without sacrificing the long view—because both their immediate and eventual economic well-being is tied to both performance periods.
Each organization needs to determine which long-term value sharing approach is best for its company. Sometimes offering stock is inevitable, but there are a range of options available that don’t involve giving equity away. Most organizations need outside help in determining both the right balance between short and long-term incentive plans and what kind of plan will best accommodate the results they are trying to achieve. However, regardless of the specific plan chosen, a competitive pay strategy must include a means for top producers to participate in the growth they help drive. This makes them feel like a true partner in the company’s success and gives them to have an element of their earnings opportunity that mirrors that of owners. That creates a unified financial vision for business growth.
3. A Flexible and Comprehensive Benefit Package. Premier talent is looking for ways to maximize its wealth building opportunities. As a result, when it comes to benefits, high performers want options. Some may be married, have children and are concerned about superior medical protection. Others may be single and would prefer to have “adequate” coverage for health risks but want to make sure their income will be replaced in the event of a disability. You may have employees who will embrace vision care while others would prefer to use those dollars for a legal benefit or to increase the funding of their health savings account.
The message here is that you shouldn’t assume a “one size fits all” approach to benefits is going to work when you’re competing for talent. You must understand the profile of the people you want to attract and retain and then think in terms of the range of needs and desires different groups will have when it comes to this rewards element. Flexibility with limits is a good philosophy to assume in today’s environment. You can’t be everything to everyone, but you can provide a range of benefits that makes your people feel like they have choices.
4. Executive Benefits. You make a mistake if you assume you can treat key producers like everyone else in the organization. Again, in a competitive talent environment, the best people have options. Others will offer them a car allowance, flextime, sabbaticals, education funding or other perks. As with the flexible benefits approach addressed above, you will need to determine what combination of offerings the people you are trying to attract will find most valuable.
Security benefits are an inexpensive but meaningful way to address the needs of the primary growth contributors in your organization. Cash value life insurance plans, supplemental disability replacement coverages and even long-term care insurance (for those over 50) can round out your offering in a way that makes participants feel like you understand the financial vulnerabilities they face. This can be an important differentiator when competing for premier talent.
One of the most critical executive benefit areas for attracting and retaining highly compensated people is some form of 401(k) mirror or deferred compensation plan. These programs serve two purposes. First, they allow key contributors to build a retirement account that will replace a higher percentage of their earnings than a qualified retirement plan is able to. Second, it offers participants a means of deferring income to a future date so they can save current income taxes. The limitations on contributions to 401(k) plans make it difficult for high income individual to experience any meaningful tax relief through that kind of channel. And this is an important issue for high income earners.
Much more could be said about each of the four elements of a “complete” compensation strategy. Your organization should explore what additional plans or approaches would best bolster each particular area within your offering. Regardless of what should be added or subtracted to meet the demands of your circumstance, hopefully the framework just covered gives you a sense for what it will take to build a value proposition that allows you to compete in the talent wars that are raging. The competition is only going to increase.