If you run a business, you worry. And if you work closely with the CEO of a business, you will want to understand and respond to what that person worries about. The issues that rise to the level of concern for most chief executives are things that are likely to impede their company’s ability to perform and grow at a rate commensurate with its potential. While those specific factors differ from company to company, there are some universal concerns most in business leadership share. And many of those issues have to do with talent and the most effective ways to drive higher performance from their people.
In this regard, the November 2016 edition of the Harvard Business Review includes a list of the 100 best performing CEOs in the world. The top three on that list were asked to weigh in on issues that most concern them and how they’re handling them. Here are a few of the questions they were asked and their responses:
Is it difficult managing younger workers these days? Are Millennials actually different, and do they require you to adapt how you handle talent?
The Millennials have grown up seeing businesses start from scratch, thanks to the emergence of technology that allows young people to create and communicate and make apps. I think that has influenced their [un]willingness to invest in being part of brand building or make a long-term commitment to companies. But that can change if a company offers a sense of purpose, in which case people are willing to partake in a journey that can last years or even decades.
There seems to be a rise in populist agitation against business, in part over the issue of income inequality. Do you sense that?
We have to acknowledge that there are justifications for the distrust, that there have been many big corporate scandals. It’s up to us to be transparent, to do the right thing, to believe in what we do, to gain trust. For example, people are concerned that lot of big companies don’t pay taxes. So we now publish in our annual report all the taxes that we pay in different geographies.
Pay is another lightning rod. What’s the right way to handle an issue as volatile as executive pay?
(CEO #1)…it’s important to base executive pay on long-term performance. If you don’t succeed, you should suffer. If you do succeed, you should be rewarded.
(CEO #2) I agree that executives’ rewards should be based on long-term performance. But I need to raise another issue, which may be contentious, and that’s the internal cohesion of companies. When we have too wide a disparity between executive compensation and workers’ compensation, we create a barrier to the employee passion and engagement that all companies need to achieve their objectives. If there is too big a gap between what I earn and what a blue-collar worker at my company makes, it’s going to create problems. Executive compensation explains part of people’s distrust of business.
(CEO #3) Compensation has to be transparent, long-term-oriented, and really, really based on performance. Even more than closing the pay gap, it’s important to have everybody, if possible, benefiting from the evolution of the company. Last year we approved a profit-sharing plan for all employees, and I think it’s very much valued.
Now, I should point out that the CEOs quoted here lead global organizations. Your business is likely smaller than theirs. Therefore, the CEO worry list you carry around will have a different "scale." However, the issues raised here—how to manage (and pay) millennials, how to maintain a culture of trust when it comes to pay and how to create an approach to rewards that satisfies both shareholders and employees—are among the universal issues referenced earlier with which chief executives of any company size are grappling. So let’s comment on each.
Managing Millennials in the Workforce
One of the most common mistakes businesses make in trying to construct pay for millennials is to treat them as one monolithic group—almost as if they were all the same person. Millennials represent a diverse range of age, experience and ambition. Trying to make assumptions about what "all millennials" desire (or reject) in the realm of compensation and rewards, without an acknowledgement of those segments, is a recipe for disaster. So, let’s consider the career groupings into which Millennials typically fit:
Launchers. These are young professionals at the start of their careers. They have either just left the university or are within their first few years of graduating. Your company has provided their initial or perhaps second career-related job. Most of them are single.
Accelerators. These are millennials who have had some experience with more than one company and are now trying to settle in with an organization where they can rise in ability, recognition, contribution and influence. Most in this group are probably still single but a growing number are married or have life partners and are starting families.
Catalysts. These are individuals who are either entering or are well into their 30s, have gained meaningful experience and possess unique abilities. They are able to affect significant (positive) change in an organization and companies are competing for their talents. They may not be Jony Ive from Apple (yet), but they are still catalysts who could change the growth trajectory of your business. As a result, they have leverage and are in a position to negotiate. These millennials either want to put their talent to work in a business that has resources they can leverage to accomplish their ambitions or start a business of their own. More in this group are married (than in the previous two segments) and many of them have children.
As you look at each of those descriptions, it should become obvious that a "one size fits all" pay approach is not going to succeed when it comes to a value proposition for millennials. This does not necessarily mean you need to construct a different compensation strategy for each group, however. It simply suggests that the components of pay you offer, and the emphasis you give to each, will differ based on the life history and career trajectory of each group. That is because those issues will inform how these employee segments will each evaluate what I'll call their “Hierarchy of Financial Needs” when it comes to pay and wealth accumulation opportunities.
(To dive deeper into this subject, download my e-Book, How to Pay Millennials.)
Building Trust through a “Fair” Pay Approach
I believe most companies have more control over the sense of fairness employees feel about compensation than they sometimes allow. For example, many are confronted by employees who have looked at market pay data online and concluded they are under paid for their positions. Never mind that there is a range of variables in evaluating such data, and that employees who are overpaid will never make that known to their employer. The overriding issue is that most companies don't have a philosophy driving their pay strategies. They are not armed with a cohesive approach, so their people conclude the company is "unfair" when it comes to pay--regardless of the logical explanations that are offered in response to the challenges those employees raise. Such business leaders need an approach to rewards that will allow them to respond in such situations with something like the following:
"Our company's philosophy about compensation is that we will pay salaries at the 45 percentile of what market pay data indicates for the positions in our organization. (By the way, our last check of that data indicates you are at the 47% for your position, based on an average of four surveys we evaluated.) However, we also believe in providing significant upside potential through the two value-sharing plans for which you are eligible. Our annual bonus plan allows you to earn an additional 25% plus of salary if you and the company meet the performance standards we have set and communicated. Likewise, you participate in a phantom stock plan that allows you to earn an additional 30% of your salary in phantom shares of stock which, if we continue to meet our targets, will grow in value and be paid out to you in five years. You also are part of our company's deferred compensation plan which has a performance match of up to 25% of your contributions, based on the fulfillment of the targets we have set for that plan. That is not counting the match we give all employees on their 401(k) program contributions. All told, your pay package has a value of $1.7 million over the next five years."
I think most people would not only consider such an approach "fair" but would likely find it a compelling reason to join and or stay with such an organization. And by the way, the "self-financing" approach to the value sharing described here makes CEOs and shareholders happy to write incentive payout checks. Value is being paid out of superior value created (productivity profit)--and nothing is paid if certain performance thresholds aren't met. So it is not only a fair approach for employees but for the business as well.
Companies that give this much thought to their approach to pay communicate the value they place in the relationship with their people and a respect for the unique contributions individual members of the workforce make. That sense of partnership makes fairness self-evident.
(To dive deeper into this issue, read What Exactly is a “Fair” Pay Strategy , Compensation and Trust and Wells Fargo Lesson #2: Pay Must be “Trust-Worthy.” )
Paying for Long-Term Value Creation
In a Strategy+Business online column, Ken Favaro wrote this:
Peter Drucker once wrote that the manager’s job is to keep his nose to the grindstone while lifting his eyes to the hills. He meant that every business has to operate in two modes at the same time: producing results today and preparing for tomorrow.
But “preparing for tomorrow” really means investing in the future, an expensive and uncertain proposition. It demands taking an incremental hit to today’s performance in exchange for an unguaranteed payoff. Meanwhile, you have to meet your previous promises of big gains to have the wherewithal to continue investing. But that wherewithal will soon be lost if meeting those promises means forgoing new investments that are essential to future results. Drucker’s dictum is not only an acrobatic feat, but a managerial one as well.
The dilemma posed here plays itself out in every dimension of the business, including compensation planning. When it comes to pay, business leaders face the same balance issue: What blend of short and long-term incentives will support the growth we're seeking without sacrificing current performance? The ability to answer that question is critical to any company wishing to align compensation with the organization's vision, business model and business strategy.
Shareholders have significant capital tied up in the businesses they own. They deserve a return on that capital and, therefore, a return on the compensation investment they make in their people. The design of rewards, therefore, needs to ensure that pay holds employees accountable (those individuals in a position to influence the growth trajectory of the business) for improving shareholder value and driving productivity profit. If employees are not financially “at risk” in this regard, then the growth partnership owners should be nurturing with their people is out of balance. There is no “incentive” to adopt an ownership mindset about “what’s important” to shareholders if there is no part of an employee’s pay that is tied to the future company. As a result, shareholder value is vulnerable.
(To dive deeper into this topic, read Why Every Company Should have an LTIP, and download our white paper entitled, Why Long-Term Value-Sharing Matters.)
There are certainly more issues that could be added to a CEO’s “worry list.” However, what’s apparent is that all of these issues are connected and can’t be dealt with in isolation. That is why VisionLink recommends company leaders develop a clear performance framework that connects the talent and compensation philosophy and systems to the business vision, model and strategy of the organization. That way, those issues are viewed and acted upon as equally important, interdependent factors in the performance culture most chief executives seek to build.
