The CEO’s Role in Building a Pay Strategy

It is not unusual for a chief executive to rely on human resources to manage the compensation programs of the business. The CEO doesn’t want to get involved in the minutia of who is getting a wage increase this year or what salary band every group of employees falls in.  It’s not his role and a focus on such details would dilute his ability to lead the company effectively.  However, there are certain pay issues that only the company’s primary business leader can properly address. 

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I am referring to those issues that influence how an organization’s employee value proposition will impact matters such as:

In short, most CEOs probably need to devote more attention to the strategic dimension of compensation design than they usually do.  There are at least three key issues that chief executives should be addressing if they want pay to be an enabler of business growth instead of a drain.

1. Establishing a Performance Framework. An organization’s performance framework has three dimensions: The Business Framework, The Compensation Framework and the Talent Framework.   These three parts are separate but interdependent.  Within the business framework, a chief executive must articulate the company’s growth expectations (vision), define the business model and strategy, and identify roles and expectations.  In constructing the compensation framework, the company leader has to identify a clear pay philosophy, insist on pay strategies that reflect that philosophy and then enable a total rewards approach to the development of a compelling employee value proposition.  The final piece in the performance framework is talent.  This level of CEO planning has to do with identifying key producers already within the business and then defining where potential talent gaps might exist so a recruiting strategy can be formed.  With both existing talent and that being recruited, it includes establishing success criteria and performance standards as well as the kind of rewards that should be attached to their fulfillment.

2. Defining a Value Creation and Value Sharing Model.  Growth-oriented CEOs view and treat all non-guaranteed compensation as value-sharing.  This term is important because it eliminates the idea of "cost" from the pay equation and replaces it with a focus on compensation as an investment.  Corporate "wealth sharing" is a function of value creation.  It requires an organization's leader to be precise about how value creation is defined within that specific enterprise and what thresholds have to be reached before value sharing can occur.  For example, one company defined value creation and value sharing this way:

  • The first $80 million of net operating profit goes back to the company and shareholders to fuel future growth.
  • The next $20 million of net operating profit is shared with employees and is split between short and long-term value-sharing programs.
  • After that, all profits are divided 50/50 between company investment and employee rewards (further value-sharing).

Your definition of value creation may be different, but the principle is that rewards (in the form of value-sharing) are not a cost but an investment that is intended to fuel growth.  Whether profits are applied to future capital acquisitions or to reward the individuals driving growth, the intent is to improve shareholder value.

3. Measuring Results.  Compensation is one of the largest deployments of capital a business consistently makes and yet many CEOs don’t measure it as they do other capital investments.  If a company leader wants pay to be a growth contributor, then he or she needs to be able to calculate and track the productivity profit of the business.  This simply means the organization is able to identify that part of its net operating income that is attributable to the productivity of its people as opposed to capital already at work.  Measuring productivity profit also helps a business identify its value creation threshold.

CEOs that are focused on measuring results make sure that specific value-sharing plans employ metrics that are tied to ROI Factors.  Bonuses, for example, are only paid if employee performance has contributed to increased revenues, better margins or lowered costs. This usually requires some effort to align specific roles and duties with ROI criteria.  It also means that CEOs spend time discussing ROI and value creation with their employees, so line of sight is reinforced and a unified financial vision is forged.

The business environment of the 21st century is more competitive than ever before.  If a company expects to come out ahead, it must attract the best talent, create sustained performance and drive consistent profitability; and do it better than everyone else.  In such a context, compensation—along with the rest of the organization’s employee value proposition—has to be approached strategically.  As a result, the CEO’s role in building a pay strategy is only going to increase. 

Therefore, if you lead a company, I suggest you get comfortable with the three key issues we just discussed.  You can still use human resources to help you implement all that’s been outlined here; but make no mistake, you must be the standard bearer in enabling a unified financial vision for growing the company.

 

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