If you lead an ambitious private company, you likely struggle with some part of your pay strategy. Maybe you're comfortable with your salary structure, but your annual bonus is ineffective. Or perhaps you've delegated the formation of your compensation approach to human resources--and are not feeling like it's headed in the right direction. It could be you feel your overall pay structure is solid enough but it's not helping you attract the kind of talent you're trying bring in.
In short, you don't feel there's alignment between compensation and the business model and strategy of the company. As a result, you're feeling some pain.
The truth is that while this issue isn't uncommon, it has to be proactively addressed if the business wants to succeed. It won't solve itself. It doesn't matter that it's hard and painful. Great companies learn how to do it right. In my experience, while pay plans may differ from one organization to another, there are some common practices they all follow to ensure they get the results they're seeking. Here are five pay practices of successful, growth oriented, private companies:
- They employ a process. Businesses that don't have a formalized structure for addressing compensation issues and making decisions find inertia takes over and necessary improvements seldom get implemented. Effective organizations form a compensation committee, hold regular meetings, have a system of review and a process for making decisions. This is much easier if a philosophy has been defined and a structure has been built (see numbers two and three below).
- They have a philosophy. Organizations that have defined what they're willing to pay for make more effective decisions about rewards. A pay philosophy offers clear guidelines that informs all plan designs and ensures everything from salary grades to value-sharing plans and benefits are aligned with the business model and strategy of the company.
- They have a structure. A total compensation structure is essentially a pay "dashboard" that those responsible for rewards use to manage and balance the comprehensive strategy being pursued. It shows them all of the pay plans for which employees are eligible by salary grade. It ensures that no compensation decisions are made "in a vacuum" without considering their impact on the whole pay picture.
- They share long-term value. Because growth-oriented companies seek to attract growth-oriented talent, they recognize that top producers expect to share in the value they help create. So they implement short and long-term plans to codify a financial partnership with those they expect to drive results and growth. Equity sharing, phantom stock, annual bonus plans, performance unit plans and others are used to create a wealth multiple opportunity for all key stakeholders.
- They measure their return on pay. Companies committed to growth want to know that any deployment of capital or profit is improving shareholder value. As a result, they evaluate compensation as an investment and calculate a "productivity profit"--that part of their operating income attributable to the contribution of their people. They watch the trend of this ratio and ensure it is improving year to year.
When businesses follow these practices consistently, they have greater confidence about how they are investing their compensation dollars and what they expect to get in return. There is higher trust in these organizations because employees understand the driving philosophy behind their financial partnership with the organization. That trust instills confidence and gives the company the freedom to succeed.