You're the CEO of a successful private company. Your business has been growing at a modest rate but you feel it's capable of more--even much more. Breakthrough growth is in reach but not all of the pieces are coming together in quite the way you envisioned. You're willing to analyze everything to find the answer. You take a look at your P&L and notice the largest budget item there is compensation. "Hmmm, that's a big chunk of change," you muse. Yes, it is. As a result, let's think about the impact it should be having on the growth you're seeking.
It's that time of year when enterprise leaders look carefully at their businesses and ask: "What needs to change? How can we improve?" CEOs are looking at ROI and ROA (among other things)--and trying to determine how to squeeze more out of both. Everything is scrutinized. Somewhere in all of this compensation comes up. When it does, everyone sighs. The same questions are asked: "What needs to change? How can we improve?" But why the sigh?
October 28, 2014
Those are perhaps the two most common words CEOs and other business leaders will use between now and December 31. "Next year we plan to increase revenue by 20%." "Next year's budget is due in two weeks." "Next year we need to reign in costs." "Next year we'll recruit to five key positions." "Next year we'll be making our next acquisition."
In that mix there will likely also be certain "next year"
There is something inherent in successful organizations that makes everyone associated with them want to "win." You can notice it the minute you walk into their building and it permeates every aspect of their operations--including compensation. At their core, they have an abundance mentality and believe that their approach to growth should financially benefit all key stakeholders. In fact, they believe such a philosophy means that shareholder wealth will accelerate at a faster rate if others participate in the value they help create rather than being mere bystanders as the company succeeds.
A performance culture is essential to achieving sustained success within an organization. It breeds an environment that is passionate at its core. Passion is unleashed when a company has achieved sufficient line of sight in the minds of its employees between the following related elements:
Everything related to a competitive advantage begins with hiring and keeping the right people—then making sure they are focused on the right performance factors. If you think otherwise, then perhaps you can identify a company that has the wrong people focused on the wrong issues and is somehow sustaining a competitive advantage. It just doesn’t happen.
Your people and their distinctive abilities are the soil that must be prepared and cultivated before a competitive advantage harvest can be reaped. This conclusion is born out in real (business) life over and over again.
August 15, 2014
Before an organization can effectively determine the kind of approach to pay it wishes to adopt, it must first think through and articulate the performance framework that will inform its compensation philosophy and strategy. This business architecture is made up of three separate but interdependent parts—a business framework, a compensation framework and a talent framework. For any pay plan to make sense, or have the prospect of success, it must be considered within this context.
August 05, 2014
Stephen Covey taught that effectiveness means achieving desired results in a way that preserves and enhances the assets that produce those results. It's a true principle that has infinite application.
In a rewards context, for a strategy to be effective and produce the growth results the company has targeted, it must do the following:
"I'm paying my top four people $1 million. What am I getting for it?"
That question, or one similar to it, crosses the mind of every CEO that examines what he or she is paying key producers in the organization. It's an important question for a company to answer since compensation represents such a large allocation of the company's profits. And as economic challenges arise, the question carries an even greater urgency.
What are you getting right now for what you are paying in compensation? Well, you are getting the current result, whatever that might be - right? If the results you achieve this year are not measurably different than you got last year, what will you do next year to drive a different performance level? And how will pay differ as a result of those changes?
All compensation, and especially incentive plans, should help focus employees on the company’s priorities and strategies. In other words, the company’s growth objectives--and individual roles in the same--should become clearer as a result of how employees are paid. Of course, these issues are different for every business. However, they typically include priorities and objectives such as the following:
- Define and remove barriers to the company’s growth goals.
- Expand the business’s core value proposition.
- Accelerate the execution of the organization’s business model, processes and strategies.
- Identify and execute new growth drivers.Maintain the company’s revenue engine.
- Expand the company’s market reach and audience.
- Stay ahead of market trends.
- Be responsive to customers.
- Codify expectations and accountability and build a sense of partnership with key employees.
- Manage change effectively and encourage innovation.
- Become a magnet for the best talent.
- Be a great company.
Business leaders need a workforce that understands these priorities and will assume an appropriate level of stewardship for their fulfillment. How incentives are constructed can tie priorities to pay and thereby reinforce in the minds of employees “what’s important.” They help clarify priorities.
The CEO Worry List
Chief executives of businesses translate “what’s important” into a kind of worry list they carry around with them all the time. They all have one. It’s what keeps them from going to sleep at night or awakens them at three in the morning. Pretty much every business issue can be placed in a group on that list. Those categories represent the five lenses through which the CEO sees the organization. From this perspective, the company leader makes decisions based on the current state of the business and where he or she wants it to be in the future.
Generally, these categories are as follows:
In his recent Strategy+Business online column, Ken Favaro said this:
The leaders of most growth-oriented companies are always in search of better ways to tie compensation to performance standards. As a result, they experiment with various metrics and measures associated with incentive plans they have in place--trying to find the formula for success. A few eventually land on something that works well enough. Most end up frustrated.
Expediency often guides compensation decisions. Too often. A company feels like its bonus plan is viewed as an entitlement so it wants to engineer a new design that has more clear metrics and performance standards. It's coming to light because it's November 30 and what has come to be known as the "Christmas bonus" is about to be paid. So...frustrated business leaders vow to have a new plan in place by January 1 that will "fix" this problem.