A Total Compensation Approach

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.

You get the idea.

The problem here may seem obvious, but not so fast. Let's examine what's really going on. The core issue isn't that the company is rushing to change something that may need time to develop. It's also more than overcoming an entitlement mindset with a new plan design. The root of the problem here is context. The bonus plan is (er... should be) one piece of a "whole" compensation strategy that frames the financial partnership a company has with each of its employees. It's part of a larger construct. Therefore, what?

At a minimum, it means that each compensation "category"--from salaries to bonuses to long-term incentives and benefit plans--must be built in a framework that respects all parts of the pay structure. For example, the percent of salary an executive employee may receive in bonus should be tempered by his salary level, whether or not he's eligible for a long-term incentive and when that long-term value sharing piece will be paid--among other factors. These considerations will also differ for different tiers or grades of employees.

Expediency gets companies into trouble because it forces them to think in temporary and narrow terms about an enduring and comprehensive issue. The business that does this finds itself constantly chasing its tail, metaphorically speaking. It is always reinventing and trying to put out fires that relate to pay issues. There is a better way.

The solution that addresses the core issue here is to build a total compensation structure. The construction of that framework should include the following five steps (performed in sequence).

  1. Define a Compensation Philosophy. A company needs to define what it believes about pay; how it thinks value should be be shared with those who help create it.
  2. Establish Position Benchmarks. This is commonly done through a comprehensive market pay assessment.
  3. Perform an Internal Equity Evaluation. Once a company has data about the positions in its workforce, it needs to analyze that information in the context of the company's focus and priorities. Some positions may be more valuable to a specific company than the broader market data allows.
  4. Group Common Positions Together. This process helps you organize job "families" and the pay structure each should have.
  5. Establish Band Parameters. This completes the process by defining the range of pay available in each grade and the specific pay plans for which someone is eligible.

Once a company has this construct in place, the design of any specific rewards plan now has context. It is measured against the other plans for which employees are eligible and removes the risk of developing a plan in a "silo," without consideration for the overall strategy. The philosophy defines what value creation means to the business as well as how and with whom it should be shared. It's the guiding piece that governs decision making and influences the kinds of pay plans that should be considered.

At the end of the day, pay needs and deserves the same attention (if not more) as any other large deployment of capital in a business. Without a framework for applying that attention, the frustration described at the outset will guide companies to making one ill fated decision after another in their pursuit of the "right" solution.

To learn more about this topic, download our white paper entitled The Total Compensation Structure by clicking here.

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