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.
In this first category, a company must attempt to envision the future business, define its performance engine and standards, then identify the roles needed to execute its strategy and business model. Specifically, it is recommended that the following be addressed:
- Define the company’s growth expectations (vision). Here company leadership wants to clearly express key outcomes that need to be achieved in the future in quantifiable terms. A financial model that looks at a three to ten-year horizon in terms of base, target (or budget) and superior levels of growth is recommended.
- Define the business model and strategy. This step involves a clear articulation of two separate but related issues.The business model defines how the company drives revenue and makes money. Its strategy describes how it competes in the marketplace. With those two elements in mind, business leaders need to identify where the leverage points are and how each can be maximized. This should help determine the growth opportunities that will lead to fulfillment of the vision defined in step one.
- Identify roles and expectations. With the first two elements established, the company should think about the specific skill sets that will be needed to drive the business model and strategy. Those skill sets inform the kinds of roles and expectations that will be associated with the outcomes the company must achieve if the “future company” is to be realized. Expectations should be articulated in the form of performance criteria. Finally, the company needs to also define what “success” means as it relates to the fulfillment of each role.
With the business framework in place, the compensation framework is more naturally constructed. The pay structure should help align roles and expectations with the business vision, model and strategy by framing the financial partnership that will exist between ownership and the workforce. It should include the following:
- Identify a Pay Philosophy. This is a written statement that acts as a kind of compensation “constitution” for the business. It should define what the company is willing to “pay for”—and presupposes the organization has defined value creation so it can articulate its belief about what and how value should be shared. The pay philosophy is also where a company addresses whether it’s going to adopt an expansive or selective approach to structuring rewards for key producers.
- Engineer Pay Strategies that Reflect the Philosophy. This means a company will pay attention to both salary structures and value sharing—and strive to achieve an effective balance between the two. Likewise, it will build both short-term and long-term incentive plans (value sharing arrangements) that properly manifest the organization’s belief about the kind of financial partnership it wants to have with its people. To do so, it must pay attention to both the structural and the mindset impact of their plans. Structure addresses who should be in the plan, what kind of plan it should be, how much it should pay out and so forth. Mindset has to do with whether or not a plan will build a greater sense of stewardship about ownership priorities and whether there will be a higher level of commitment and engagement associated with employee performance.
- Adopt a Total Rewards Approach. This simply means that an organization recognizes that there must be more to its value proposition than financial rewards. First, there must be a clear and compelling future—one that invigorates key producers about where the business is headed. They need to be able to see themselves in that future and believe that their unique abilities are necessary for its fulfillment. Second, employees seek a positive work environment. This suggests premier talent in particular is working within the sphere of its distinct abilities, it likes the nature of the work in which it is engaged and the team of people with which it associates. Third, there must be opportunities for personal and professional development. This doesn’t necessarily mean training—although that can be a component. Rather, it means people feel as though their abilities will be magnified as a result of their association with the organization and its resources. And finally, fourth, there must be financial rewards. And those financial rewards need to relate to the value a producer helps create in the business. Key people want to have an appropriate salary and bonus plan, but beyond that they want to know there is a mechanism for building wealth in a similar way ownership experiences. (This does not necessarily mean sharing stock, however.)
The final piece in our performance framework is talent. This level of planning has to do with identifying key producers and defining where potential talent gaps might exist. With both existing talent and that being recruited, it includes communicating expectations and the rewards associated with their fulfillment.
- Identify Key Producers. These are individuals who are most responsible for helping the company consistently achieve the “success” standards it has identified. A business needs to be able to recognize the difference between this kind of contributor and the rest of its workforce. It should also be able to identify the skill sets of those in this category and how they compare with the expertise needed to achieve the growth goals the company has set.
- Identify Talent “Gaps.” Step one should make it easier to identify where the company falls short in the skills needed to reach organizational performance standards and goals. That gap should then drive the recruiting strategy the business adopts for seeking new talent.
- Communicate Expectations. Individuals that are capable of driving the performance of the company want there to be high expectations that are well defined. Expectations are—or at least should be—reinforced in the way people are paid. When there is clarity in the link between company vision, business model and strategy, roles and expectations and rewards, “line of sight” exists within the organization. This means each of those elements are working together to create a unified vision of what the target is, who is responsible for its completion and how he or she will be rewarded when expectations have been fulfilled.
- Communicate Rewards. In the context just described, pay strategies form the capstone that defines the financial partnership with the company’s key people. As a result, compensation must be both effectively engineered and clearly communicated. That communication should include a statement of the company’s pay philosophy, an articulation of the specific program(s) being introduced and a projection of the total rewards value a producer can receive from the business over an extended period of time. When all of this occurs, it provides a magnified view of the value proposition being offered individuals coming into the organization. The new employee is no longer being recruited to a $175,000 salaried position. She is being offered a financial “partnership” that is worth, for example, $2 million over the next five years (or whatever the numbers play out to be for a given company).
Any company that is serious about developing compensation plans that will meet the demands of the future will want to build a performance framework involving the elements just described. That way, as plans such as those about to be discussed are considered, they will be evaluated in the proper context and will more likely bring about alignment between the outcomes desired and the pay strategies being implemented.
To learn more about the importance of a performance framework, view our webinar entitled "How to Effectively Link Compensation to Results."