- Fulfilling the business plan is important. Your strategy and its associated business plan were presumably built on the foundation of a mission, values and vision for your company that defines who you are, why you exist and what you want to become. Your business plan probably identifies key initiatives for operations, product development, marketing, distribution, customer service, capital and human resources. In all likelihood it articulates roles and expectations for key people in the organization. These things are of critical importance to any business wishing to become something greater than it is today.
- Sustainable growth is important. Such a pattern emerges in organizations that are superior in executing their business plan and can maintain a compounding, positive trajectory in their revenue development. Organizations that are so oriented build success patterns that breed a culture of confidence and a competitive advantage. This is how growth becomes sustainable. Such a pattern is of primary importance to any growth-oriented company.
- Appropriate return on capital for shareholders is important. Business leaders have to make effective decisions about capital investments if a future company that is bigger than the present is to be realized. Capital, therefore, that is expended (invested) in any aspect of the business must translate to a positive economic result for the shareholders. This is a comparative analysis. What return must one achieve in the business relative to other potential applications (investment) of that capital to make it a superior use of those resources? In short, a return on capital invested in the business must be rewarded with a superior return - otherwise, why not withdraw that capital and invest it in the market at potentially less risk? Measuring and achieving an appropriate return on capital investments within the business is a crucial issue for companies wishing to grow.
Assuming we agree that these can be defined as issues that are important to shareholders, then what is it that we desire of employees? Although a long list could be developed in this regard, I believe all could be categorized under the three following outcomes or results:
- Daily behavior that is designed to fulfill the business plan.
- Accountable decision making that reflects employees' awareness of their impact on the business plan and the economic outcomes the business needs fulfilled.
- A dedicated and committed effort fueled by passion and focused on the execution of key performance initiatives.
Sustained growth in a business comes about primarily because key employees are focused on performance factors they can impact - and they feel motivated to do so. That focus leads to execution. When sustained, that pattern brings about the results and success the business plan calls for.
If the beginning point then is focus, then the role of a rewards strategy should be to create that focus. At a minimum, that is a good outcome. A better outcome is that the rewards strategy leads to greater execution. Ultimately, the best outcome is that it creates and then sustains the desired results.
Likewise, for an ownership thought process to be cultivated, employees must be able to draw a straight line in their minds between the vision of the company (goals and outcomes), the strategy for its achievement (key performance initiatives and indicators), their role in that strategy (expectations) and how they will be rewarded for achieving those expectations (meaning). When this "line of sight" is achieved, certain passion measures have been met and engagement occurs. An employee then moves from commitment to engagement to accountability - with the latter ultimately becoming self imposed.
Can properly engineered rewards really create such an effect? In fact, they can.
The Role of Incentives (Value Sharing)
The outcomes discussed in this article are not achieved because a company pays a salary, has a group medical plan and/or allows its employees to contribute to a 401(k) plan. Rather, they are achieved when an employee feels "invested" in the results the company seeks to fulfill. Being invested means the employee recognizes he will be devoting his mind, heart and talent to the business in anticipation of a return on that commitment - and that the return is measurable, attainable and meaningful.
Many of VisionLink's clients have some kind of incentive plan when they engage us to work with them. However, those incentives do not typically match the return criteria just mentioned; they are not measurable, attainable and meaningful. In many cases, none of the three criteria are met.
If the incentive is regularly and universally paid out in full, it is often because it has become an entitlement, in which case it doesn't pass the "ownership" test. For an employee to be invested, he must also be at risk. And he is willing to take that risk if the payoff is measurable, attainable and meaningful.
Incentive plans by their very nature create a direct correlation between performance and results. Just as a business will not receive a payoff from the market unless it creates sufficient value, an employee participating in an incentive plan should only realize that part of his remuneration if he has helped create it through his performance.
The moral? When pay aligns employee interests with shareholders, it can become a powerful growth partner to the business. All great companies come to know this is true.