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.
When a rewards strategy is effectively linked to results it will help an organization accomplish one or more of the following:
- Solve a problem
- Remove a barrier
- Encourage a superior outcome
- Reinforce a pattern or cycle
- Create greater focus and execution
Each of the things listed here are factors that unleash growth in a business. And that’s what compensation should enable—growth; sustained success. It should facilitate that outcome rather than become a barrier to it. Understanding this is essential if a company expects compensation to become a strategic tool in driving results for the enterprise.
It should also be noted that each of the outcomes listed above doesn't have a specific revenue or margin impact, nor do any one of them define some rate of growth the company will experience. However, the things on that list do impact issues that affect growth. Unless a company successfully does each of those things, its progress and success will be stymied. Compensation, then, impacts outcomes that can either improve or diminish growth. Here’s what that means.
The ultimate “result” most companies seek from a comprehensive point of view might best be labeled as breakthrough growth. The adjective “breakthrough” implies that some kind of barrier which has been stifling growth--or is otherwise keeping the company from passing through a new threshold of performance—needs to be overcome if a higher or more accelerated success trajectory is to be achieved. In other words, if the vision of the future company is going to be realized, the business needs to do certain things differently or better. That doesn’t happen when an organization clings to the same strategy and execution patterns it has followed in the past—particularly those related to compensation. As Albert Einstein once said: “We cannot solve our problems with the same thinking we had when we created them.” Steve Jobs said essentially the same thing with the Apple slogan, “Think Different.”
So what patterns lead to breakthrough growth and what role, if any, does compensation play?
To answer that question, let’s examine a “present company” that’s on its way to becoming the “future company” its leadership has envisioned. To achieve the growth the business seeks, a certain performance progression needs to occur. That sequence is best summarized as follows:
- Execution. When a company’s business plan and strategy are executed consistently and effectively, value is created in the market place. Over time, the market rewards that effort by first recognizing, then acquiring and, ultimately renewing the product or service being offered. The goal is that the enterprise’s customers become its advocates and “spread the word” enough that a dominant market position can be achieved then perpetuated.
- Sustained Success. As a company’s execution pattern becomes refined and improved, a level of market acceptance emerges that is self-sustaining. This is what Jim Collins referred to as the “flywheel effect” in his book Good to Great (Harper Business Publishers). Companies that reach this state have found the leverage point in their business models that makes quantum improvements and leaps in performance the norm rather than the exception. Think of how Apple was able to leverage the appeal of the iPhone when it introduced the iPad—and how the iPhone had benefited from the success of the iPod. Consider also how Disney’s virtuous cycle neatly ties together its animated movies, theme parks and merchandise. Sustained success is the reward of consistent and effective strategy execution.
- Culture of Confidence. Market dominance occurs when the first two performance stages are sustained over an extended period of time. At that point, an organization’s culture lives and breathes success. Such companies become magnates for premier talent and systemic in their ability to achieve superior results. The culture exudes confidence and acts accordingly. When that happens, a company has a true competitive advantage—because culture is not “copyable.”
The performance progression just described grows out of what might be considered the “center of gravity” for the business—its vision, strategy and business model. Those elements drive decisions in the organization regarding product development, sales and marketing, operations and finances. They are tied together as one whole. Successful execution in each of these areas is what creates value in the marketplace, leading to the success patterns and culture of confidence alluded to above.
With that framework in place, where does compensation fit in this “breakthrough growth” schematic? It is, in essence, a support structure for the core functions of the organization. It begins with a Compensation GamePlan that articulates a pay philosophy and associated strategies that reflect and support the value creation approach the business is trying to execute. That GamePlan leads to the design of specific compensation plans that will reinforce the company’s pay philosophy and establish priorities regarding the “center of gravity” performance issues that fuel the organization’s revenue and growth engines. Finally, a rewards management system ensures that “line of sight” is created through the pay systems that are initiated. This means key performers and other members of the workforce understand at a visceral level the relationship between the company’s vision, it’s business model and strategy, their role and what’s expected of them in their role and how they will be rewarded for fulfilling those expectations.
Companies that experience sustained success develop an almost intuitive sense regarding the relationship between the elements just described. When it comes to compensation, their leaders recognize that it is one of the pieces that needs to be structured “right” if all of the other parts are to function effectively and in sync with one another. Similarly, no compensation structure and strategy, regardless of how good it is, can compensate for failure in the other areas just described. Pay strategies are multi-dimensional in nature and work in concert with each other and with the core functions of the business to consistently fuel company growth.
To learn more about this topic, attend our upcoming webinar broadcast entitled: "Compensation Your P&L Statement Will Love." Register here today. Space is limited.