What Does it Mean to Have an Effective Rewards Strategy?

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:

  • Provide a compelling future.
  • Maintain a positive work environment.
  • Offer opportunities for personal and professional development.
  • Define a meaningful financial partnership.

Those four elements make up what is known as a Total Rewards Approach. Each is needed if an organization wishes to not only achieve the results it's targeting, but preserve and enhance the assets (employees) that are producing those results. And that combination of components has proven to be an effective formula for attracting and retaining premier talent, then keeping them focused on the right issues and producing a positive economic return for the organization.

Framing a meaningful and effective financial partnership with employees requires the proper allocation of a company's investment in its compensation and benefit plans. Most companies limit their ability to create sustainable results in their business in part because they limit the range of compensation strategies they employ to impact the behavior of key individuals and teams.

From a practical standpoint, employees are expecting two things from their financial rewards program: confidence in lifestyle and participation in value creation.

Confidence in lifestyle is achieved primarily by having sustainable cash flow needs met and by securing one's financial environment. These are fulfilled primarily through a combination of salary, short-term incentives (annual bonus) and employee benefits (group insurance, cafeteria plans, supplemental insurance, etc.).

On the other hand, participation in value creation has primarily to do with wealth building opportunities. In this regard, employees seek fulfillment of ambitions revealed in these kinds of questions:

  • If I apply my talent and ability here in a way that helps this business grow, how will I benefit from that increase?
  • Is there a way to increase the amount of wealth I am building for my future by applying my energies and efforts to building the future of this business?

Below is a pie chart of the compensation components that VisionLink suggests companies consider in the development of their rewards strategies. Certainly, not all will be used by every company. Your business is unique, and the allocation you have among these rewards components should reflect the outcomes you wish to achieve and that will best link the visions of owners and employees in your company.

VisionLink Rewards Strategies

Of the segments illustrated above, the most common missing ingredient in organizations with whom we work is a long-term incentive. Whether cash, equity, or phantom equity-based, this key ingredient is critical to developing the longer-term view owners need their most valuable talent to have if their growth objectives are to be achieved. They need employees who can and want to be stewards of the shareholders' vision - ones that are as concerned about growing the business as they are.

This can only occur if employees feel like they are participating in the growth they help create. Employees that see they have a stake in that future are much more likely to help bring about its fulfillment. Consequently, tying employees to the future of the company in the type of pay they receive is one of the ways to create an effective rewards structure; in this case, one that produces the long-term results ownership seeks to achieve.

At the end of the day, for companies to experience meaningful growth and progress, they must develop the means of helping their most valuable assets - their employees - draw the following conclusions about the businesses they work for and the rewards associated with that involvement.

  1. My company has a compelling and meaningful future.
  2. I'm clear about what's expected of me and how to accomplish it.
  3. I have a meaningful financial stake in the company's success and am motivated to achieve it.

To read a white paper on this subject, download VisionLink's white paper entitled: "Why Long-Term Value-Sharing Matters."

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