What is the Compensation Model of the Future?

If it feels like the relationship between the employer and the employee has fundamentally changed recently, it is because…well…it has.  There are many reasons for it—which I have been detailing in this space over the past couple of years: There is a scarcity of skilled talentPremier performers are in control of the terms of their employment.  Performance management is undergoing a reinvention.  Employee engagement and employer branding are no longer luxuries.  Sites like glassdoor.com and other resources are making it impossible to ignore such issues.  So, what does all of this portend for future pay models?  Where is compensation headed and, as a result, what should you be doing now?

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Rewards strategies of the future will need to be rooted in four principles if they are going to have relevance:

 Agile.  There is not any question that the way organizations approach pay issues in the future will have to include a high degree of flexibility.  Businesses are abandoning strict performance management systems because they need to be able to turn on a dime in their response to the pace of change.  When they do, the pay system they employee needs to be able to react just as quickly.  However, this does not mean companies should be reinventing their compensation model every quarter.  They need a structure that allows them to adjust without completely redoing everything (see next principle).

 Stable.  Can a company’s pay strategy be agile and enduring at the same time?  It can and it has to be.  This is accomplished by building a Total Compensation Structure (TCS).  A TCS is built on the foundation of a pay philosophy statement that clearly defines the company’s beliefs about how value is created in the business, with whom and in what form it will be shared and what measures will determine its success.  In a TCS, a company creates a comprehensive view of all of its pay plans at once and what kind of weighting is given to each. 

 Think of a TCS as you would a investment portfolio report that shows you all of the asset classes in the portfolio, what percentage of the total they represent and how each has performed.  That is what you want a TCS to do for you with compensation.  Each pay element is like an asset class in your investment portfolio.  When a TCS is set up properly, you will not have to change specific pay plans as the company evolves and responds to market conditions.  Instead you change the weight you give to each component; you rebalance just as you would with an investment portfolio.

PayStrategyWebinarCTA092717.pngEmployee Driven.  No, this doesn’t mean you are going to turn the design of your pay strategy over to your employees.  But it does mean you will have a clear understanding of how employees view their compensation and what they expect it to achieve for them.  These issues fall into two categories: business and personal.

 On the business side of the equation, employees look to their pay strategy for clues and clarity on three things:

  1. What their role is, what’s expected of them in that role and what priorities are attached to those expectations.
  2. Where they are in their career relative to their peers who are at a similar stage of career development. They want to know if you see their worth the same way they do—or if they should be looking for an employer that sees the value they can bring.  (This has nothing to do with market pay data, by the way.)
  3. Whether there is integrity and continuity in the organization’s operations. In other words, employees look at their compensation and compare it with the goals and expectations you have of them and of the company.  Do you have a goal to double revenue in the next three years but have no long-term value-sharing component in your pay offering?  Employees will see that as inconsistent—and probably unfair

 On the personal side, there are also three issues:

  1. They want to know what kind of lifestyle and standard of living their compensation package will afford them. What kind of house will they be able to live in and in what kind of neighborhood?  Where will they be able to vacation?  What kind of protection will they have if they get sick or disabled?  And so on.
  2. They are interested in the wealth accumulation potential your value proposition offers. They want to know if the company operates under a wealth multiplier pay philosophy—where all stake holders participate in the growth value they help drive. 
  3. They look at the entire pay offering and compare it with their contribution ambitions. Everyone has things they want to contribute to in life, some simple and some more ambitious.  For example, one employee’s contribution expectation is to fund their children’s college education.  Someone else might want to do charity work or devote themselves to a cause.  All contribution ambitions have a financial requirement attached to their fulfillment.  So, employees look at their total pay package and ask themselves if it is going to “get them there” relative to this expectation.

 Creative.  Employers will need to develop pay approaches in the future that are a bit “outside the box.”  These are strategies that are tailored to the profile of their employees as well as the performance priorities of the company.  Here are some examples of programs VisionLink is starting to see:

  • Opt-In Plans. This is an approach that gives employees ultimate control over their earnings potential while protecting owners at the same time.  Individuals are given the option of electing a higher salary (within salary parameters based on market data) with low or no incentives or a lower salary and no cap on total compensation.
  • Performance Agreements. Key talent agrees to performance terms which are detailed on a “deal sheet.”  The employee’s superiors help the key producer determine what performance expectations should be met and how he or she will be paid if those targets are reached.  The superior then assumes a mentoring role helping the employee stay focused on the results and provides resources to support him or her.
  • Internal Venture Capital. This is geared to talent that has an entrepreneurial orientation.  This approach is being used to bring their innovative abilities inside the organization and “fund” their ideas with the company’s capital—essentially becoming partners in developing new initiatives.  Often compensation for these arrangements is structured through performance agreements as just described.

 The demands of today’s talent environment require business leaders to adjust or be buried.  There is really no two ways about it.  The landscape for recruiting, retaining and engaging employees has forever shifted and so the compensation model that companies employ must change accordingly.  Start applying these standards now if you want to be ahead of the curve instead of playing catch up.  Playing catch up is just not an option any more. 

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