When you look at your company’s compensation program, what do you see? Do you see something that is having a strategic impact on the way your employees view their roles and stewardships? If not, why not? What purpose do you need your rewards approach to help you achieve that it is not currently achieving? Do you know? Okay, I’ll stop with the quiz now. If you’re unclear or uncomfortable with your answers to those questions, don’t be overly concerned. You’re not alone. Most business leaders are.
But let’s not leave you in a “dissonance zone.” Let’s consider how you set priorities for building a more effective and strategic approach to pay.
An important starting point in this examination is a change in mindset about compensation. Ultimately, pay should not be viewed as a series of disparate parts that work independent of one another and exist merely because you assume you have to provide them. Instead, you should view your pay approach as you would an investment portfolio—where each asset class has a purpose and works with the others to drive the performance you need to achieve your accumulation goals. With pay, you are constructing a compensation “portfolio” where every plan is an asset class that has an important role. A good investment advisor will look at your portfolio in the context of your wealth building objectives and help you identify any asset classes that are missing. So let’s examine how you do the same for your pay strategy.
Start with a Philosophy
The organization of an effective investment portfolio relies on a well-defined investment philosophy statement. A pay portfolio is no different. I can’t emphasize enough how critical this step is. A compensation philosophy is a written statement that acts as a kind of compensation “constitution” for your business. It should define what kind of outcomes the company is willing to “pay for”—and presupposes you have determined how value creation is defined in your business. Defining value creation puts you in a better position to articulate your company’s belief about how that value should be shared and with whom. The pay philosophy is also where a company addresses whether it’s going to adopt an expansive (we treat everyone the same) or selective (we reward high performers based on their contribution) approach to structuring rewards for key producers.
If you haven’t yet articulated a pay philosophy in writing, it will be harder to identify what part of your compensation strategy is “missing.”
Define the Kind of Value-Sharing You Need
Most companies are trying to encourage three different kinds of outcomes in the way they pay their people: annual performance, sales performance and growth performance. And all three are needed. In other words, if you lead an enterprise, you want your people to: 1) maintain the revenue “engine” of the company; 2) increase sales, and; 3) drive long-term business growth. These are not mutually exclusive or independent results. They work together. So what does this mean from the standpoint of your pay strategy?
You will need three distinct value-sharing plans in your company: one that rewards performance generated in a period of 12 months or less, one that reinforces your selling system and one that promotes sustained profitability and revenue expansion. Most organizations have a commission-oriented sales compensation plan (for their sales force) and some kind of annual bonus plan (typically for non-sales people). Our experience is that most organizations don’t have any kind of long-term value-sharing arrangement; something that keeps employees focused on the horizon while they’re chugging past the mile markers on the company's year-by-year revenue-generation highway. If you don’t yet have one or more of these kinds of plans, you are on your way to identifying what your rewards strategy is “missing.”
Identify Salary Levels and Pay Grades
Why do I cover salaries after talking about value-sharing? The reason is that defining a pay philosophy forces you to think about what your organization wants to reward. It defines what value creation means for your business, with whom it should be shared and over what time interval. It forces you to think about how short, long-term and sales performance value-sharing should be balanced. That, then, should turn your focus to guaranteed compensation and what the right blend should be between salaries and variable pay. For example, does the company want to be at the 90th percentile of market pay for salaries with modest value-sharing or is paying at the 45th percentile with unlimited upside potential more conducive to your company’s growth ambitions?
Once those questions are settled, your company should look at reliable market-pay data from several sources and perform an analysis that leads to the most logical salary structure for your organization. There is no “right” salary structure that applies best to all companies. What you need is an approach that fits for your business and reflects your pay philosophy. You want to be able to clearly explain to your people the reason they are in their current salary band and how they move to the next level. However, you want to be able to place that discussion in the broader context of your pay philosophy and value-sharing approach.
So, if you haven’t carefully thought through a strategy for guaranteed compensation (salaries) that properly reflects your overall rewards philosophy, this is another part of your pay strategy that is “missing.”
Assess Your Core and Executive Benefits
If your organization is like most, benefits are a bit of an afterthought—and a painful one at that. You deal with your medical plan when you get your renewal notice each year; you have an adequate 401(k) plan; you may provide some additional payroll deduction options (life, disability or long-term care insurance); and perhaps you provide some unique workplace perks such as flex time, free days or child care. However, if you’re going to approach compensation as an investment, you need to treat this “asset class” as strategically as you do the others. Here are some questions you should be asking:
- What career stages are represented within our workforce and what types of benefits fit the range of employee “groupings” we have (e.g. millennials just out of college versus those in their 30s who are in their third career role and now married with two kids)?
- What role do benefits play in the context of my pay philosophy? Is it important to me to make sure security issues are handled with superior or generous group benefit arrangements? Am I trying to attract a level of talent for which a high amount of flexibility in benefits will be important?
- Do I have executive benefits that properly address the strategic leaders our organization is attracting; people that are highly compensated and for whom I have to compete heavily? Are they expecting, for example, a supplemental retirement plan that allows them to put more away for retirement than the 401(k) limits allow—to both accumulate a nest egg for the future and save current taxes?
There are more questions, but you get the idea. Benefits cannot be an afterthought and if you’re not ensuring there is consistency with your pay philosophy in this “asset class,” then you likely have a piece of your compensation strategy that’s still “missing.”
Build a Total Compensation Structure (TCS)
A TCS is a framework you engineer for managing and analyzing all the components of pay and benefits you are offering. Ideally, it gives you an “all in one place” view of every employee tier, what plans they are eligible for and at what level. It allows you to evaluate the whole value proposition as opposed to each individual component in isolation. Within this framework, it is easier to make decisions and adjustments in specific pay plans because you can measure each against its impact on the whole picture.
When a TCS is built properly, it instills integrity in how you operate your overall compensation strategy. By integrity I mean there is continuity and consistency between the company vision, the business model and strategy, the pay philosophy, employee roles and expectations and specific rewards for achieving results. That structure creates the assessment symmetry needed to achieve the right balance between salaries and incentives—and every other part of your pay offering.
While a Total Compensation Structure is not a pay plan per se, it is an essential element in building and managing an effective rewards “portfolio.” It transforms individual pay elements into a comprehensive and strategic picture of your compensation approach. So if you do not yet have a Total Compensation Structure, mark this piece as “missing.”
The word I would use to describe the compensation approach of most companies our firm encounters is—“incomplete.” If they are a successful business, they have inevitably done some good things but they just haven’t gone far enough in their pay offering. For example, they may have a well thought out salary structure, a robust benefit package and a solid annual incentive plan but they have no means of sharing long-term value with those who create it. Or maybe they do have a plan that rewards sustained performance but the company’s 401(k) doesn’t allow highly compensated people to defer as much income as they would like to. As a result, they are getting hit hard by taxes and it’s diminishing their wealth building ability. Most of these gaps occur because these organizations haven’t yet developed a core compensation philosophy.
Hopefully, this process has helped you identify where your gaps are so your approach to compensation in 2017 will have no more missing pieces.