If you lead a business, you likely have a good sense of what your company can achieve. But you recognize that your vision cannot be realized if you’re be the only one who holds it and is passionate about it. You need people around you who are as committed to its fulfillment as you are and possess the wherewithal to make it happen. Beyond that, they must have unique abilities—skills, experience, foresight, intelligence and judgment that most other people do not have.
Intuitively, you know this. The problem is, you are settling for something less than what you really need. As a result, you probably find yourself perpetually frustrated that your lofty goals are not being realized, at least not consistently.
Over the past several years, Harvard Business Review has published several articles identifying the skill set that the ideal talent prospects will have, and that chief executives should be trying to nurture in the key people currently in their employ and look for in those they are trying to “woo.” They call these people strategic leaders. Here is how one HBR article described them:
It’s in the combination of consistency and agility that leaders can become strategic, performing an organization’s purpose with excellence but changing course when the situation demands. These leaders have high quality standards, achieve goals, and expect consistency, but they are also open to change, keep an eye on the external environment, and understand when old ways of working no longer pass the test of the market in which they compete. They stay the course until it no longer makes sense and combine continuous improvement with ideation and strategy. (The Best Strategic Leaders Balance Agility and Consistency, Harvard Business Journal, January 4, 2017, John Coleman)
This is a perfect description of the skill set that is needed in today’s business environment. Everything is in “hyper” mode—competition, innovation, growth, change. As a result, employees who have a leadership role need to possess the ability to maintain the business model of the company that is driving its revenue engine while simultaneously looking into the future and anticipating opportunities that will leverage the business’s ability to grow.
Not everyone you are trying to recruit is going to have the skill set to be a strategic leader. One set of HBR authors identified six characteristics these individuals will have. They are able to: anticipate, challenge, interpret, decide, align and learn. Wise business leaders, then, will set these as primary criteria for those they are trying to recruit and retain. These are the kind of people that CEOs and owners need to help them take on challenges that require clarity about priorities and values, and foresee opportunities they otherwise would not have anticipated. They will help them spot problems before they become cancerous and be decisive on jugular issues that can make or break the company’s ability to hit its targets and achieve its growth goals.
So, assuming you are able to find and recruit this kind of talent, what kind of pay strategy should you employ to make sure their role in your organization is properly reinforced? The last thing you can afford is to have a compensation offering that is at odds with the consistent yet agile approach to leadership you need your strategic leaders to take. The pay approach needs to reward both stability and growth—and do so in a manner that makes clear the balance the organization wants to strike between the two.
A Balanced Value-Sharing Approach
The primary way companies can walk the tightrope between incentivizing short and long-term performance is by defining a clear value-sharing philosophy. To do this, organizational leaders must first decide how value creation will be defined for their businesses. In this context, we’re talking about the threshold at which employee performance can be considered the source for the “value-added” profits the company is experiencing. These are profits after accounting for a return on capital that shareholders should expect to see before they start sharing value with employees. At VisionLink, we call this productivity profit.
Once a value-creation definition has been established, business leaders must then determine how that value will be shared, and with whom. If your company is trying to encourage strategic leadership, then it must recognize the need to reward both consistency and agility, as the article above describes. This is best accomplished by having a single philosophy that guides the value-sharing approach the company will employ with two performance periods that are rewarded through distinct plans.
One Philosophy, Two Performance Periods
Companies that are encouraging strategic leadership are adopting what our firm calls a wealth multiplier philosophy. Its foundational principle is that all stake holders (owners and employees) should participate in the wealth multiple they help create. This requires the company to set clear performance targets on an annual and long-term basis. Strategic leaders need clarity about the outcomes they are expected to produce through the application of their unique abilities—and an effective pay structure will reinforce those expectations.
By having one overriding philosophy, defining the metrics for each performance period becomes easier. For example, we know the long-term goal is to increase company value, because that is what drives improved shareholder value. And if the enterprise is going to enjoy sustained growth, then it must grow its profits. As a result, profitability becomes the rewards driver for annual value-sharing. Team, department and individual performance metrics may play a role, but it’s a supporting role. If profits aren’t growing, then all other metrics do not really matter.
So, the value-sharing plans that reward long-term performance should be linked to increase in business value. Those that reward short-term performance should be tied to profits—and specifically productivity profit.
An Inflection Point
Twenty first century business is at an inflection point. As each year turns over, we are faced with challenges and opportunities previous generations could not have even conceived of. The result is that business leaders need more strategic assistance than they ever have before. This requires a new approach to everything from the recruiting standards they adopt to the way they structure compensation and, ultimately, the employee experience they create for their people.
Certainly, there is much to look forward to for business leaders that understand the dynamics at play. Those who can get them to work in their favor will have a competitive advantage that few will be able to overcome. They will win, now and for years to come.