When to Hire a Compensation Consultant

I suppose it may seem odd for someone who works in a compensation design firm to muse about when you should engage a pay consultant to help you with your rewards planning. In reality, given the experience our firm has with those who were ready for a consultant when they hired us and those who weren't, I think we're experts on the topic. This guidance should be helpful to anyone who is struggling with compensation issues and considering whether to engage outside assistance.  

Hiring a compensation consultant can be very helpful...if you've properly prepared.

I'll approach this topic from two directions: The first addressing when you should probably consider getting a qualified outside firm to help you and the second, when you probably need to get some other things taken care of first. 

When it's the Right Time

  1. You Need a Gameplan. Business leaders often need someone to help them construct a coherent, comprehensive strategy for compensation.  This is common in growing companies that have built pay programs in a patchwork fashion and have discovered there is no continuity in what they are doing. They need help understanding how to develop a sound pay philosophy and practices that will effectively align pay with the business model and strategy of the company--and forge a unified financial vision for growing the enterprise.
  2. You Need a Structure. Some companies have developed some specific pay plans that are effective but there is no overarching structure for managing them.  A Total Comprehensive Structure helps you look at everything from salary grades to incentive plans and benefits through one "dashboard." It helps you see your total compensation financial commitment in one place and how it is spread through various programs and tiers within the organization.  If facilitates ongoing decision making and planning regarding pay issues.
  3. You Need a Market Pay Assessment. Building sound salary grades is a combination of art and science. Many companies rely either too much on data to form their guaranteed pay structure or not enough. Knowing what kind of data to obtain and how to evaluate it once you receive it are critical steps to building salary bands that make sense for your business. Combining data with an internal "equity analysis" helps create a path to guaranteed pay levels that are compatible with your compensation philosophy and competitive with the marketplace.
  4. You Need Better Metrics. Most companies have a hard time determining what criteria to set for the achievement of the annual incentive they provide. Many are frustrated because their plan is largely discretionary and has become a kind of entitlement.  Others have built a plan that has too many metrics. Therefore, employees are confused and feel payouts are unachievable. In either case. finding the right type and number of metrics is critical to a successful plan. Most organizations need help with this.
  5. You Need Help Finding the Right Long-Term Incentive Plan.  Most private companies don't have any long-term value-sharing arrangement.  Often, this is because they don't know how to determine which plan is right for their company--restricted stock, stock options, phantom equity, SARs, performance units, profit pool, deferred compensation, etc. They need someone to guide them through a decision process that enables them to determine the most effective value-sharing approach for their organization--and then help them with an effective plan design.
  6. You Need Help Managing Your Plans. Once plans are set in motion, much needs to be done to ensure their success. There is a need for ongoing administrative, financial, communication and statutory oversight. The plans need to be monitored and tested to ensure they are working together to create "line of sight." They need oversight, employee reports and a promotional strategy to keep them alive in the minds and hearts of participants. Many organizations ignore the need and their plans fail as a result.
  7. You Need to Measure Your ROI on Compensation.  In today's business environment, every dollar invested by a company should be scrutinized for it financial impact.  Compensation is typically the largest deployment of capital and profits a company consistently makes, yet it is rarely measured the way other business investments are.  Decisions about how compensation dollars are being allocated need to be justified. Incentives, in particular, should be "self-financing" (paid out of productivity profit) and most organizations need help determing how to do that effectively.

There are certainly more reasons that could be listed for engaging a pay consultant, but most of them would probably fall in one of those categories. Now let's turn our attention to when it probably isn't a good time to engage someone to help you with compensation issues.

When You're Probably Not Ready

  1. You Consider Pay a Cost not an Investment.  Organizational leaders who view compensation solely through the prism of expense have a hard time opening their minds to options available to use rewards as a strategic tool in reinforcing what's most important to shareholders. Compensation professionals are there to help you not only with how much you should pay, but how you should compensate your people. It's not unlike the discussion you would have with an advisor regarding your investment portfolio. The discussion is centered on what investments (pay programs) should be included in your portfolio and what weight (level of allocation) each should be given.
  2. You Don't Have a Growth Plan or Strategy. Incentives in particular are tied to business growth. If you don't have a clear vision for how the business is going to grow--and how profits will be generated--it will be difficult to build an effective plan.  Become clear about your growth objectives and their feasibility before engaging a compensation consultant. 
  3. You Don't Have a Decision-Making Process. Organizations that don't have a systematic way of working through a project with an outside consultant and making ongoing decisions end up throwing money away when they hire a pay consultant. Compensation design is a partnership between the consultant and company leaders.  The best consultants know the right questions to ask (and there are a myriad of them) and when they need to be addressed in the process. If you aren't prepared to engage in the system the consultant uses for producing your plans, or you're unclear about the outcome you're looking for, it's probably not the right time to engage outside advisors.
  4. You Have your Mind Set on What You Need. Good consulting firms have seen what works and what doesn't.  If you aren't open to the direction they are equipped to give you, because you assume you already know what compensation solution you need, then you'll experience conflict and frustration--and resent what you're paying for the help.  For example, we'll often get a call from someone who says they want help setting up a stock plan or a profit pool (as examples)--and they want to know what we'll charge to help them construct it. This is a akin to calling a doctor and asking what he would charge to perform gall bladder surgery because you've decided that's what you need. In either case (doctor or comp consultant), any professional firm worth what it charges doesn't see itself creating much value for an organization that thinks it already knows what it needs. If you have self-diagnosed, you probably should do the rest on your own as well.

The reality is that most organizations probably need a compensation consultant but many just aren't either ready or open to one yet.  Hopefully the factors summarized above will help you determine whether the timing is right for you or not.  Given the amount of money invested in compensation every year by most growing companies, it usually makes sense to spend a fraction of that payroll on advice that can help you maximize your return on that investment--if you're open to the guidance a pay consultant is prepared to offer. 

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