5 Strategic Compensation Decisions Every CEO Must Make
And the workplace disaster that ensues if they don’t.
Pay can either be an asset or a liability. Stated another way, pay can either drive growth or hinder it — fuel performance or diminish it.
Is that placing too big a burden on compensation to produce results? I don’t think so. In fact, my experience and observation has been that most chief executives don’t set high enough expectations for their rewards programs. The evidence leading me to that conclusion? Business leaders don’t involve compensation in other strategic discussions. And that causes a problem.
Problem:
Because business executives don’t intertwine their compensation philosophy with strategy discussions, they establish little to no link between pay and the key success measures the company needs to reach.
Solution:
To change this outcome, a company must alter how it makes compensation decisions. And the CEO must take the lead in that process.
I suggest five key issues a business must successfully address if it wants to drive better results and increase the productivity and performance of its people:
1. How can we reinforce our business model through the way we pay our people?
Implied in this decision is a company’s ability to clearly articulate a business model and distinguish it from the business strategy.
Presumably, every business has a distinct business model — which means creating a distinct pay strategy. For example, Walmart and Four Seasons Hotels have very different business models, so their approach to pay would need to reflect that difference.
To parse this issue down further, here are the two essential questions that need to be addressed:
- What outcomes reinforce the core virtuous cycles of the company’s business model?
- What kind of pay strategies will best reinforce those outcomes?
2. What kind of rewards approach best reflects the partnership we want to have with our employees?
When building any type of rewards programs (short- or long-term), company leaders need to consider the kind of partnership their methods are communicating. For example, I prefer to approach rewards with the term value sharing rather than incentives because it conveys the relationship I want with my employees.
Incentives: implies that someone needs a carrot dangled in front of them to become motivated.
Value sharing: implies that all stakeholders deserve to participate in the value they help create.
It can be a tricky balance to strike because rewards programs must be self-financing (no dollars paid unless employees produce sufficient results) and yet meaningful to participants (employees want to see them achieved because the payout helps them fulfill their personal financial needs and goals) on the other.
3. What pay components will best foster a unified financial vision for growing the business?
This issue has to do with how employees will be paid as opposed to how much. Addressing this issue forces a company to develop a basic rewards philosophy:
- What other elements will compose employees’ total compensation?
- Where does the company want to be vis a vis market pay for salaries?
Companies need to consider which elements of pay will best foster an ownership mentality throughout the organization. When employees feel ownership for their outcomes, they’re empowered in decision-making and more instinctively act in the long-term interests of shareholders.
4. What structure do we need to maintain to ensure our compensation strategies produce the desired results?
Structure has to do with organization and process. A company needs a systematic means of assessing performance and productivity — and the ability to pivot in a different direction if necessary. The structure continues to keep strategy front and center with a constant eye on cost and productivity.
For most companies, this means there should be a compensation committee established with a regular meeting schedule (no less than twice a year) to review and make decisions about these issues.
5. How can we communicate our rewards strategy in a way that has the most favorable impact on the mindset of our employees?
If effective, a strategic approach to building rewards programs should result in more engaged employees.
Engagement does not come by simply rolling out a great compensation plan.
Engagement is built over time and reinforced by integrating the discussion about pay into the overall business strategy discussion, which all stake holders are exposed to. When those ongoing dialogues are intertwined, employees come to work each day and sense a clear connection between the following:
a) the vision of the company — where it’s headed
b) the business model and strategy — how the company’s vision will be fulfilled
c) the role and expectations of the employee within that model and strategy — defining their stewardship
d) how the employee will be rewarded if he or she meets the expectations — including the range of pay potential
Conclusion
Certainly, more could be added to this list of five issues. However, if a company attempts to address even one of the five summarized here, they will naturally be lead to the other four because of their interdependent nature.
Likewise, other core questions will emerge such as, What should be the balance between short- and long-term value sharing plans? and, What type of long-term rewards “incentive” should a company adopt (equity sharing, profit pool, phantom stock, stock appreciation rights, etc.)?
Most companies will need help answering all the questions that emerge, but it all starts with a foundational commitment to becoming more strategic in your approach to rewards development.
The promise is that if a company incorporates this list of five core decisions, they’ll begin to ensure that compensation becomes an asset rather than a liability in the organization.
Originally published at https://visionlink.co.
