By Vistage Editor
Welcome to the second article in Vistage’s guide to creating and implementing an effective benefits and compensation plan. In this article, we explore the importance of design. Read article one here; read article three here.
Okay: You’ve worked hard to create a comprehensive benefits and compenation plan strategy that’s relevant to your company. Now, you’re ready to start building the actual compensation plan.
While compensation plans come in a variety of shapes and sizes and have widely different goals, our Vistage Speakers and compensation experts — Karen Jorgensen, Ron Fleisher and Catherine Meek — agree that certain fundamental principles should lay the foundation for every plan design.
1. Get Alignment.
To succeed over the long term, a compensation plan must have alignment, which — according to Fleisher — requires meeting the needs of these three critical groups:
- Customers (as measured by the increase in sales, service, or whatever is of value to the customer)
- The company (as measured by profitability or other financial and operational measures)
- Employees (as measured by who gets rewarded for taking care of the first two and the resulting changes in behaviors)
“When a compensation plan takes care of all three constituencies, it creates alignment,” explains Fleisher. “But if even one is missing, design flaws will quickly surface to torpedo the plan. Keep in mind that what you design on the front end always determines what you get on the back end. If your plan doesn’t meet the needs of customers, employees and the company, you won’t get the intended results.”
2. Know the Difference Between Satisfiers and Motivators.
All plan design elements fall into one of two categories: satisfiers and motivators — and each serves a specific purpose within the plan.
Satisfiers include elements like base pay and benefits. They allow you to attract and retain people, but they don’t motivate performance. Motivators include things like pay-for-performance incentives, empowerment and job opportunities. They motivate people to improve performance.
“The best plans use the different compensation elements in an appropriate manner,” explains Meek. “For example, if you need to attract more talented people, your plan should include exceptional benefits — such as flexibility and a challenging work environment — because they act as a satisfier. In contrast, if you need dramatic productivity increases, your plan should contain a lot of incentives because they motivate people to change behavior. Either way, the key is to identify what you want to do before deciding where to put the dollars in your plan.”
3. Get Employees Involved.
So — your employees decide how much they get paid, right? Well, of course not. The point is, today’s total compensation packages requires a lot more than just cash — and when it comes to non-financial rewards, what motivates one employee may turn off another. By getting your employees involved, you can find out what motivates them specifically. You can also make them feel that they have a say in one of the most important aspects of their jobs.
Says Meek, “Again, this is where the satisfiers and motivators come in. If you need to develop a program to change behavior, you must find out what motivates your employees.
“Don’t assume you already know, because every employee group will have different wants and needs. Look at the demographics of your employees and get representatives from each group involved in providing input into the plan design. What motivates the owner or CEO will not necessarily motivate employees.”
You may also want to consider forming a compensation committee. “In addition to performing functions such as researching compensation issues (i.e., market pay, industry standards) and reviewing performance evaluations,” Jorgensen says, “a committee can also recommend policy to the CEO. This can help create a perception of fairness and objectivity in the minds of employees, thereby making it easier for them to accept the plan.”
4. Recognize the Difference Between Results and Effort.
Successful compensation plans pay for results. “On the results side, you have to distinguish between performance levels. Most compensation plans pay very little difference between average performance and outstanding performance. Effective plans have a very clear correlation between superior results and superior rewards.”
At the same time, you also need to recognize effort because no matter how hard employees work, sometimes they don’t achieve the results.
“Make it very clear that your philosophy is to pay for results,” insists Meek, “but don’t overlook effort. People can work hard and not make the goals, and you can’t ignore that, especially when factors beyond their control impact their performance. So pay for results, but build into the plan other ways to reward and recognize hard work.”
5. Define, Measure and Track Performance.
Most companies ignore or overlook this difficult step, especially when faced with trying to measure slippery concepts like customer satisfaction, teamwork, and other more qualitative measures.
But all three of our compensation experts agree — if you want to pay for performance, you must define performance in very specific, objective, quantifiable terms, measure it, and track it. Don’t change any compensation plan without having these critical performance measures in place.
6. Check Trust Levels.
Employee trust in management has hit an all-time low. When you announce a change in the compensation plan, the first reaction from employees will likely be fear and distrust.
“Before designing any compensation plan, check organizational trust levels,” cautions Fleisher. “If they’re low, bring them up before putting in a new plan. Otherwise, employee resistance will kill any chances of success.”
If you find trust levels unacceptably low, Fleisher recommends two specific actions:
- Frequent, accurate and strong communication. Studies show that when communication from the CEO is frequent, accurate and strong, trust goes up. Every time you implement any kind of change, communicate it in terms of three criteria: how it will affect the customer, how it will affect the company and how it will affect individual employees. “When people feel wired in to what is going on in the company,” explains Fleisher, “the trust level goes up because they don’t have to try to figure things out for themselves.”
- Under-promise and over-deliver. CEOs and senior management often set expectations without realizing it. When you create expectations that can’t be achieved, trust levels decline. Pay very close attention to what you do and say. Be especially careful about thinking out loud in front of employees, because they often mistake that as a promise from you.
“Compensation involves people’s livelihood. When you mess with it, they feel threatened,” says Fleisher. “So it makes sense to do a cultural evaluation to see where you stand with employees. I recommend using someone from outside the company because they always see things that you don’t. Plus, people will open up a lot more to an outsider than they will to you.”
7. Avoid Discretionary Measures.
According to Jorgensen, discretionary rewards represent the most common form of incentive pay. But although easy for management to implement, they carry many hidden dangers. When you pay rewards based on managerial discretion:
- You minimize the impact of the reward. Employees don’t know exactly what they did to get the reward, which decreases the chances of repeating the results.
- Employees often assume favoritism because they don’t understand the evaluation criteria used to make the bonus decisions.
- Hard feelings can arise when people receive unequal bonuses.
“Successful plan design improves employee performance,” says Jorgensen. “You get performance improvement by communicating clear goals and rewarding employees for achieving them, not by passing out bonuses on a whim.”
8. Constant Communication.
Communication sounds like an implementation issue, and it is. But it also falls under plan design, because if you don’t build in enough time, effort and resources for communication and education, your plan will go over like a lead balloon. The compensation plan overview, vision and philosophy must come from the top. It has to be consistent and ongoing, and it can’t take place too often.
“This piece involves more than merely communicating data and information,” says Meek. “What you’re really doing is educating employees and trying to make compensation exciting and motivational. Most compensation systems bore people to tears. That’s where the marketing, selling, communication and education come in. People don’t just suddenly wake up one morning and feel great about the compensation plan. You have to design a marketing campaign to sell employees on the benefits of your plan, and that requires a fair amount of advance planning.”
9. Frequent Reinforcement.
To change behavior over the long term, you must provide two essential ingredients: reinforcement and reward. Most compensation plans do a good job defining the rewards, but the intervals for reinforcement come too few and far between.
Fleisher recommends no less than monthly payouts for incentive programs, on the theory that “the closer you get the reward to the desired behavior, the more you will impact the behavior.”
Meek, however, cautions against automatically adopting monthly intervals, arguing that some companies can’t measure results on a monthly basis, and for others, a monthly payout would be so small it would act as a disincentive rather than an incentive. Her recommendation? Try to get the reward as close to the behavior as possible, but use good judgment when determining payout intervals.
Fleisher also recommends daily team meetings that involve every employee at all levels of the organization. Each team consists of four to six people and has a leader, usually at the supervisory or managerial level. The meetings, which last exactly 15 minutes, serve several important purposes:
- Track performance and provide feedback to employees.
- Constantly reinforce the new culture and desired behaviors.
- Provide a forum to exchange ideas to improve performance and help move the company toward its goals.
“You have to keep educating, communicating and reinforcing the principles every day,” says Fleisher. “Fifteen minutes gives you enough time to get the point across without wrecking anyone’s workday.
“Daily meetings may seem like overkill, but the results more than make up for the investment of time. Not only do you reinforce the principles of the compensation plan, but you keep employees focused on what they need to be doing to drive results and provide a forum for new ideas.”
Originally published: Aug 30, 2011