By Vistage Editor
Like it or not, the world is changing, and in order to remain competitive, your compensation program must change with it.
But just updating the way you pay employees probably won’t be enough. In today’s frenzied marketplace, attracting, retaining and motivating the kind of people who can sustain a fast-growing organization may require a complete overhaul in the way you think about compensation.
“When it comes to compensation,” says Vistage Speaker and compensation expert Catherine Meek, “the vast majority of corporations still cling desperately to the past.
“Far too many companies base their compensation programs on models that were developed in the 1930s or 1940s. Bringing your company’s compensation program into the 21st century requires both an understanding of the forces driving the change and a willingness to embrace new ways of thinking.”
Catalysts for Change
According to Meek, five “catalysts” are blowing the winds of change through the field of compensation:
- Changing Business World. The global economy. New technology. Downsizing. Empowerment. Flexible work forces. Labor and skill shortages. These trends have shaken the business world to its very roots. To survive and thrive in today’s turbulent markets, companies must have the ability to change directions on a dime. In such a world, outdated compensation programs shortchange your ability to get maximum effectiveness from your human resources.
- Changing Workforce Contract. The old (and unspoken) employment contract said, “Work hard, demonstrate loyalty and the company will take care of you.” Constant downsizing in companies of all sizes and industries has shattered that contract beyond repair. The loyalty of today’s work force is to their profession and to a balanced life first, and that requires a very different kind of compensation.
- Organizational Values and Culture. Too many companies have little or no connection between their stated values and what the compensation plan rewards. For example, they espouse the virtues of teamwork but continue to reward individual performance. This kind of disconnect always leads to sub-par organizational performance. “Employees aren’t stupid,” says Meek. “They know what you reward — regardless of what you say you reward — and shift their behavior accordingly. Matching organizational values to performance requires a new approach to compensation, one that is far more strategic in nature than most firms currently employ.”
- How Work Gets Done. In the old vertical organization model, management told employees what to do, when to do it and how much to do. As a result, compensation was vertical, stable and very functional. Today, companies have eliminated most middle layers of management. Increasingly, people work in functional and cross-functional teams. You can’t reward cross-functional teams with a compensation plan built around a top-down, command-and-control structure.
- Lack of Results. Companies want their compensation programs to help increase productivity and reduce costs. But traditional programs don’t reward employees for cutting costs or increasing profits. In fact, in many cases, it is hard to know exactly what the compensation program does pay for. This creates a real conflict between organizational and employee needs. When employees see no personal gain for working smarter or harder, they have no motivation to improve.
The New Paradigm
Vistage Speaker and compensation expert Karen Jorgensen, president of the human resources consulting firm of Jorgensen & Associates, draws very clear lines between traditional compensation models and what should be the new model.
“The old compensation model rested upon outdated notions such as pay for time, stability, permanent employees, employer paternalism and employee entitlement,” she explains. “Today’s compensation reflects a new contract between employers and employees. It takes into account elements such as pay for results, change and uncertainty, a nontraditional work force and employees taking responsibility for their own careers.”
Meek agrees. “Too many employers view compensation as a ‘hygiene factor,’ something they have to do to keep people. They fail to consider how compensation can — and does– impact the bottom line. Like it or not, compensation has become a strategic activity that impacts the organization at all levels.”
According to Meek, the new compensation model has to incorporate a number of fundamental principles, including:
- Total compensation;
- Linking compensation to corporate strategy;
- Pay for performance: recognizing and rewarding superior performance;
- Tailoring to culture and values;
- Generating a cost-effective return on invested payroll dollars;
- Compensation as a competitive weapon;
- Focus on the customer (internal and external); and
- Being open, well-communicated and understood by employees at all levels.
Of these, suggests Vistage Speaker and compensation expert Ron Fleisher, president of Creative Bottomline Solutions, the most dramatic change — from both the employer’s and employee’s perspective — is the shift to pay for performance.
“The old compensation models paid for time,” says Fleisher, “and when you pay for time, that’s what you get.
“Today’s compensation models pay for performance, productivity and results. They create a behavioral model that dictates how people will perform. They reduce the need for supervision and encourage creativity and initiative. And, more importantly from the company’s standpoint, rather than automatically increasing fixed expenses, new compensation models focus on reinforcing company profitability or other key performance measures.”
Originally published: Sep 1, 2011