By Vistage Editor
Welcome to the first article in Vistage’s guide to creating and implementing an effective benefits and compensation plan. In this article, we explore the importance of strategy. Read article two here; read article three here.
Compensation experts agree: Before you even think about designing and implementing a compensation plan, you have to develop a clear and compelling strategy. And to get your strategy started, our compensation experts — Vistage Speakers Ron Fleisher, Catherine Meek and Karen Jorgensen — have outlined the following “expert practices” in this critical area.
1. Define Your Compensation Philosophy.
A sound benefits and compensation plan begins with a clear, focused compensation philosophy that defines and answers fundamental questions like this:
- What do we want to pay for?
- How do we want to pay for it?
- What is our competitive posture?
- How will we split up the pie?
“I recommend developing a total compensation mission statement,” advises Meek, “One that clearly specifies the results you want to accomplish, the behaviors necessary to achieve them, what you will pay people for, and how you intend to position your company in the marketplace.
“This lays the foundation for your entire compensation program. It serves as a compass and a beacon to guide you through the difficult task of creating and implementing the program.”
Who creates the total compensation mission statement? Depending on the size of the company and the management structure, any or all of the following: the board of directors, board of advisors, CEO, top management team, and/or representatives from other leaders in the organization.
According to Jorgensen, your pay philosophy should:
- Reflect the values and beliefs of the owner / CEO / management team.
- Reflect the economic realities of your pricing structure and market share.
- Take into account “softer” issues such as corporate culture, industry standards, and your growth strategy.
- Provide a foundation from which to make consistent hiring and promotion decisions.
2. Link Compensation to Your Overall Business Strategy.
Most CEOs know where they want their company to go, and how they want to get there. Think of compensation, then, as a tool to get employees to move in the same direction.
For example, suppose a young, growing company wants to ramp up its market share. Its compensation plan should then reward people who bring in new customers and clients. In contrast, a more mature company might need a better balance between growth and profit. Accordingly, its compensation plan should equally reward activities that generate growth and profit. Another company might identify world-class customer service as one of its top strategic objectives. That company would need to reward the activities (in all areas of the organization, not just the customer service department) that lead to outstanding customer service.
“If compensation doesn’t have a direct connection to corporate goals and objectives, employees will take any direction, because they don’t know which one to take,” says Meek.
“Compensation strategy starts with identifying your top strategic objectives, defining what they mean in terms of organizational behavior and designing your compensation plan in a way that rewards and recognizes those behaviors. The rewards don’t have to be cash — they can be non-cash awards, too. Many employees today place a high value on work-life balance, so awards such as paid time off can be more motivational than cash.”
3. Change the Culture — and Reinforce it With Compensation.
According to Fleisher, compensation alone won’t generate the results you want. To get permanent behavior change, you must first change the culture and the environment. Then, use compensation to reinforce those changes.
“If all you do is dangle money in front of people, you get short-term blips in behavior and then people go right back to the old ways of doing things,” Fleisher explains. “You don’t get sustained productivity improvements unless you change the culture. That involves identifying the results you want to achieve as an organization, identifying the behaviors that lead to those results, and then designing a compensation program to reinforce and reward those behaviors so they become permanently instilled in the organization.”
Meek agrees. “Compensation provides a very effective tool to reinforce organizational values. Too often, CEOs talk about values but then don’t walk their talk. For example, many companies say they value teamwork but continue to reward individual performance. Or they talk about customer service but reward only financial performance. Compensation sends powerful messages to your employees about who you are as an organization, what you value and what skills and results you reward. If you want to instill certain values in the organizational culture, reward them through your compensation program.”
4. Reward the Behaviors That Drive Results.
You want to reward the kind of behavior that drives results, right? Well, to do that, you need to know what creates value in your company in the first place.
According to Fleisher, value gets created in two ways. First, as an organization you must do the things your customers want, need and desire. This represents the qualitative side of the business. Second, everyone in the company has to help the company do those things in a profitable manner. This represents the quantitative side of the business. Without both, a company won’t survive very long.
To get the customer’s perspective on value, suggests Fleisher, call your top 20 customers and ask two questions:
- What are we doing now that is creating value for you and makes you feel good about doing business with us?
- What can we do to earn more of your business?
“Asking these questions will generate some amazing feedback,” states Fleisher. “It will definitely change your thinking, not just in the compensation arena but in almost every area of your business.”
Next, look internally to see who is creating value on the financial side. Every employee must do one of two things (or both): create or support sales (revenue side) or keep expenses to a minimum (expense side). If you find that people aren’t doing either one, you have to question whether or not their function should continue to exist.
“Between the quantitative and qualitative pieces, you can start to figure out where value really gets created in your company,” explains Fleisher. “Then you can design a compensation plan that will get the results you want, because you have identified the specific behaviors that directly lead to those results.”
5. Think Total Compensation
In today’s fiercely competitive labor markets, compensation provides a powerful tool for attracting and retaining quality people. Yet, most employees think of compensation as base pay plus the occasional bonus. They forget — or never get told — that anywhere from 30 to 50 percent of their total compensation comes from other areas, including:
- 401k or profit sharing
- Retirement and pension plans
- Stock or equity
- Incentives and bonuses
- Recognition and rewards
- Vacation and personal time off
- Opportunity income (tuition reimbursement, professional development programs, etc.)
Our compensation experts agree that if you don’t think, talk, market and sell total compensation, you’re leaving a lot of money on the table.
“Talk about compensation frequently,” advises Jorgensen. “Impress upon employees that it includes a lot more than base pay. When comparing compensation for potential employees, always use total compensation because base pay never tells the whole story.”
Meek recommends providing employees with an annual “total compensation statement” that lists the complete package of rewards and recognition they receive for working in your organization.
“A total compensation statement surprises employees because the bottom line number always exceeds what they normally think of as their compensation,” notes Meek. “You can’t afford to lose employees who might get lured away by promises of a bigger base pay. Make sure all your people understand and appreciate the full range of compensation and benefits they enjoy in your company.”
Fleisher concurs. “Don’t just stick the compensation statement in the paycheck. Instead, sit down with each employee and say, ‘I want to show you the full extent of our commitment to you.’ (Don’t say, ‘Here’s what you cost us,’ because that insults the employee.) Thank them for doing a good job and go over all the costs, answering any questions they may have.
“This little meeting will get you two weeks’ mileage, and then employees will forget about it. The real value comes when competitors try to steal your people. They may offer more dollars above the line but not as much below the line. Once your employees become aware of all that you pay them, they start to ask the right questions when other employers come courting.”
6. Measure Your Return on Invested Payroll Dollars.
How do you know whether you’re getting a good return on your invested compensation dollars? The answer is simple — measure it. Yet, far too many companies either ignore or overlook this critical practice.
“Most companies don’t even measure their return on compensation dollars, much less determine whether it’s a good one or not,” says Meek. “To measure your compensation ROI, decide up front what you want to look at — productivity, bottom-line results, employee turnover, ability to hire and retain key people, morale, customer service, or any number of measures. Identify the measures that come from your overall business strategy, then define and track them to see whether the return on your compensation dollars matches up to your expectations.”
Originally published: Aug 29, 2011