The Overture Group is an executive search firm with an additional specialty in compensation consulting. We recently heard a presentation by Bob Lindeman and Mark Reilly, both managing directors of that firm. They reminded us that compensation is (or should be) a strategic issue, not a simple, tactical, what-are-we-gonna-pay-this-person issue. And our strategy should consider not only the outcomes we hope to achieve, but also the compensation methods we intend to use. That is, do we want pay a straight salary or do we want to use some combination of salary plus incentive (pay for performance)? If we want to use incentives of some kind, should they be short-term or long-term incentives, or both? We also need to consider what portion of our total compensation package should be salary and what portion should be incentive. So there’s a lot to think about. For more on this, please continue reading below.
“Compensation is an equity issue. People want to know that they are being compensated fairly compared to others doing similar work within the company, and to others doing similar work in other companies. After that it’s a non-issue.” ~ Richard Teerlink, former CEO, Harley-Davidson
Mr. Teerlink is right as far as it goes . . . nothing ticks off an employee as much as learning that someone else is being paid more for the same work. When pay practices pass the fairness test, that may make compensation a “non-issue” as far as employees are concerned, but not for managers. As long as managers are pursuing, reviewing, amending and/or changing compensation strategies, compensation will continue to be an active issue for them.
Using compensation strategy as a starting point, let’s look at a few such strategies and the outcome each may be aimed at achieving.
- If you are intent on attracting the best talent available . . . particularly if the market for key positions you need to fill is highly competitive . . . you may choose to pay a premium over the going rate for those positions. On the other hand, if there is a glut in the market for the sort of people you need, you could actually consider a compensation package that is at or below the market rate.
- Companies often use long-term incentives to retain their key people. These programs, sometimes called “golden handcuffs,” set aside a pool of bonus money that require a participant to stay with the company for a prescribed length of time. If the participant bolts early, the bonus is forfeit.
- Better payroll control. Sales commissions have always been based on the idea that you only get paid a commission on what you sell. It doesn’t matter how long or how hard you worked. No sale, no commission. When a similar incentive structure is applied to administrative and operational roles, participants are paid the incentive amounts only when certain specified goals are met. In this way, payroll becomes more flexible in that it ebbs and flows as the participants achieve (or fail to achieve) the key goals that will move the company forward.
- Improved communication. As they say, “Follow the money.” A well-conceived incentive program shows the participants, in a clear, unambiguous way, where the company priorities are, where the company is trying to go, and the role he or she must play to help the company get there.
- Not in the equal-pay-for-equal-work way Richard Teerlink referred to. Here we’re talking about an incentive system that rewards, not just the CEO, but all the key players who helped achieve the company’s goals.
As you consider the compensation strategies and outcomes that would be most appropriate for your business, consider these do’s and don’ts:
- Do keep it simple. If participants have to go to an Excel spreadsheet to figure out what the plan can do for them, forget it. That will be a non-starter.
- Don’t try to make an omnibus comp plan. It’s tempting to try to build in provisions aimed at governing all behaviors and all activities of the plan participants, but don’t do it. That will only add a layer of complexity that will be unhelpful and will violate the bullet point above. A lot of that stuff you’re just going to have to manage the old-fashioned way.
- Do make goals that are tied to compensation as specific as possible. Sometimes tough to do when the goal is qualitative rather than quantitative, but it can be done. It will be very detrimental to your plan if there are misunderstandings and disagreements about whether or not a goal was accomplished.
- Don’t confuse a discretionary bonus program with an incentive program. It’s nice to hand out $500 checks because the company had a good year and you want to share the wealth, but there was no “incentive” involved. And there’s a dark side to discretionary bonuses. They can get to be entitlements. People will begin to expect bonus checks at the end of the year regardless of the company’s performance.
- Do put an expiration date on all comp plans . . . annually often works best. Even the most carefully crafted plan can have unintended consequences, sometimes bad for the company, sometimes bad for the employee. Or maybe the company’s priorities have changed requiring a different compensation strategy. In any case, there needs to be a specific point in time when the plan can be reviewed and, if necessary, changed.
Our purpose here is two-fold:
- To convince you that compensation is an enormous and complex topic with lots of moving parts. This blog doesn’t even begin to scratch the surface. If you doubt your internal resources to deal with it effectively, seek outside help. Messing around with people’s pay will get you in a lot of trouble if you don’t handle it properly.
- To convince you that compensation planning is a strategic issue and merits the time and attention you would devote to any other strategic issue. That means you should be looking for specific goals with specific outcomes, and compensation negotiations should be guided by that strategy.