by Gail Paul, CEO StrategiComp
In my work in compensation over the years, I have seen organizations succeed and fail in their efforts to design effective compensation plans. The direct compensation of employees is often the top expense, or certainly very near the top, so clearly it is important that the investment in employee pay produces the intended results! Fortunately, there are some keys to successful pay design that are not terribly difficult. However, these key steps do require some investment in time and effort by the leadership of an organization. And, with many competing priorities on leaders’ plates, some may need additional convincing in order to move these key steps up on their priority lists.
Consider this: according to a survey across 27 countries and nearly 3,000 employees by Karie Wilyerd, former Chief Learning Officer of Sun Microsystems in conjunction with Oxford economics, competitive base pay and bonus are the top two most valued aspects of the workplace, followed by merit based rewards and retirement plans. The study also found that high performing employees cared significantly more about both of these factors (base and bonus) than average or low performers. Since your high performers are generally 400 percent more productive than your average performers, paying people right should be a high priority. Appropriate pay design is also significantly correlated with lower turnover and higher levels of engagement.
A successful pay strategy should align with the business goals and talent needs of your organization. A successful strategy will also have a thoughtful communication approach which sets the appropriate expectation with your workforce, shows them how they can positively impact their compensation, and touts the total value proposition of working for your organization.
The following are the key steps to a successful pay strategy.
Step one: Review your current and near-future business strategy. Ask yourself what are the top 3 - 5 goals your business must meet in the next couple of years and what consistent behaviors will drive these outcomes? Do these behaviors require special talent or ability or are they fairly common in the workforce? Depending on your answer, you may have to pay more competitively relative to your industry or general market. Also, knowing and clarifying key success behaviors will help you formulate your performance expectations which is a key component of any merit or incentive pay plan.
Of course, in order to complete step one, you must first have your business strategy firmly in mind and be able to prioritize the “must-haves” from the “nice-to-haves.” They key here is focus. You and your leaders must have the discipline to focus on the critical business success elements in order to create a unified and focused vision for your talent needs, key behaviors, and outcomes.
Step two: Identify your current or desired workforce and divide it into categories or groups. For example:
Sales associates (outbound and inbound)
This is important because the key behaviors in step one above will apply differently to different groups of employees and because the next step is to determine appropriate pay types for each of these employee groups.
Step three: Using your identified employee groups, determine the appropriate pay types and pay mix for each group in terms of base pay, bonus, commission, and long-term incentives. Executives should have most of their pay “at-risk” or in the form of a combination of long and short-term incentives or bonuses. Sales employees should also have much of their pay at-risk, although their focus and reward cycles should be very near-term. While your lower-level staff can certainly have bonuses or incentives, the amounts should be fairly small.
Once you have “sketched-out” your general pay design, identify any pay component gaps you may currently have. Also, think about what your leaders need to deliver and whether they have appropriate pay leverage within their teams to align to their required outcomes.
Step four: Define by employee group where and with whom you compete with for talent. This will vary by group! The important point is to identify your competitive universe so that you can be prepared with as much data and information about what and how your competition pays. This will help you determine your competitive pay levels as well as potentially give you some good ideas for creative pay approaches.
How can you get pay data on your competition? The best and safest way is to participate in pay surveys or purchase them. Participation in pay surveys usually lowers the cost of them significantly. Or, purchase from any number of online services that give you data by industry, geography, job title or category, company size, etc. The reason this is “safe” is that you avoid exchanging compensation data directly with a competitor which can potentially lead to anti-trust wage-fixing concerns. Surveys provide you with relevant data that is aggregated for all participants and therefore avoids anti-trust issues. The other approach, if you have a very specific industry group that general surveys don’t sufficiently address, is to hire a third party to gather this data from a sufficient number of competitors and provide participants with custom industry-specific aggregated data.
Step five: Define where you need/want to compete relative to what your competitors pay, keeping in mind all of the employee benefits, culture, opportunities your company offers. This exercise relates to step one (behaviors and abilities you need in your talent) and where your company is in its business or growth cycle. Business start-ups have different talent level needs than mature companies, for example. Companies specializing in technology may have to pay a premium to lure programmers away from the Googles and Apples of the world.
During this step, consider your company culture. Companies that have a desirable culture that offers premium perks or benefits may be able to pay less than average or median wages. Also, don’t forget how much your company contributes to health plan premiums or retirement plans versus your competitors. This is an important indirect compensation aspect as well.
Step six: Document your desired pay philosophy and approach based on your progress in steps one through five. The main point is to create an effective communication that tells your employees why you pay the way you do. Your philosophy should address at a minimum:
- What types of employees you want to attract (how they behave, what environment they thrive in).
- What you have to offer them: compensation competitiveness, benefits, culture, opportunities to grow, etc.
- Where you compete for talent: industry, geography, company size. This is an important expectation exercise. Employees appreciate transparency. Additionally, transparency here can help you address those “I saw my job posted online and it pays $XX more than I make here” issues that may arise. When that comes up, and it will, you can ask questions like, “where is this job located?”, “what is the company size?”, “what is the industry?”, “how are their benefits and other opportunities?” Then you can reference your firm’s compensation philosophy and talk about the research your company does to ensure appropriate pay levels.
- Finally, your philosophy should address how employees can positively impact their pay: experience, skills, behaviors, outcomes, etc.
Step seven: Now that you have your pay philosophy/desired approach, and you have competitive data, you can identify where your current pay offerings are lacking or perhaps hyper-competitive. Now, you can formulate a plan to make any and all necessary adjustments. Be sure you document your efforts to enhance your compensation structure and design. This will become an important part of the change-management and communication strategy when you roll out changes.
Step seven can also include reviewing your incentive pay design and that plan’s associated metrics. Review whether these metrics align with your business strategy and encourage the success behaviors you identified in step one. Ask yourself whether the behaviors your plan is currently driving lead to the desired business outcomes. Are there any untended consequences? Are your metrics balanced or just focused on profit?
Your sales incentive plans should also be reviewed as part of this process. In order to ensure alignment with your business plan.
If your compensation needs significant change, think about what needs to be adjusted sooner than later and prioritize appropriately. Rapid and significant changes to employee compensation can create concern among the team. It is best to phase changes over an appropriate time frame.
Step eight: Communicate your pay philosophy (developed in step six) to your employees in an effective manner along with any/all compensation changes. If done well, your pay philosophy will frame the “why” of any pay changes you are making. Part of your communication should also include how employees can positively impact their pay in the future, i.e. experience, skill, promotion, high performance.
The importance of a good communication and change management strategy cannot be overemphasized. Even small, positive changes in compensation can throw people. Especially if it is unexpected and requires different behaviors (i.e. new measures for a bonus plan). Communicating your pay philosophy and approach is not a one-time exercise. Use pay events throughout the year (merit, bonus, etc.) to reinforce your company’s approach to pay.
Any incentive pay is meant to drive certain behaviors, so it is especially key to define those new behaviors and show the connection between desired outcomes and incentive pay. For these types of plans, it is important to communicate throughout the plan year how the company is doing relative to goal and how the employee is doing relative to his or her goals. An incentive payment that is a “surprise” is not an incentive.
About Gail Paul
Gail Paul is the CEO and owner of StrategiComp. She has over 25 years of experience as both consultant and practitioner in the areas of compensation, executive compensation and benefits. For more information about compensation, you can visit www.strategicomp.com.