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CEO Best Practice: Compensation

Executive Tools

  • Executive Summary
  • Self Assessment Checklist

Expert Practices Articles

  • The Changing World of Compensation
  • Compensation Strategy
  • Compensation Plan Design
  • Implementing the Plan
  • Incentive Plans
  • Incentive Plan Design Issues
  • Implementing Incentive Plans
  • Incentive Plan Success Factors: What Vistage Members Say
  • Establishing Market Base Pay
  • Getting Employee Buy-In
  • Non-Cash Rewards

Tools & Analysis

  • Are You Ready for an Incentive Plan?
  • CEO Incentive Questionnaire
  • Pay Philosophy Checklist

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The Changing World of Compensation

In today's business environment, attracting, retaining and motivating the kind of people who can sustain a fast-growing organization requires most companies to think differently about how they pay their employees. According to TEC speaker and compensation expert Catherine Meek, five "catalysts" are reshaping the entire field of compensation:

  1. Changing business world. In a world dominated by new technology, the Internet, and an increasingly diverse workforce, outdated compensation programs become an anchor rather than a support for the organization.
  2. Changing workforce contract. Today's workers are loyal to themselves first and the company second. Such a workforce requires a very different kind of compensation.
  3. Organizational values and culture. Too many companies have little or no connection between their stated values and what the compensation plan rewards. Matching organizational values to performance requires a new approach to compensation.
  4. How work gets done. The way companies get work done has undergone a dramatic revolution. You can't reward cross-functional teams with a compensation plan built around a top-down, command-and-control structure.
  5. Lack of results. Traditional programs don't reward employees for cutting costs or increasing profits, two essential elements for survival in today's world.

The new compensation model incorporates a number of fundamental principles, including:

  • A "total" compensation mindset
  • Linking compensation to corporate strategy

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Compensation Strategy

Before designing and implementing a compensation plan, you must first develop a clear and compelling strategy. Meek, Fleisher, and TEC speaker Karen Jorgensen have identified the following "expert practices" in this critical area:

  1. Define your compensation philosophy. A focused compensation philosophy answers fundamental questions such as: What do you want to pay for? How do you want to pay for it? What is your competitive posture? How will you split up the pie?
  2. Link compensation to your overall business strategy. This involves 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.

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Compensation Plan Design

Once you have all the elements of strategy in place, you can begin to build the actual compensation plan. Although compensation plans come in a variety of shapes and sizes and have widely different goals, our experts agree that certain fundamental principles should lay the foundation for every plan design.

1. Get alignment. To succeed over the long-term, says Fleisher, all compensation plans must meet the needs of three critical entities:

  • Customers (as measured by the increase in sales)
  • The company (as measured by profitability)
  • Employees (as measured by who gets rewarded for taking care of the first two)

2. Know the difference between satisfiers and motivators. Satisfiers (base pay, benefits, etc.) allow you to attract and retain people but they don't motivate performance. Motivators (pay for performance incentives, empowerment, job opportunities, etc.) motivate people to improve performance. The best compensation plans use both appropriately.

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Implementing the Plan

If you have done your work properly in the strategy and design phases, say our experts, implementation should naturally follow. However, the following practices can smooth the implementation process.

  • Communicate constantly.
  • Make sure the plan creates alignment with customers, the company and employees.
  • Use measurement information to keep people focused on the plan.
  • Consider a bridge program.
  • Separate base pay from incentive pay.

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Incentive Plans

Incentive plans, particularly those that share profits with employees, have a number of benefits. According to our experts, these include:

  • Unlocking hidden employee creativity
  • Fostering alignment and greater employee commitment to organizational success
  • Reducing turnover of good performers and increasing peer pressure on poor performers
  • Increasing profits and improving morale
  • Providing strategic and economic advantages over competitors
  • Providing recruiting advantages in the marketplace

Despite these benefits, says Fleisher, incentive programs are not the sole determinant of successful change. To improve performance, change the culture and then use incentive compensation to support the new culture.

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Incentive Plan Design Issues

An effective incentive plan should be customized to the unique needs of your company. Before rolling out the plan, Jorgensen recommends considering the following issues:

  • How do you measure the goal?
  • Who participates in the plan?
  • How will the payout be determined?
  • How often does the plan pay out?
  • What are the threshold numbers?
  • How do you define salary?

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Implementing Incentive Plans

Incentive plans have a wide variety of names: gainsharing, profit sharing, incentive pay, pay for results and more. Regardless of what you call them, say our experts, they all include three fundamental elements:

  1. Vision. A clear vision helps to define what you want to accomplish, which sets the parameters for the plan design and the elements within the plan.
  2. Objectivity. Successful incentive plans totally eliminate any possibility of subjectivity on the part of management or uncertainty on the part of employees.
  3. Simplicity. Make sure every employee understands the goals, how they contribute to achieving those goals and how they will get rewarded when they do.

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Establishing Market Base Pay

Establishing fair and equitable base salaries lays the cornerstone for any variable pay compensation plan. Jorgensen recommends a six-step process for establishing market base pay:

  1. Develop a pay philosophy. Research your company's past pay practices and identify how you intend to pay employees to reflect current market rates.
  2. Establish a compensation committee. The committee develops and administers the pay process, acts as champion of the compensation system and develops pay policies.
  3. Conduct a market survey. The compensation committee conducts market surveys within the industry and for comparable jobs outside the industry.
  4. Evaluate the survey data. The committee then compares its findings against internal salaries. In some cases, it establishes job grades and ranges to provide a framework for assessing individual pay levels.

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Getting Employee Buy-In

Fleisher recommends daily meetings to educate employees about the plan, provide reinforcement and improve performance. These meetings operate best under the following ground rules:

  • Meet in groups of four to six employees.
  • Each group is led by a department head or designated team leader.
  • Every employee participates every day. No exceptions.
  • Meetings never last more than 15 minutes. Any unfinished business gets carried over to the next day.

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Incentive Plan Success Factors: What TEC Members Say

A survey by Meek's firm, Meek & Associates, asked 312 TEC member companies about their use of incentives and bonuses. The four most successful incentive plan practices, as reported by these TEC members, were:

  1. Linking incentives to the company's business results
  2. Tying the plan to performance (quantitative and qualitative)
  3. Communicating as much and as frequently as possible
  4. Involving employees in the process

The four biggest mistakes in incentive plan design and implementation were:

  1. Insufficient communication and feedback
  2. Lack of alignment with the business strategy and objectives
  3. Using discretionary measures
  4. Setting unrealistic goals

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Non-Cash Rewards

Increasingly, companies are including non-cash rewards and recognition as one important element of their overall compensation program. These plans tend to be simpler in design and execution than cash-based plans. Nevertheless, says Jorgensen, companies should consider certain essential principles before putting a non-cash reward plan into action.

  • Take care of the cash side first. In order for non-cash rewards to have an impact, employees must make enough money to meet their basic needs.
  • Find out what motivates your employees. Find out what your people like and offer a number of choices because not everyone wants or needs the same thing.
  • Combine recognition with reward. After an employee earns the reward, acknowledge them publicly.
  • Get employees involved. The best programs allow employees to recognize and reward each other.
  • Link the rewards to performance. Use non-cash rewards to drive the behaviors that will lead employees to accomplish your organizational goals. Set specific goals and targets, define the measurement criteria and promptly reward the performance.
  • Use non-cash rewards to measure hard-to-measure indicators. Non-cash compensation allows you to start rewarding employees in areas where you don't want to commit hard dollars because of the difficulty in quantifying the measures.

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Using Employee Focus Groups

Employee focus groups can help you determine the recognition and rewards that fit your organizational culture. Creating a compensation focus group, says Jorgensen, consists of three simple steps:

  1. Form the team. Gather 10 to 15 employees from various departments and management levels, making sure every level in the organization has at least one representative.
  2. Identify the purpose of the group. Make sure employees understand that the meeting is for information-gathering purposes only, that management will evaluate and make decisions at a later time.
  3. Gather the information. Ask employees the following questions:*
  • What reward systems in this company are working now? Why?
  • What reward systems in this company are not working and what would you like to see changed?
  • What would you like to see changed about the way we reward employees today?
  • If we could design a reward system that didn't cost too much, what gifts or other items do you think would be appropriate?
  • How do you think employees should be recognized in this company?

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