5 Strategic Compensation Decisions Every CEO Must Make

Pay can either be an asset or a liability to a company. Stated another way, it can either drive growth or hinder it-- fuel performance or diminish it. Is that placing too big a burden on compensation to produce results? I don't think so. In fact, my experience and observation has been that most chief executives don't set high enough expectations for their rewards programs. The evidence is they don't involve compensation in other strategic discussions. The result is there is little to no link established between pay and the key success measures the company needs to reach.

To change this outcome a company must alter how it makes compensation decisions.  And the CEO must take the lead in that process.  Here I would like to suggest five of the key issues a business must include and successfully address in its decision making process if it wants to drive better results in the execution, productivity and performance of its people. Here are the five presented in the form of questions to be answered:

1. How can we reinforce our business model through the way we pay our people? Implied in this decision is a company's ability to clearly articulate its business model and distinguish it from it's business strategy. (For more information on this distinction, view our recent webinar entitled: Compensation Strategy and Business Strategy, An Interdependent Relationship.) Walmart and Four Seasons Hotels have very different business models, so their approach to pay would need to reflect that difference. Presumably, your business will be equally distinct. So in this category two essential issues need to be addressed: A)What outcomes reinforce the core virtuous cycles of your business model? B)What kind of pay strategies will best reinforce those outcomes?
2. What kind of value-sharing approach best reflects the kind of partnership we want to have with our employees? I prefer the term value sharing to incentives because the latter implies that someone needs a carrot to become motivated. Value sharing, on the other hand, implies all stakeholders deserve to participate in the value they help create. Company leaders must think in these terms as they approach the building of short and long-term rewards programs. Such programs must be self-financing (no dollars paid unless results are produced at a sufficiently high level) on the one hand and yet meaningful to participants (employees want to see them achieved because the payout helps them fulfill their personal financial needs and goals) on the other.
3. What pay components will best foster a unified financial vision for growing the business? This issue has to do with how employees will be paid as opposed to how much. Addressing this issue forces a company to develop a basic rewards philosophy. Where do you want to be vis a vis market pay for salaries? How about for total compensation? It asks a company to think about the elements of pay that will best foster an ownership mentality throughout the organization, so employees are empowered in their decision making and more instinctively act in the long-term interests of shareholders and all other stake holders.
4. What structure do we need to maintain to ensure our compensation strategies produce the desired results? Structure has to do with organization and process. A company needs to have a systematic means of assessing performance and productivity and then "pivoting" in a different direction if necessary. The structure continues to keep strategy front and center with a constant eye on cost and productivity. For most companies, this means there should be a compensation committee established with a regular meeting schedule (no less than twice a year) to review and make decisions about these issues.
5. How can we communicate our rewards strategies in a way that has the most favorable impact on the mindset of our employees? If effective, a strategic approach to building rewards programs should result in more engaged employees. This does not come by simply rolling out a great compensation plan. Engagement is built over time through a reinforcement process that integrates the discussion about pay into an overall strategy and business plan review to which all stake holders are exposed. As employees come to work each day, there should be a clear connection in their minds between the following: A) The vision of the company--where it's headed; B) The business model and strategy of the company--how it's vision will be fulfilled; C) The role and expectations of the employee within that model and strategy--defining the stewardship, and; D) How the employee will be rewarded if he or she meets the expectations--including the range of pay potential.

Certainly, more could be added to that list. However, if a company attempts to address even one of the five decisions summarized here they will naturally be lead to the other four. You will see that they are really interdependent in nature. Likewise, other core decisions will emerge such has what balance should there be between short and long-term value sharing plans, and what type of long-term rewards "incentive" should a company adopt (equity sharing, profit pool, phantom stock, stock appreciation rights, etc.)? Most will need help answering all of the questions that will emerge, but it must start with a foundational commitment to becoming more strategic in your approach to rewards development.

The promise is that, if incorporated, this list of five core decisions will help ensure that compensation will become an asset rather than a liability in your organization.