CEO success is completely dependent upon attracting and retaining great people and getting them to perform. Years ago, in his book, Good to Great, Jim Collins said it this way: “The executives who ignited the transformations from good to great did not first figure out where to drive the bus and then get people to take it there. No, they first got the right people on the bus (and the wrong people off the bus) and then figured out where to drive it.” (Good to Great, Jim Collins, Harper Collins Publishers, Inc. 2001, pgs. 41-42) The problem nowadays is that many business leaders are either not able to attract the right people to be on their bus or they are losing those people to competitors. So, why is this happening?
In fairness, there are a lot of reasons otherwise good chief executives are unable to attract and retain premier talent. But, certainly one of those reasons is that they stumble over pay strategy issues. Left unaddressed or resolved, these become a huge barrier to their ability to succeed at levels commensurate with their potential. They make “unforced errors” in their rewards approach that undermine their ability to get and keep the right people "on the bus."
So, let’s talk about the most common compensation-related mistakes that we (at VisionLink) observe in working with business leaders throughout the country.
The 3 Mistakes
The errors CEOs make in their approach to rewards usually fall into one of the following three categories:
1. No Pay Context. This simply means that the company’s leaders have not thought through the performance framework upon which compensation design will be based and within which pay decisions will be made. A company’s performance framework consists of three connected areas of focus: a business framework, a compensation framework and a talent framework.
In this first category, enterprise leaders must envision the future company, define its revenue engine and standards and then identify the roles needed to execute that strategy and business model. In thinking about roles, you should determine the specific skill sets that will be needed to drive the business model and strategy you have defined. Those skill sets inform the kinds of roles and expectations that will be associated with the outcomes you must achieve if the “future company” you have envisioned is to be realized. Expectations should be articulated in the form of outcome criteria which you will use to define what “success” means in the fulfillment of each role.
With the business framework in place, a compensation framework is easier to construct. Your company’s pay structure should help align roles and expectations (just identified) with the business vision, model and strategy. It does this by framing the financial partnership that will exist between ownership and the workforce. The development of your compensation approach should start by articulating your organization’s pay philosophy; a written statement that acts as a kind of compensation “constitution” for your business (see #2). You will then want to make sure any specific pay programs you introduce are consistent with that philosophy.
The final piece in your performance framework is talent. This area of focus has to do with identifying your key producers and defining where you have potential talent “gaps.” With both existing talent and that being recruited, your talent framework must include a plan for communicating role expectations and the rewards associated with their fulfillment.
2. No Pay Philosophy. This is the category that gets chief executives in trouble more than any other: They are unable to articulate why they pay people the way they do. As a result, every time an employee raises a compensation issue, the business leader is on the defensive and working from a position of weakness instead of strength.
A well thought-out, written pay philosophy articulates how the business defines value creation and what it believes about how and with whom it should be shared. It identifies where the company wants to be relative to market pay standards and what balance it wants to maintain between guaranteed and variable compensation. Further, it defines the company’s philosophy about rewarding short versus long-term performance. As it relates to the latter, the philosophy spells out how long-term results will be rewarded (profit pool, strategic deferred compensation, phantom stock, etc.) and what it believes about sharing equity with employees.
CEO success is more likely when a leader knows exactly who he wants on the bus and how he believes they should be paid for their performance. It puts him in the driver’s seat whenever approached by employees about pay issues.
3. No Pay Strategy. This is related to having a pay philosophy but is distinct. If you think about compensation as you would an investment portfolio, the relationship between a pay philosophy and a pay strategy becomes a little clearer. One of the first things professional investment advisers do when working with a new client is help them think through what their investment philosophy is. What is the goal of the portfolio and what is their tolerance for risk? Once those issues are spelled out, the adviser can begin selecting the asset classes and specific investments for the portfolio. The strategy for which ones will be chosen and how to balance those assets is informed by the investment philosophy.
It should be no different in a compensation “portfolio.” CEOs should know the purpose of each pay “asset class” in the mix and how it works with other rewards elements to achieve the ends the company is trying to fulfill. Too many business leaders make decisions about pay programs in isolation from each other and there is no overriding strategy that is informing those choices. Pay is a strategic issue. It requires leadership—chief executive leadership. It should not be delegated to human resources or the finance department (although both should play a role) and needs to continually examined to ensure it is fulfilling its role properly.
Ken is Senior Vice-President
of The VisionLink Advisory Group. He is a frequent speaker and author on rewards strategies and has advised companies for over 30 years regarding executive compensation and benefit issues.
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