Let’s be honest, if you had to give your pay strategy a grade, you wouldn’t know where to start—right? I’m not trying to be offensive or presumptuous. I’m just making an educated guess based on my interaction with dozens of business leaders over the years about their employee value propositions. Some feel they have set their salary levels properly but don’t like their bonus plan. Others haven’t yet figured out what balance they should have between short and long-term incentives (assuming they even have either). You get the idea. Company leaders don’t really know how to “score” the effectiveness of their compensation plans…and may not think it actually matters anyway.
Well, it matters. If you’ve read more than one of my blog posts, then you know “old school” thinking about compensation is no longer viable. Your employee value proposition is a critical factor in determining who you will be able to hire in today’s labor market—where highly skilled talent is scarce and the competition to attract them is fierce.
With that truth in mind, let’s consider a way to measure whether or not your pay strategy is running on all cylinders…or running on empty.
Following are eight categories that every business leaders should evaluate both independently and as a whole to determine whether they have built a complete and compelling offer. Under each category, I have listed four tiers of statements, each of which is a potential descriptor of your company’s approach in that area of pay strategy development. Read through all of them before deciding which fits your organization.
If the response in Tier 1 best describes where you are right now in that category, then give yourself a score between 1 and 3 (depending on how far up in that tier you feel you are). For example, if you feel you are a little more advanced than what is described there, but you’re not yet to Tier 2, then give yourself a 3. Conversely, if this is something you haven’t addressed at all yet, then give yourself a 1. If Tier 2 is a better description, give yourself a score between 4 and 6. For Tier 3, a score between 7 and 9. And for Tier 4, score yourself between 10 and 12. Get the idea?
If you are following this scoring system correctly, you would conclude that a perfect “score” for the entire assessment (the sum of all eight categories) would be 96 (8 categories times a maximum of 12 points per category). No one gets a 96, by the way. It just doesn’t happen. So you over achievers shouldn’t be discouraged if you come in south of that number. (If your scores add up to more than 96…well, you didn’t understand the system and you should go back and read the instructions again.) Okay, are you ready? Go ahead and start.
Tier 1: You have not established a compensation philosophy for your organization.
Tier 2: Your compensation philosophy is to treat every employee uniquely and to maintain high flexibility in your pay decision-making.
Tier 3: You have a clear sense of why and how you pay compensation but have not formally shared it with your employees.
Tier 4: You have a written comp philosophy statement that is shared with all employees and potential new hires.
Tier 1: Your employees are made eligible for different compensation programs based on subjective criteria.
Tier 2: You have a loose hierarchy for determining who participates in which pay programs.
Tier 3: Your HR team slots all positions within a pay category that defines compensation levels and eligibility for all pay and benefit programs.
Tier 4: Your pay structure is a crucial tool for evaluating all pay decisions and helping you measure the return on your compensation investment.
Tier 1: Your salaries are negotiated and settled on a person-by-person basis.
Tier 2: You establish salaries for new hires based generally on the market pay data for the closest matching position within the company.
Tier 3: You seek and obtain the best market data you can find to set mid-points and ranges for salaries.
Tier 4: While market data is helpful, you seek to individualize salary levels based on individual value creation.
Tier 1: You offer no annual bonus plan or you make subjective end-of-year payments.
Tier 2: You provide a basic profit sharing program that allocates a percentage of profits at the end of the year.
Tier 3: You have a detailed short-term plan that incorporates company, department, and (possibly) individual performance metrics.
Tier 4: You employ a company-results focused, no-cap, profits-driven annual value sharing program for all full-time employees.
Tier 1: You do not have a long-term incentive plan (stock, phantom stock, SARs, etc.)
Tier 2: You have a long-term plan that is out-of-date.
Tier 3: You provide a long-term plan that offers limited or indeterminable value for selected employees.
Tier 4: You offer a clear and meaningful long-term incentive program for at least your key employees.
Tier 1: You don't emphasize benefit programs. You offer no, minimal, or basic coverage and opportunities.
Tier 2: Some of your plans are at or above market while others lag behind.
Tier 3: You offer a solid program that treats all employees equally. There is no supplemental or carved-out coverage for the executives.
Tier 4: You have a comprehensive program that thoroughly closes all gaps for executive team members.
Tier 1: You do not measure or evaluate your total financial commitment to compensation and benefits.
Tier 2: You calculate the size of your total rewards budget but do not have a means of determining the return on that investment.
Tier 3: You conduct periodic reviews of the financial viability of different elements of pay and benefits.
Tier 4: You regularly review the key metrics that calculate the return on your total rewards investment and monitor improvement over time.
Tier 1: You communicate compensation and benefits information only during one-on-one employee discussions.
Tier 2: You periodically communicate the full and potential value of rewards programs in group meetings.
Tier 3: You provide end-of-year statements to employees illustrating the value of their current total rewards program.
Tier 4: You regularly communicate both the current and future value of each employee's rewards opportunity.
If you score 10 or more in any category, you are in excellent shape in that area. If you are between 7 and 9, you’re in pretty good shape but improvement is needed if you want to become truly competitive. If you score yourself between 4 and 6 in any area, then this should be a priority focus for you. Serious improvement is needed. And finally, if you have slotted a number between 1 and 3 for a given category, stop everything, sound the alarm and go into panic mode. You need to address this area right now!
A similar thought process can be applied to your total score although that analysis forces you to go back and look at the grade you gave to each category.
Whether you use this scoring system or something else, evaluating how your value offering to employees stacks up is critical. You cannot improve what you do not measure. And if you are not continually improving in today’s business environment, then you are declining. There is no such thing as standing still any more.
If you would like to discuss your score, email me at kgibson@vladvisors.com.