An interesting phenomenon is emerging in the labor market recently. According to the Bureau of Labor Statistics, job openings remain at record highs and new unemployment claims are at record lows (meaning relatively speaking, few people are being fired). So why aren’t the open positions being filled? Are employers just not finding suitable talent? While that could certainly be one issue, it doesn’t fully explain the weak hiring levels businesses are experiencing.
Employers could be starting to run out of workers they can hire on their own terms, at the wages they want to pay, and with the skill levels they require. Employers are failing to adjust to the changing environment. The economy has added payroll jobs for a record 80 straight months. But employers don’t seem to be willing or able to do what is necessary to get people to change jobs, or to get off the sidelines: pay more and offer training.
Gross’s observation makes sense in the context of the age of the empowered employee. A report cited in Deloitte Review drew this conclusion:
After decades of corporate discourse about the war for talent, it appears that the battle is over, and talent has won. Employees today have increased bargaining power, the job market is highly transparent and attracting top-skilled workers is a highly competitive activity.
This kind of data should lead you to ask serious questions about your company’s employee value proposition. Chief among those questions might be this: If your current value proposition were offered to the premier talent you’re trying to attract and retain, would it be accepted or turned down—or do you even know? The evidence would seem to suggest that most pay offerings are being rejected—and employers can’t figured out why.
The 21st Century Value Proposition
By the time you discover your pay strategy is inadequate, it’s too late. You lose a key player or fail to secure a top recruit because your value proposition just doesn’t “wow” him or her. The studies just referenced reinforce that a pay strategy cannot be an afterthought. It has to be approached strategically and comprehensively or you will fail in attracting, developing and retaining premier talent. But how do you do that? What does a complete pay program look like in the 21st century?
The word I would use to describe the compensation approach of most companies our firm encounters is—“incomplete.” If they are a successful business, they have inevitably done some good things but they just haven’t gone far enough in their pay offering.
So what does a complete pay strategy look like? It’s one that includes four critical parts. Each of these elements assumes the company has already thought through its compensation philosophy and will develop specific plans within each of these categories that reflect the principles to which its leadership has committed in that written document.
1. A Value-Centered Salary Structure. Companies normally tie their salary levels to market pay in one form or another. At VisionLink, we are certainly proponents of looking at market data in making those evaluations and many of our clients engage us to help them with that analysis. However, companies run into trouble if they rely too completely on those surveys to build their salary structure. Heavy emphasis must also be placed on a combination of value creation and internal equity. This means that salaries tied to roles and stewardships which have a direct impact on company or even department performance are defined and adjusted based on the value employees create—or at least should be able to impact. Internal equity means that the company acknowledges certain positions should be measured for their value creation impact and opportunity relative to other positions and not solely based on what market data says that role is worth.
All of this points to the need for companies to have a system for gathering and evaluating market pay data in a proper context—one where it is given appropriate weight. Because data is imperfect, it’s recommended that three to four surveys be obtained and then averaged to determine a justifiable market level for each category of positions. The organization’s philosophy statement will articulate what roles may fall outside the dictates of the data and where it wants to be relative to market pay for others. That statement should also spell out what balance the company wants to maintain between guaranteed and variable pay.
2. Balanced Value-Sharing. This has to do with how you use pay to reinforce the importance of maintaining the revenue engine of the company while simultaneously focusing on growth—and doing so in a way that helps employees achieve their wealth-building goals while shareholders are pursuing their own. If your compensation strategy rewards only one or the other (short or long-term performance), employees will likely have only half the focus you want them to have. The pay approach you take needs to emphasize both priorities and help the company sustain a kind of performance equilibrium. This allows value-sharing participants to enjoy significant earnings potential by being completely aligned with the growth goals of the company.
Although there is no silver bullet for how to strike the exact right balance between short and long-term rewards in every organization, here are a couple of guidelines to keep in mind.
A. Short-term value-sharing should reward the successful maintenance of the company's revenue engine.In other words, you want a reward system that reinforces the execution of the business model but with an eye on the leverage points that impact the growth trajectory of the business. This will require you to have clear guidelines for defining roles, outcomes and expectations. Since the business model defines how the company generates revenue, if some component of pay is not tied to it you can’t expect it to be an area of focus for your people.
High performers feel empowered by this approach. It affords them a level control over their annual earnings contingent on their ability to impact value creation. They see this component of pay as a means of maintaining the living standard they feel they’ve “earned” at this stage of their careers while also building wealth. And by tying value-sharing to roles, outcomes and expectations, the company is able to provide superior income opportunities without putting shareholders at risk. This is because the value-sharing approach promotes accountability; you share only in the value you create.
B. Long-term value-sharing should reward sustained, "good" profits. When the first guideline (just discussed) is followed, profitability should—at least in theory—occur regularly. However, you shouldn’t be interested in just any kind of profits; you want good profits. Good profits are those that build lasting value. "Bad" profits, on the other hand, come with an offsetting long-term cost—diminished customer or supplier relationships, lowered cultural morale, impaired growth leverage, and so on. The combination of short and long-term value-sharing create operational integrity and accountability in your pay strategy. This dual approach encourages participants to pay attention to what needs to get done “this year” without sacrificing the long view—because both their immediate and eventual economic well-being is tied to both performance periods.
3. A Flexible and Comprehensive Benefit Package. Premier talent is looking for ways to maximize its wealth building opportunities. As a result, when it comes to benefits, high performers want options. Some may be married, have children and are concerned about superior medical protection. Others may be single and would prefer to have “adequate” coverage for health risks but want to make sure their income will be replaced in the event of a disability. You may have employees who will embrace vision care while others would prefer to use those dollars for a legal benefit or to increase the funding of their health savings account.
The message here is that you shouldn’t assume a “one size fits all” approach to benefits is going to work when you’re competing for talent. You must understand the profile of the people you want to attract and retain and then think in terms of the range of needs and desires different groups will have when it comes to this rewards element. Flexibility with limits is a good philosophy to assume in today’s environment. You can’t be everything to everyone, but you can provide a range of benefits that makes your people feel like they have choices.
4. Executive Benefits. You make a mistake if you assume you can treat key producers like everyone else in the organization. Again, in a competitive talent environment, the best people have options. Others will offer them a car allowance, flextime, sabbaticals, education funding or other perks. As with the flexible benefits approach addressed above, you will need to determine what combination of offerings the people you are trying to attract will find most valuable.
Security benefits are an inexpensive but meaningful way to address the needs of the primary growth contributors in your organization. Cash value life insurance plans, supplemental disability replacement coverages and even long-term care insurance (for those over 50) can round out your offering in a way that makes participants feel like you understand the financial vulnerabilities they face. This can be an important differentiator when competing for premier talent.
One of the most critical executive benefit areas for attracting and retaining highly compensated people is some form of 401(k) mirror or deferred compensation plan. These programs serve two purposes. First, they allow key contributors to build a retirement account that will replace a higher percentage of their earnings than a qualified retirement plan is able to. Second, it offers participants a means of deferring income to a future date so they can save current income taxes. The limitations on contributions to 401(k) plans make it difficult for high income individual to experience any meaningful tax relief through that kind of channel. And this is an important issue for high income earners.
Much more could be said about each of the four elements of a “complete” compensation strategy. Your organization should explore what additional plans or approaches would best bolster each particular area within your offering. Regardless of what should be added or subtracted to meet the demands of your circumstance, hopefully the framework just covered gives you a sense for what it will take to build a value proposition that allows you to compete in the talent wars that are raging. The competition is only going to increase.
Will your employee value proposition be turned down? If you follow the guidelines offered here, probably not.
