Please note the headline question does not ask how much you should pay your people. It asks how you should pay them. Why is that distinction so important? Because compensation is expensive, and if it’s not done correctly, your P&L will suffer, your ability to attract and retain top talent will diminish, and your growth plans will be inhibited.
Should employees receive high salaries and modest incentives—or vice versa?
Should they be rewarded for short-term performance or long-term?
What about the pay offering employers will be making to the people they want to recruit this year? What will great people expect and how should that factor into a business leader’s compensation planning?
The combination of a highly competitive talent market and an unpredictable economy makes it difficult for enterprise heads to be confident about any pay strategy they consider. Chief Executive Magazine said it this way:
“There is a delicate balancing act happening in many organizations where there is a need to: Be conservative in hiring activity and managing variable labor expenses, and; Reward existing talent—and especially top talent—as competitively as possible.” (“Compensation Challenges and Opportunities in 2023”—Chief Executive Magazine, January 2023, Dow Lowman and Tom McCullen)
Adding to the dilemma most chief executives and owners face is the uncertainty they feel about the role incentive compensation should be playing. Every year, they pay thousands of dollars in bonuses and other financial awards, but don’t see results that justify those payments. They know they must be doing something wrong, but they can’t identify what it is.
Getting Compensation Right
The starting point in creating an effective pay strategy is to define the “job” compensation needs to fulfill for your company. And to determine that, you must start by addressing why you pay your people at all.
Too often, business leaders look at compensation as an issue they just have to “deal with” and don’t give it much strategic thought. Perhaps they institute an annual incentive plan because they think they need one to be competitive, but then end up resenting the plan because employees view it as entitlement. So, they “fire” their bonus plan and “hire” another one in an attempt to change behavior or otherwise rewire the way their employees think. Employing an incentive plan to make sure you’re offering a competitive pay package may be a legitimate reason to “hire” (institute) a bonus arrangement—if that’s the job you need done. But you must establish that before you build one if you want to be able to assess whether it’s fulfilling its role.
A more strategic approach to pay is to adopt the same mindset to compensation design as you bring to building a go-to-market strategy for the products you develop. Presumably, when you create a new offering for your customer base, you think about the issues it will solve for them. You carefully consider the audience you are appealing to and then determine what they will be able to do easier, faster, cheaper or better as a result of your product. If you get it right, the market responds by buying more and more of what you’re offering. When you don’t, your sales reveal that you missed the mark.
Approaching compensation design is really no different. What is the problem compensation needs to help solve in your business? What is not happening organizationally now that needs to happen and how might a given pay strategy be a potential solution? And who is the audience to whom the value proposition needs to appeal if the outcomes you’re looking for are going to be fulfilled?
To be prepared in today’s business environment, companies need a compensation offering that will work in any economy and in every talent market. They need a value proposition that is both complete and compelling.
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.
Receive free, ongoing access to updates on compensation and talent trends, reports, events, and more.