Transform Pay Into a Growth Driver
Periods of financial uncertainty force chief executives to look for greater economic efficiencies within their companies. Leaders are under pressure to protect cash flow and profits but still drive growth.
In 2025, it's been particularly difficult to satisfactorily address this pressure. Everything from tariffs to the proliferation of AI to global geopolitical tension has made business life unpredictable and created an urgency for company heads to find efficiency solutions.
In this context, the cost of compensation looms large.
Payroll is the biggest expense on most companies' P&L. Consequently, leaders see compensation as an obvious place to deliver the economic adjustments they need.
But here's the problem.
Most CEOs want to lower payroll costs without sacrificing their ability to attract, develop, and keep high impact talent, or reward performance outcomes that enable them to hit their financial targets. And to achieve their growth goals, they likewise need to build a unified financial vision for growing their businesses--which usually means their compensation offerings need expansion not reduction.
It's a conundrum.
So...how do we solve it? How can compensation be made less expensive without diluting a company's recruiting and retention capabilities while simultaneously incentivizing its people to implement its growth model?
It requires a new pay paradigm.
What Makes Pay Expensive?
Compensation isn't simply a number sitting passively on a company's financial statements. Pay is either helping or hindering the achievement of an organization's purpose, vision, business model and strategy, and growth objectives. Consequently, it must be treated as a strategic investment in the performance potential of a business's employees.
But that's not what usually happens.
Most companies are either overpaying underperformers, under-incentivizing high performers, or both. In doing so, CEOs are making the biggest line item on their P&L (compensation) more expensive.
Consequently, once company leaders get around to examining where they can lower costs, the enormity of their payroll expense stands out. And because most businesses lack a methodology for measuring ROI on the results their compensation offering is generating, its cost feels unjustified.
When compensation is viewed in isolation on a company's financial statement, without an ROI context, chief executives reflexively want it reduced.
You Can Have Your (Compensation) Cake & Eat it Too
The good news is there is a solution to this dilemma.
By reframing the role of compensation in your business, you can transform your pay offering from an unwieldy expense sucking the life out of revenue and profits to one that accelerates company growth. The best way to make compensation less expensive is to increase the results it produces.
Believe it or not, this is not as hard as it sounds. Reframing is not about inventing something new. It's about leveraging the way you use your pay offering to reinforce your company's performance standards. All the compensation tools needed to achieve this outcome already exist. You don't need to discover some new compensation approach no one has ever thought of before. Instead, here is what you need to do.
3 Ways to Reframe Compensation to Make it Less Expensive
The following are not mutually exclusive strategies and practices. Although each one can contribute greater compensation efficiency and effectiveness, you'll achieve maximum impact by employing all of them.
1. Stop Paying Incentives and Start Sharing Value.
Pay offerings become expensive when rewards are not tied to the right financial standards. This is common among companies that don't establish value creation thresholds for sharing value with their people.
For example, a business may have an annual bonus plan that ties its benefit payout to employee activity metrics. The belief is that incentivized behavior will lead to higher performance, which will, in turn, drive the financial results the company needs to achieve.
The problem is that such metrics seldom include a profit or revenue threshold that must be met before any incentives are paid. Consequently, businesses sometimes find themselves making bonus distributions when they aren't even profitable--or at least not sufficiently profitable.
To solve this problem, company leadership should articulate and communicate a value creation threshold that must be met before rewards payments will be made. That standard should become part of a written pay philosophy that explains how the organization shares value (what form it takes) and with whom. A company's compensation philosophy acts as a kind of pay constitution that guides all rewards strategy decisions.
At VisionLink, we recommend that companies use productivity profit as their standard for value creation. Productivity profit is a subset of net operating income. It refers to the profits attributable to the performance of an organization's employees. When productivity profit is the threshold, incentive compensation literally pays for itself, because value sharing only occurs once the value creation standard has been met.
You can learn more about this concept in VisionLink's Productivity Profit Workbook.
2. Create a More Complete Pay Offering
One of the things that makes compensation expensive is its heavy emphasis on guaranteed income (salaries) and short-term incentives (annual, quarterly or monthly bonuses).
This was one of the lessons learned during the 2020 economic shutdown. When cash flow dried up, businesses were imprisoned by rigid compensation obligations. To survive economically, they had few options. They were forced to either reduce salaries, suspend bonuses, furlough or lay off employees, or "all of the above."
This happened because organizations had incomplete pay offerings. They had nowhere to pivot that would enable them to save their workforce without committing financial suicide.
Compare that with organizations that added even one additional component to their pay offering, such as a long-term value sharing plan like phantom stock or a profit pool.
When these companies confronted the financial crisis, they were able to remain agile. For example, they could tell their key people they needed to reduce their salaries and suspend the annual bonus plan temporarily. In exchange, they would issue additional shares of phantom stock (or make an additional contribution to the profit pool) if certain performance standards were met. The result was that affected employees suffered a temporary reduction in earnings but were able to keep their jobs. And if the company recovered and did well, their long-term earnings and wealth accumulation would substantially exceed the level they would have under "normal" conditions.
And here's the magic of this approach: The company can allocate additional phantom shares with zero cash flow impact to the business--because the company has no booked expense until the benefit is paid out, typically five plus years in the future.
3. Balance Rewards for Short and Long-Term Performance
An unbalanced pay offering is an expensive pay offering. Here's why.
Think of performance rewards as an investment portfolio. Your incentive plans are your asset classes.
Now, assume you want to build a solid return on your rewards investment over several years and mitigate your risk in the process. However, you then fill your portfolio with commission awards and short-term incentive plans. How likely is it that you will achieve your portfolio's long-term growth objective, and how volatile do you suppose your portfolio will be? (Highly unlikely and highly volatile.)
Similarly, what if your portfolio's only asset class were a restricted stock, stock option, or phantom equity plan? You would similarly reduce the likelihood of achieving your growth goal and significantly increase the volatility of your portfolio.
The way you ensure a solid return on your rewards investment is by balancing short and long-term value sharing.
Peter Drucker once said that "the manager’s job is to keep his nose to the grindstone while lifting his eyes to the hills. He meant that every business has to operate in two modes at the same time: producing results today and preparing for tomorrow." (Ken Favaro, Strategy+Business). Compensation becomes expensive when the performance focus of employees is too narrow--it's either too short-term or too long-term. That unevenness creates "portfolio" volatility, which is costly because the company is assuming too much risk in how its paying its people.
When organizations effectively balance rewards for short and long-term performance, they prevent bad profits. These are profits that appear on your P&L, but at the expense of something essential for the company to meet its growth objectives: customer value is eroded, a vendor relationship is compromised, or employees are incentivized to perform in ways that are adverse to the long-term interests of the company. When organizations effectively balance short and long-term value sharing, the long-term reward prevents employees from exploiting their annual bonus to maximize this year's earnings. They realize doing so would negatively impact their long-term wealth accumulation opportunities. In other words, the combined plans align the interests of employees and shareholders.
When this kind of alignment exists, compensation becomes an investment that drives profits and growth. It has a measurable ROI.
Reduce Your Compensation Expense By Transforming the Purpose of Pay
The road to lower compensation costs need not be paved by layoffs, furloughs, salary reductions, or bonus plan suspensions. By adopting a more strategic approach to pay design, you can better control the economic results your compensation offering generates and make them more predictable. You can mitigate risks imposed by sudden economic swings or other financial vulnerabilities your company may face.
Value sharing makes compensation less expensive. A complete pay offering makes compensation less expensive. And balanced rewards for short and long-term performance make it less expensive.
Do all three and watch the economic efficiencies work miracles on both your P&L and your balance sheet.
Shareholders will be happier. Employees will be happier. And customers will be happier.
That's about as inexpensive as it gets.
