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Principles that Should Guide Compensation Design

January 10, 2013 • By Ken Gibson

There is no constitution that dictates how compensation should be designed. Nor is there a "one size fits all" approach to building pay strategies that will help a company succeed. However, there are what might be considered self-evident principles that businesses should use when they approach the development of rewards strategies. I call them self-evident because companies that have succeeded in their approach to compensation have applied these principles and seen positive results; the principles have been tested.

So, not in any particular order, here are the guiding principles that any company wishing to develop an effective compensation strategy should follow:

  • Know Your Philosophy. Every company needs to be able to articulate what it believes about pay and value sharing. This should be in writing.
  • Define Outcomes. This means a company knows the results its looking for and how to prioritize those results. All leadership needs to be in agreement about those outcomes and that they are achievable.
  • Envision the Future. A business must be able to effectively model what the future will look like if the defined outcomes are achieved. It needs to be able to envision what will happen to shareholder value if certain assumed results are achieved.
  • Define Value Creation. This should technically be part of the compensation philosophy. A business must be able to articulate the point at which additional value has been created beyond that attributable to the financial and physical capital at work in the business.
  • Identify Clear Roles. An organization needs to link outcomes and value creation to people. What functions need to be performed to achieve the results that have been identified? Are the right people filling those roles now? Are additional or different people needed?
  • Share Value--Especially Long-Term Value. There needs to be a relationship between value created and value shared. Key producers want to know that there's a mechanism for participating in the growth they help create.
  • Adopt a "Total Rewards" Approach. Financial rewards is only one of four reasons individuals join and then stay with an organization. Pay is a critical component but premier talent also wants to know that the company has a compelling future, that a positive work environment is being nurtured and that there will be opportunities for personal and professional development.
  • Market a Future to Your People. At a minimum this means a company has to have a clear and compelling means of communicating its value proposition to its people. But it has to more than communicate how a bonus plan works. It has to create "line of site" between vision, strategy, roles, expectations and rewards. Innovative leaders such as Steve Jobs, Mark Zuckerberg and Jeff Bezos have developed ways of transforming the way both their employees and their customers view the future. Compensation has to be framed in such a context for it to have impact.

Well, there you have it. Now you're equipped and should never fail in your development of effective pay strategies. Okay, you should have smaller failings at least. No one gets it all right at the outset, but if sound principles are being applied, making adjustments will be much easier. Your people will also sense there is a fairness to your approach and will help you get it right.

In the end, growth companies know that if they don't get rewards right, there is a high likelihood they will fall short of the results that hope to achieve. Correct principles will help make sure you get it "right."

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Ken Gibson

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.