By Jason Richmond, Chief Culture Officer and Founder at Ideal Outcomes
The biggest single expense of running a business is often labor, anywhere from 15 to 45 percent, depending on the industry according to azcentral, a member of the USA Today network. Add in benefits and taxes, and that number can run even higher. The right compensation strategy and structure can help us both hire and retain great talent.
The challenge with developing the right compensation strategy is that there is no “one size fits all.” Market data, industry benchmarks, and application of best practices are useful, but also too generic. You cannot stop there.
When organizations invest considerable time and money into identifying and building the right culture to give them a competitive advantage, but do not consider how pay plays a role, they are missing a significant opportunity to reinforce and sustain that culture. While we love to say “People join organizations, but they leave bosses,” compensation (offered higher pay elsewhere) as a reason for resignations increased from 57 percent in 2017 to 65 percent in 2018. Pay does matter.
In a fascinating study, Dr. Pankaj M. Madhani found that organization culture and compensation system were complementary elements in achieving a company’s strategic goals. He said, “When compensation systems are not aligned with organization culture, it causes many unintended consequences.”
Consider these four perspectives when designing your compensation structure:
Fairness: You are never going to convince anyone that people are your most important asset if you do not pay them fairly. How do you accomplish that? Monitor the market frequently:
- Monitor what other companies pay on an annual basis, or at least every eighteen months—and even more often for highly volatile, hard to fill jobs such as software engineer or application developer. Top performing, fast-paced organizations deliver spot and project completion bonuses on top of base pay.
- Know what your mission critical jobs are: Pay higher for these.
- Reward superior performance: Have a solid talent review system in place to identify top performers, especially those in mission critical roles. (A-players in A-roles.)
- Correct Imbalances: Conduct racial and gender pay equity analyses and take action where needed.
Flexibility: According to PayScale’s 2019 Compensation Best Practices Survey, 73 percent of organizations have a variable pay plan in place and 23 percent of top performing organizations have increased variable pay to improve retention.
Alignment: Variable pay is only going to be effective when there is close alignment with behaviors you want to drive and reward. Alignment needs to occur in three key areas:
- Values: Incentivizing individual or team performance will drive very different behaviors. So will rewarding the wrong behaviors.
- You want to award top performance, but you also have to consider how numbers are attained. For example, do you have a manager who kicks their goals out of the water, but also has high turnover and lots of employee relationships issues, or a reputation for demotivation or harassing team members? Think about the message you send when this manager is rewarded handsomely.
- Is collaboration and teamwork highly valued, but your variable pay structure rewards individual results? Consider a team bonus. When employees know the reward at the end of the project is individual in nature, they are not going to put the needs of the team first.
- Business Goals: Are you profit oriented, revenue driven, or innovation focused? It’s easy to say you want all three, but which is your foundation?
- If you are profit oriented, figure out ways to reward for achieving the KPIs that drive profit. For example, repeat business from existing customers is usually less expensive than acquiring a new customer. If that is the case, how can you reinforce this through pay?
- Revenue focused? What behaviors drive revenue growth? What is the relationship between customer satisfaction and revenue? How can you use pay to reward the right customer-centric behaviors?
- Innovation focused? Innovation takes time and requires risk taking. Do you punish employees for making mistakes or reward them for sticking their neck out?
- Long-term vs. Short-term Focused: This may vary depending on the employee’s level or position but in general if we want people to focus on the long-term, incentives need to balance with that perspective. Equity, stock bonuses and grants, and gainsharing (a share of the value generated by performance improvement) are approaches for any level of employee. Executives and executive compensation is more complicated and non-qualified multi-year vesting plans should be considered.
Transparency: A lot of organizations say they have an open-door culture, or that communication is a core value. Perhaps it’s time to put your money where your mouth is. Pay transparency can create more trust and fairness. Your younger employees are often sharing what they make with colleagues anyway.
- Transparency does not mean you have to share how much a job will pay or how much pay an individual receives. It does mean sharing your strategy and rationale. In addition, most transparent organizations share pay ranges for specific jobs, finding this practice helps with career pathing. According to LinkedIn’s Global Talent Trends 2019 Report, 27 percent of HR and hiring professionals say their company currently shares salary ranges with employees or candidates, with a further 22 percent saying they’re likely to start doing so within the next five years.
- Help employees understand the concept of total compensation. Their pay is base pay, variable pay, AND benefits. Share this information with them, especially in this day and age of rapidly rising benefit costs.
- Look for ways to increase transparency over time. This does not have to be an all or nothing approach. There is a growing number of companies who do share individual pay information for a variety of reasons. Take a look at companies such as Buffer, Glitch, and Starbucks.
When organizations consider pay as a critical component of their culture strategy, they are more likely to sustain the culture they have worked hard to realize.