What are the major elements of an effective strategic compensation system?

Compensation management is the process of developing and administering employee pay. While salary is typically the first thing that comes to mind when we think of compensation, the reality is that total compensation extends far beyond base pay alone. A comprehensive and effective compensation management strategy should also encompass the following key elements.

1. Short-Term Incentives: Short-term incentives (STIs) or bonuses can encourage desired employee behavior and may include monetary or non-monetary rewards. They can be given to individual contributors or entire teams, and may be awarded at different payout frequencies, including annually.
2. Benefits: Medical, disability, life insurance, paid time off, and retirement benefits are among the most common types of employee benefits, but the options are virtually endless. While some are mandatory, including workers’ compensation coverage, communicating the ways in which your organization goes beyond legislative minimums can support a more compelling employee value proposition.
3. Long-Term Incentives: Long-term incentives (LTIs) such as group saving plans and stocks and options are favored among many employees, but employers must be careful about controlling their costs as they can become expensive. Limiting eligibility and putting proper terms and conditions in place is essential to an economical approach.
4. Additional Perks: While it is by no means obligatory, many employers are offering non-traditional perks to incentivize specific employee behaviors. Subsidiaries for transportation, fitness, and other costs employees incur, as well as personal development opportunities and extra time off, are some popular options to consider. For best results, companies should choose non-traditional perks that align with their employer brand.

When combined with base pay, the elements listed above comprise a robust total rewards program. While developing total rewards plans requires thoughtful planning, it is equally important to craft a plan for effectively communicating the program details to employees. After all, a total rewards program that isn’t acknowledged by the workforce for which it was designed serves little purpose.

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Compensation is an emotional subject for a host of reasons. Because it is emotional and factual “getting it right” in the eyes of employees can be challenging in the best of situations. Handled poorly compensation can prompt lowered morale, increased turnover, increased costs and decreased productivity. Not exactly a recipe for success. Is “getting it right” simply a matter of paying an individual what he or she says he or she desires? The answer is “No.” There are at least five key elements involved in effective compensation within an organization (regardless of the type of organization); specific goals and objectives, accurate information, clear integration, effective communication and regular reevaluation, which we will briefly discuss.

Specific Goals and Objectives

Organizations that achieve success, especially long-term success, rarely do so via simple good fortune. Instead, successful organizations operate based upon a plan, which has been derived from specific short and long-term goals and objectives. The desire to achieve specified goals and objectives is the source from which effective organizations get specific sets of responsibilities for employees at all levels. Further, goals and objectives are used by members of the organization to determine which activities (work) will be carried out on a daily (and longer) basis.

Specified goals and objectives provide a mechanism for determining how resources will be allocated, including employees. One of the sets of goals and objectives an organization should have is its goals regarding people, which some refer to as its human capital goals. Does it intend for its employees to lead its industry or association? Does the organization intend to be an organization that attracts its industry’s most talented individuals? Does the organization seek to foster innovation and entrepreneurial thinking and acting or is it looking to maintain its present state? Does it intend to share responsibility with its employees regularly and push them to grow or is it looking to have its power concentrated in the responsibilities of a few individuals who may need less skilled subordinates?

The answers to the question above, “What does our organization intend to accomplish through people?” And its corollary, “What do we intend to have our people be?” are key questions, which leading organizations take very seriously and spend much time thinking deeply about. They know how damaging the absence of clear goals and objectives can be. They also know while they may have had a measure of success in the past, sometimes luck and skill looks very similar. Rather than succeeding but being unable to reproduce success, well led organizations have a compensation philosophy, which is a by-product of clear organizational goals and objectives.

Accurate Information

How an organization arrives at what and how it should pay individuals is important to the achievement of its specific goals and objectives. Different types of responsibilities require different types of individuals, both in terms of skill and disposition. As a result, effective organizations do not depend, or make substantive compensation decisions based upon information arrived at via discussion boards, cocktail parties, or even industry conferences. While each of these sources may have merit (depending upon the specifics of the specific event), organizations striving to succeed at high levels understand the critical significance of accurate information regarding compensation system design (whether simple or complex) and compensation levels them (the amount an individual will be able to earn or potentially earn). Therefore, the information used to make system design and compensation amount decisions is secured thoughtfully and carefully from credible sources.

While recent litigation regarding the common process referred to as salary surveys has perhaps made securing such information organization-to-organization a bit more dicey, outside consulting firms and trade associations still produce credible salary survey reports and other types of information, which provide firms with a more reliable source of effective, fair compensation for a position than grapevine conversation over cocktails, or employee threats in the midst of a big project. Moreover, typically numbers gathered by a disinterested third party are less biased in specific directions of concern than those gathered in-house. Regardless, accurate information is pivotal to compensation, which produces results, especially long-term results.

Clear Integration

If compensation is to help motivate performance, there must be clear integration between the goals and objectives (including the resulting compensation philosophy) and how individuals are compensated. It is possible to unintentionally incent an undesired behavior if this integration is not present. For example, a multi-national organization with sales people around the globe was frustrated by the fact that its sales of an old product line were growing, the pay of its sales force was increasing, its efforts to launch new industry-leading product were sluggish and its culture between sales managers and sales employees becoming a increasingly ineffective. When we examined the issue it was clear that there was not integration between the goals and objectives and the compensation system. In fact, the compensation system, which had been designed by one executive largely in a vacuum, actually discouraged the sale of the new product and virtually assured the organization a clash between long-tenured sales managers and newer sales executives.

Effective Communication

Clear goals and thoughtfully constructed compensation systems are of diminished value if they are not effectively communicated throughout the organization. There are several substantive issues, which may impede effective communication of compensation systems in organizations. Those issues include, though certainly are not limited to: too little early involvement, outside the executive group, in the formulation of goals, objectives and compensation strategies; too much one-way communication (remember, “Sell in’ ain’t tellin”), including little use of questions rather than statements to determine whether understanding and buy-in are occurring; too much use of technology to communicate regarding these critical issues (use technology to follow-up on these presentations rather than using technology as the key delivery system); and too little follow-up shortly after the initial presentation to determine how the information was processed and what new questions have arisen once some time has passed (and the grapevine has been able to process an interpretation). Effective communication requires far more work than most organizations exert.

Organizations, like individuals, tend to operate as if effective communication is linear – We made sound, or gave information, you received it (or it looked like you did) therefore we communicated. Seldom is communication linear. Language is relative. People’s experiences, personally and professionally, different. As a result, organizations and individuals who want their message received accept responsibility for the effectiveness of the communication rather than spending their time blaming hearers, resolving largely unnecessary understandings, or both. Successful communicators understand an idea we call, “Total Time”. An accurate understanding of Total Time is present in the question, “How can we send this message so that the accurate, results-producing receipt takes the least amount “Total Time”? This is a very different idea than “How quickly can we get this over with,” or “What is the quickest way to get this to every member of the staff?” In an individual’s hands and accurately in an individual’s head so he or she can produce the desired results are two VERY different things!

Organizations, who desire high levels of motivation, productivity, as well as the ability to succeed in today’s dynamic environment, go to great lengths to communicate – not simply trade information with employees. One of the key communication topics is the manner in which the compensation system (and accompanying levels) allows both the organization and individual employees to accomplish their respective goals.

Regular Reevaluation

In a dynamic world, it can be difficult to meet the new challenges presented each day much less find time to go back and revisit issues “settled” at some point in the past. We even have a saying for our reluctance to look anew at processes in place – “If it isn’t broken, why fix it?” However, most organizations and individuals learn at some point regularly executed reevaluation and maintenance is less costly than unexpected repair or replacement. Reevaluation and maintenance, though not always convenient, allow appropriate control to be retained.

Conversely, unexpected repair and replacement, in most instances present themselves at the absolutely least convenient times, often require greater than expected levels of resources than desired and allow much lower levels of control. Consider this basic example as an illustration of the statements above. An organization chooses not to regularly review its goals and objectives, compensation system and performance management processes on a regular basis. Business has, and continues to be good. In the midst of a major initiative, two key individuals, an executive and a key non-exempt employee decide they are underpaid. Both demand additional pay or they will depart for a competitor. Could it happen? It happens regularly. And, unfortunately, organizations that have chosen to operate with one or more of the elements discussed here, including regular reevaluation, give in to the demands of the individuals to prevent initiative for becoming side tracked.

However, shortly word gets out the two individuals have received increases and other individuals become disgruntled with their own levels of pay and make a similar demand, conflict between employees increases over the issue, employees become disgruntled and produce less effectively as they think about the increases, employees leave the organization believing it to be haphazardly managed or potentially some of each. While reevaluation might not have prevented the situation entirely, in our experience it would have greatly reduced the likelihood of the threats above.

Conclusion

How and what individuals are paid is important to them and to the success of the organization. Balancing the demands of each requires both art and science. The likelihood that compensation will produce its intended results are greatly increased if five key elements are viewed as a system, each impacting the other; specific goals and objectives, accurate information, clear integration, effective communication and regular reevaluation.

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