Executive Tools
- Executive Summary
- Self Assessment Checklist
Expert Practices Articles
- The Changing World of Compensation
- Compensation Strategy
- Compensation Plan Design
- Implementing the Plan
- Incentive Plans
- Incentive Plan Design Issues
- Implementing Incentive Plans
- Incentive Plan Success Factors: What Vistage Members Say
- Establishing Market Base Pay
- Getting Employee Buy-In
- Non-Cash Rewards
Tools & Analysis
- Are You Ready for an Incentive Plan?
- CEO Incentive Questionnaire
- Pay Philosophy Checklist
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The Changing World of Compensation
In today's business environment, attracting, retaining and motivating
the kind of people who can sustain a fast-growing organization requires
most companies to think differently about how they pay their employees.
According to TEC speaker and compensation expert Catherine Meek,
five "catalysts" are reshaping the entire field of compensation:
- Changing business world. In a world dominated by new technology,
the Internet, and an increasingly diverse workforce, outdated
compensation programs become an anchor rather than a support for
the organization.
- Changing workforce contract. Today's workers are loyal to themselves
first and the company second. Such a workforce requires a very
different kind of compensation.
- Organizational values and culture. Too many companies have little
or no connection between their stated values and what the compensation
plan rewards. Matching organizational values to performance requires
a new approach to compensation.
- How work gets done. The way companies get work done has undergone
a dramatic revolution. You can't reward cross-functional teams
with a compensation plan built around a top-down, command-and-control
structure.
- Lack of results. Traditional programs don't reward employees
for cutting costs or increasing profits, two essential elements
for survival in today's world.
The new compensation model incorporates a number of fundamental
principles, including:
- A "total" compensation mindset
- Linking compensation to corporate strategy
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Compensation Strategy
Before designing and implementing a compensation plan, you must
first develop a clear and compelling strategy. Meek, Fleisher, and
TEC speaker Karen Jorgensen have identified the following "expert
practices" in this critical area:
- Define your compensation philosophy. A focused compensation
philosophy answers fundamental questions such as: What do you
want to pay for? How do you want to pay for it? What is your competitive
posture? How will you split up the pie?
- Link compensation to your overall business strategy. This involves
identifying your top strategic objectives, defining what they
mean in terms of organizational behavior and designing your compensation
plan in a way that rewards and recognizes those behaviors.
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Compensation Plan Design
Once you have all the elements of strategy in place, you can begin
to build the actual compensation plan. Although compensation plans
come in a variety of shapes and sizes and have widely different
goals, our experts agree that certain fundamental principles should
lay the foundation for every plan design.
1. Get alignment. To succeed over the long-term, says Fleisher,
all compensation plans must meet the needs of three critical entities:
- Customers (as measured by the increase in sales)
- The company (as measured by profitability)
- Employees (as measured by who gets rewarded for taking care
of the first two)
2. Know the difference between satisfiers and motivators. Satisfiers
(base pay, benefits, etc.) allow you to attract and retain people
but they don't motivate performance. Motivators (pay for performance
incentives, empowerment, job opportunities, etc.) motivate people
to improve performance. The best compensation plans use both appropriately.
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Implementing the Plan
If you have done your work properly in the strategy and design
phases, say our experts, implementation should naturally follow.
However, the following practices can smooth the implementation process.
- Communicate constantly.
- Make sure the plan creates alignment with customers, the company
and employees.
- Use measurement information to keep people focused on the plan.
- Consider a bridge program.
- Separate base pay from incentive pay.
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Incentive Plans
Incentive plans, particularly those that share profits with employees,
have a number of benefits. According to our experts, these include:
- Unlocking hidden employee creativity
- Fostering alignment and greater employee commitment to organizational
success
- Reducing turnover of good performers and increasing peer pressure
on poor performers
- Increasing profits and improving morale
- Providing strategic and economic advantages over competitors
- Providing recruiting advantages in the marketplace
Despite these benefits, says Fleisher, incentive programs are not
the sole determinant of successful change. To improve performance,
change the culture and then use incentive compensation to support
the new culture.
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Incentive Plan Design Issues
An effective incentive plan should be customized to the unique
needs of your company. Before rolling out the plan, Jorgensen recommends
considering the following issues:
- How do you measure the goal?
- Who participates in the plan?
- How will the payout be determined?
- How often does the plan pay out?
- What are the threshold numbers?
- How do you define salary?
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Implementing Incentive Plans
Incentive plans have a wide variety of names: gainsharing, profit
sharing, incentive pay, pay for results and more. Regardless of
what you call them, say our experts, they all include three fundamental
elements:
- Vision. A clear vision helps to define what you want to accomplish,
which sets the parameters for the plan design and the elements
within the plan.
- Objectivity. Successful incentive plans totally eliminate any
possibility of subjectivity on the part of management or uncertainty
on the part of employees.
- Simplicity. Make sure every employee understands the goals,
how they contribute to achieving those goals and how they will
get rewarded when they do.
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Establishing Market Base Pay
Establishing fair and equitable base salaries lays the cornerstone
for any variable pay compensation plan. Jorgensen recommends a six-step
process for establishing market base pay:
- Develop a pay philosophy. Research your company's past pay practices
and identify how you intend to pay employees to reflect current
market rates.
- Establish a compensation committee. The committee develops and
administers the pay process, acts as champion of the compensation
system and develops pay policies.
- Conduct a market survey. The compensation committee conducts
market surveys within the industry and for comparable jobs outside
the industry.
- Evaluate the survey data. The committee then compares its findings
against internal salaries. In some cases, it establishes job grades
and ranges to provide a framework for assessing individual pay
levels.
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Getting Employee Buy-In
Fleisher recommends daily meetings to educate employees about the
plan, provide reinforcement and improve performance. These meetings
operate best under the following ground rules:
- Meet in groups of four to six employees.
- Each group is led by a department head or designated team leader.
- Every employee participates every day. No exceptions.
- Meetings never last more than 15 minutes. Any unfinished business
gets carried over to the next day.
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Incentive Plan Success Factors: What TEC
Members Say
A survey by Meek's firm, Meek & Associates, asked 312 TEC member
companies about their use of incentives and bonuses. The four most
successful incentive plan practices, as reported by these TEC members,
were:
- Linking incentives to the company's business results
- Tying the plan to performance (quantitative and qualitative)
- Communicating as much and as frequently as possible
- Involving employees in the process
The four biggest mistakes in incentive plan design and implementation
were:
- Insufficient communication and feedback
- Lack of alignment with the business strategy and objectives
- Using discretionary measures
- Setting unrealistic goals
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Non-Cash Rewards
Increasingly, companies are including non-cash rewards and recognition
as one important element of their overall compensation program.
These plans tend to be simpler in design and execution than cash-based
plans. Nevertheless, says Jorgensen, companies should consider certain
essential principles before putting a non-cash reward plan into
action.
- Take care of the cash side first. In order for non-cash rewards
to have an impact, employees must make enough money to meet their
basic needs.
- Find out what motivates your employees. Find out what your people
like and offer a number of choices because not everyone wants
or needs the same thing.
- Combine recognition with reward. After an employee earns the
reward, acknowledge them publicly.
- Get employees involved. The best programs allow employees to
recognize and reward each other.
- Link the rewards to performance. Use non-cash rewards to drive
the behaviors that will lead employees to accomplish your organizational
goals. Set specific goals and targets, define the measurement
criteria and promptly reward the performance.
- Use non-cash rewards to measure hard-to-measure indicators.
Non-cash compensation allows you to start rewarding employees
in areas where you don't want to commit hard dollars because of
the difficulty in quantifying the measures.
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Using Employee Focus Groups
Employee focus groups can help you determine the recognition and
rewards that fit your organizational culture. Creating a compensation
focus group, says Jorgensen, consists of three simple steps:
- Form the team. Gather 10 to 15 employees from various departments
and management levels, making sure every level in the organization
has at least one representative.
- Identify the purpose of the group. Make sure employees understand
that the meeting is for information-gathering purposes only, that
management will evaluate and make decisions at a later time.
- Gather the information. Ask employees the following questions:*
- What reward systems in this company are working now? Why?
- What reward systems in this company are not working and what
would you like to see changed?
- What would you like to see changed about the way we reward employees
today?
- If we could design a reward system that didn't cost too much,
what gifts or other items do you think would be appropriate?
- How do you think employees should be recognized in this company?
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