Fix it then Pay, Not the Other Way
Often companies come to me with a request to design a compensation program, philosophy or market analysis hoping it will fix a critical problem in the company. Sometimes the company needs people to perform better. Sometimes they want employees to act and/or feel more like owners or investors. Let’s be clear, regardless of the issue, compensation CANNOT fix it, at least not in the long run.
Compensation can be effective at fixing (or hiding) problems for a short period. A bonus program to improve quality may fall under this category. A big raise or long-term incentive plan to stop complaints about the direction of the company may also have an impact for a while. But, compensation in itself is not the solution to fundamental flaws.
Stock Options don’t create an ownership culture. Your culture must first exist and stock options can supply a concrete delivery of pay as a result of alignment and achievement.
It is fairly common to have a CEO tell me that they want an incentive program that drives or manages their employees’ performance. Only people can manage and drive performance. Compensation is the tool or measuring stick that shows the effectiveness of the people leading and following. Pay for performance without human leadership is destined to fail.
Incentive pay doesn’t motivate employees. It supports the motivation and goals that are communicated by the company and managers.
Recently, owners of a privately-held company were planning on making a significant corporate change. The executive running the impacted business was not too enthusiastic. The owners felt that modifying the compensation plan would help them get the support needed from the executive. I spoke to the executive and I learned that his problem had nothing to do with his compensation. He was open to the proposed new pay structure. His reticence had everything to do with the fact that he could not understand why the owners were making the specific corporate change while ignoring his expertise on the topic. Paying him more, or in a different way, may have quieted the issue temporarily, but it would not have fixed anything long-term. The owners and executive sat down and discussed the underlying corporate issue and got everyone on the same page. Addressing the correct compensation path became much easier once the real issue was fixed.
Compensation won't, by itself, make your company better. Create a plan for improvement and prove your commitment by delivering pay at levels commensurate with success.
As compensation professionals, we are often guilty of using the hammer we call pay to address everything as a nail. If any correction or improvement is going to last over the long run, it must first come from somewhere other than compensation. Only then can pay support the solution. I refer to this as aligning pay to corporate strategy AND culture. Without an understanding of both strategy and culture, your compensation programs are doomed to fail. Please share some situations where you saw compensation being used to solve an underlying non-compensation related problem. Did the fix stick?
Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. He has three metaphors for every occasion and is a leading expert on incentive plan and equity compensation issues. He has written several industry resources including the only resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, , “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.