Driving Your Compensation Programs in Reverse
Editor's Note: Ever feel like things are a little backward pay program wise? You're not alone, friend! Dan Walter, master of the compensation metaphor, shines a light on the Classic problem we all face at one time or another - particularly those of us who work in or serve smaller, entrepreneurial organizations.
Many smaller companies have both limited time and expertise to spend on their compensation programs. Faced with immediate needs many companies find themselves halfway down a road before planning out where they are going. In an ideal environment, these companies would pull over to the side of the road, get their bearings and start over. But, we all know that usually isn't possible, so let’s talk about driving in reverse.
You can get where you need to go in reverse but it involves more risk, longer time horizons, and a lot of looking over your shoulder. Every company starts by paying some form of base pay. When you start up, setting these pay levels is a bit of guessing, a bit of asking and a bit of art. As long as you get the people you need at a rate you can (somewhat) afford, you are feeling pretty good. As you continue to grow, things like equity, performance, retention, competition and long-term budgeting all come into play. You may even have investors who have their own ideas on both compensation structure and levels.
This is a common script I have heard from small companies.
“We rolled out our initial equity program last year. We think it’s OK and want to fix our bonus program by the end of this year. Once we have that in place we will do an analysis of base pay levels for our salaries and hourlies.”
I take a step back and ask how they have been measuring performance.
“We have done it a bit differently each year. In the end, the CEO or executive team just assigns an amount to each person. We really can't spend the time coming up with a formal system this year.”
Next, I ask about their goals or philosophy for compensation and the integration with corporate strategy and goals.
“Right now we are just trying to fix a few people that are really important. We have changed our strategic direction a couple of times and have a big meeting at the end of next month to discuss next steps. Hopefully, we can align compensation once we know what we are doing.”
It would be ideal if these companies knew what type of corporate strategy it was supporting with its compensation programs. It would be even better if the companies had a plan (even a poor one) for how it measures performance. It would be incredible if the companies had created their STI and LTI programs with a full understanding of how they fit into the big picture. But, somehow, these types of companies often thrive and grow in spite of these shortcomings.
Of course, none of this matches the well-structured process that we are all taught is the key to success. But, reality is reality and sometimes you have to drive in reverse. Regardless of how much we discuss about doing things the “right way”, just doing things even in reverse can be enough to get you where you need to go. Whatever you do, don't stop trying to drive in the right direction just because you are pointed the other way.
Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. He is a leading expert on incentive plan and equity compensation issues and 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.