Hey, Compensation Professionals! What’s the Intent of that Reward Element?

Compensation professionals spend a lot of time figuring out and communicating values. We create formulas, composites, spreadsheets, calculation tools, matrices and charts that are filled with amounts. We discuss percentiles, grades, steps, adjustments, dilution, projections, and insane guesstimates to help people understand why their pay is worth their effort. But so many companies are missing the most important component.

Nope, it’s not guiding principles (although you really should have these). It’s not a compensation philosophy (but we all know these are pretty darned important). It’s not a bigger budget or a better communication program. The critical thing that most compensation elements are missing is the intent. An amazing number of companies cannot clearly, or convincingly, express the purpose of each element of their total rewards program.

This is often where I start discussions with my clients who want to improve or fix their pay programs. It is hard to make something better, or even defend that it needs to be better, if you don’t know why it exists in the first place. The purpose of Base Pay is usually clear. Beyond that, the waters are as murky as a slow river after a big storm.

Short-Term Incentives and Bonuses are usually explained as some generic version of “they exist to motivate people to perform better.” Motivate people to do exactly what?  How much better?  Better than what? Why? Who knows these things? Is the program designed expressly with this intent in mind, is does the intent often change, while the program remains the same?

Here’s a test for you, valued reader. Draw four columns on a piece of paper. In the first write the name of each compensation element. In the second write the purpose of that compensation element. In the third define what happens for the company if that purpose is met. In the last column define what happens if that element fails.

Then sit down with each member of your HR team, and then each member of the executive team. For each element ask them to tell you what to put in columns two through four. Where there is an agreement of 90% or better, you know your intent. Below that, you have some work to do. If the mismatch on intent includes the CEO, you have even more work to do (and you need to do it quickly). With this information in hand, you can begin the real process of improvement. Without it, success is nearly impossible since success itself has not been defined.

Why does your company offer stock options? Or, why not? Why is that program paying people quarterly and another paying them annually? The list is long, but most companies can complete this exercise in a matter of weeks. It may take a long time after that to align each element with its true purpose, but with your intent defined, success is possible.

Each tool of any professional who mixes art and science is designed with a specific purpose. A general chef’s knife may be used for many things, but if you want to debone a chicken you use a boning knife. A trumpet player can play very quietly with no assistance, but a mute is used when both volume and tone must be specifically crafted. A carpenter is unlikely to use the same saw to cut a board and to cut dovetails into that same board. In the same way, your pay elements will serve you and your company better if you clearly define their intent and design them accordingly.

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.