A family-owned business faces a leadership change to the next generation and a new strategic direction. The company is looking for new opportunities to grow the business and compete more effectively, while also eliminating outdated human resource practices.
A middle market firm is weighing the benefits of consolidating its three divisions into a single organization. The goal is to restructure the way the organization gets things done and to maximize workforce efficiency.
On the surface, these two companies have little in common. However, when we looked more closely at how these organizations are working through some significant strategic decisions, some common threads appeared. First, neither company had given any thought to how the new strategic direction would impact current employee and executive pay programs or how incentive programs could be redesigned to support the new strategy. Second, these companies were potentially missing a crucial opportunity to communicate the new vision for their organizations and direct individual efforts toward the activities and results that will be necessary for future success.
The Compensation Imperative
I wish I could say these situations are unusual. Unfortunately, they aren’t. Again and again, organizations and their executives overlook the importance of pay and incentive programs when it comes to a major (or even minor) change in strategy.
Your average business executives would never consider leaving 60% to 70% of company expenses, which is what comp represents to many companies, with so little management or oversight. Yet, that is what happens again and again when those same executives do not factor compensation programs into strategic business discussions, especially when those discussions center on a major change in the business strategy itself.
The role of compensation in business strategy is only becoming more pressing. Tying comp to strategy forces companies to develop a clear understanding of what their people currently do and what they will need to do differently for the strategy to succeed. That also means making sure the right people are in the right jobs. Further, it means undertaking some scenario planning so that the company has a good grasp of how things will go during the best and worst of times. Finally, executives must be held accountable to the success of the strategy with a clear line of sight between how the company performs and how much the execs get paid.
Building a Strong Foundation
No company is immune to these issues. Every company, regardless of size, global reach or any other criteria, has to begin with these most basic matters. Otherwise, how can anyone know if they are doing a good job and accomplishing what is necessary to help the business succeed?
In this era of rapid change, the resulting strong foundation will serve the company well. After all, if compensation systems are not aligned with business strategy when the company is facing strategic changes, the resulting dysfunction could derail any new initiatives. If you want to march in a new direction, make sure everyone is facing the same way. With a strong foundation in business, talent and compensation planning, companies will be much better positioned to take advantage of new opportunities.
For most companies, there are three steps involved in keeping pay aligned with strategy:
1. Articulate the company's long- and short-term business strategies and ensure they are aligned with current compensation approaches.
2. Choose the comp approach that will best reward and reinforce the company's stated strategic goals.
3. Evaluate the approach periodically against the business strategy to see if goals have been met and then make necessary adjustments.
One of the most frequently read pieces of content on our website is an article that discusses each of these three steps in detail. Take a look and let us know what you think. How will you be making sure your comp programs are closely tied to business strategy?