Compensation Planning Insights Part 1. The business environment is changing rapidly, and your company’s compensation strategy may not be keeping up.
Does this all-too-familiar scenario describe your company? Company A sees its competitors and peers are implementing skill based pay and decides to implement a similar compensation plan. The company does not give sufficient thought to how the change will help or hinder its ability to execute its business strategy. As a result, productivity drops and frustrated high-potential employees begin to leave the company.
Or consider this scenario: Company B reformulates its business strategy and neglects to change its compensation plans and systems. At yearend, they have not achieved their business goals and, in fact, begin to lose market share.
Compensation/business strategy disconnects such as these are not unique. Many companies react to a fast-paced market and change their compensation plans and systems without investing the time to align these changes with business strategy. As a result, both compensation and business strategies become ineffective and undermine business success.
This post is part of a 3-part Compensation Planning Insights series that will discuss how companies can successfully align their business and compensation strategies. The process includes these key steps:
- Articulating the company's short and long term business strategies and goals.
- Choosing the compensation approach that best rewards and reinforces the company's strategic goals.
- Evaluating the compensation approach against the business strategy periodically to see if goals have been met.
Why Articulate Your Business Strategy?
Your company’s business strategy is the road map to growth. But if the map hidden in a drawer or on a shelf, employees won’t know where the company is going, or be able to plan effectively to get there. When senior leadership clearly articulates the company’s business strategy, the HR and compensation team gets the information it needs to help move the company in the chosen direction.
Your compensation planning team should not assume the company is pursuing its “official” business strategy if one hasn’t been articulated recently. It could be, for example, that company strategy is obsolete, and the leadership has adopted a more relevant one without articulating the revisions for compensation planning purposes.
Your company’s business strategy should include specific 3- to 5-year financial and nonfinancial objectives. These objectives can be translated into the short, intermediate, and long term goals that are relevant at each level of the company. For example, manufacturing teams have, at best, indirect influence on the company's overall profit margin. Therefore, these teams can be measured against goals such as operating and maintenance cost management or the results of customer satisfaction surveys, which contribute directly and indirectly to margin.
Without an articulated strategy, compensation professionals must often gather the planning information necessary to develop reward systems. In this case, compensation professionals should find out where the organization is headed, the goals and objectives for each level in the organization, and what behaviors are to be reinforced through the rewards system.
A key point to remember: In the strategic planning process, compensation planning and design come at the end. This way, compensation professionals can ensure that systems are rewarding the types of performance and behaviors that will ultimately allow your company to realize its strategy.
Strategic Shifts Impact the Compensation Approach
One manufacturer planned to move from offering machinery, which has a long sales cycle, to providing its customers more in-depth technical knowledge and support. This strategic shift required that the sales force develop consultative selling skills and the internal support staff build customer service skills. The shift also meant a new hiring approach to bring in people with the skills necessary for the company to achieve its overarching goal of moving from ninth place to third in the industry within five years.
To accomplish this strategic shift, the manufacturer's HR and compensation professionals needed to answer critical questions:
- Could the company re educate the affected employees in time to have the desired results within the immediate and intermediate time frames?
- How many new people needed to be hired?
- What were the desired background and experience required fill new roles?
- Were the new roles clearly defined and articulated to the employees and the customers?
- How many of the new roles required team work versus individual contribution?
- How would the company know when it was attaining its goals?
- Will cash be the only or the primary means of recognizing individual and company goal achievement?
Without answers to these questions, the company's HR and compensation professionals would be unable to develop the people systems, particularly compensation systems, which would support the achievement of the company's strategic goals.
Next post: Choosing the Right Compensation Approach
For more about how to align business strategy and compensation, contact our CEO, Don McDermott, at email@example.com or (732) 842-8634 for a no obligation initial consultation.