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Compensation Insights

Keep Your Compensation Strategy on Track

Compensation Planning Insights Part 3

keep your compensation strategy on trackIn earlier Compensation Planning Insights posts, I discussed the importance of articulating your company’s business strategy and aligning your compensation approach with strategy.

In this post, I’ll cover two common pitfalls that can knock your compensation approach and business strategy out of alignment and cause your company to fall short of its goals.

At McDermott Associates, we encourage clients to periodically review the linkage between their company’s business strategy and compensation approach, to ensure that the two remain aligned. This also helps you evaluate the effectiveness of your chosen compensation approach.

For example, if your company is now closer to meeting its strategic objectives than it was at the beginning of the strategic planning process, your business strategy and compensation approaches are most likely aligned and working synergistically. On the other hand, if your company has not moved forward as quickly as expected, you’ll want to look for two common compensation pitfalls.

First, look for the "Moving Target Syndrome". This syndrome may be difficult to detect because everything may appear to be in sync, with processes in place for planning and goal setting. However, a closer look may reveal that managers frequently change goals, targets, and objectives throughout the performance period, causing employees to change direction constantly. Companies that undergo frequent reorganizations are particularly at risk for the Moving Target Syndrome.

The syndrome also manifests itself in other ways. For instance, managers may change performance target just as employees are about to achieve them, often with the rationale that the targets were set too low or were not realistic. Or, managers lower targets if the original targets will not be reached. However it plays out, the Moving Target Syndrome can be devastating to a company’s efforts because employees become confused and frustrated without clear and steadfast performance objectives to guide them.

Second, beware of accelerated payments. Some companies will accelerate payments for long term performance before that performance is realized. For example, if an incentive plan has three  to five year time periods for goals, a company will make incremental payments to reward management for projected future performance. Unfortunately, past performance doesn't guarantee future performance will be at the same level. The company can get burned if performance drops and payouts against that performance have been made. Accelerated payments also reward and reinforce short term thinking among managers.

Don’t Make Compensation the Scapegoat

Resist the impulse to make compensation the scapegoat for unsatisfying results. After all, compensation is but one portion of the strategic planning and implementation process. It solves nothing to change compensation when the overall strategy or some other organization system is flawed.

For example, a bank holding company wanted to implement a short term incentive plan for its management team and increase senior management’s long term incentives. Why was the company making this change? Because competitors were doing it. Moreover, an analysis was done that seemed to indicate future operating performance might support such action. A retrospective and more detailed analysis of performance, however, indicated a different level of company performance that would not support the projected baseline for future performance. The challenge became for the company to fix itself by restructuring and hiring key executives to bring the company up to the level it thought had already achieved. For the short term, the company chose not to establish a new compensation plan but to rely on the current plan with more hands-on management by the executive team.

Concluding Thoughts

Compensation is an important tool for helping your company achieve its strategic objectives. However, you need to recognize that compensation is one step in a very dynamic strategic planning and implementation process. By ensuring that compensation is aligned with your business strategy, choosing the right compensation plan, and then periodically checking alignment, your company is more likely to achieve its objectives and keep its competitive edge.

For more about how to structure a compensation plan, contact our CEO, Don McDermott, at dm@dgm.com or (732) 842-8634 for a no obligation initial consultation.

 

Tags: compensation plan, comp plan, compensation strategy, business strategy, compensation planning insights, align business strategy and compensation, designing compensation systems