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Compensation Insights

The Great Disconnect: Getting Compensation Back on Track

Align compensation with business strategyDuring times of major disruption and change, organizations need to maintain a laser focus on the business. Changing technologies, markets, sales approaches, and customer expectations require nothing less. The Great Recession was one of those times – a generational event that transformed many organizations in ways large and small.

Organizations can be forgiven for leaving compensation structures on autopilot while they addressed more urgent issues. However, benign neglect can turn into something more damaging if pay gets out of sync with the marketplace. In fact, this disconnect is happening to many organizations right now.

When one health care company began having difficulty attracting and retaining a strong workforce, a close look revealed compensation plans and programs that had not kept up with the market.

Job descriptions, for instance, were out of date and no longer reflected actual day-to-day responsibilities, making it difficult to identify hiring criteria and job candidates. Being in this situation at any time is never easy. However, as the labor market, especially for the strongest talent, continues to tighten, the health care company’s situation could easily have become catastrophic. When McDermott Associates got involved, we were able to alleviate some of those pressures. We worked with the company to revamp pay structure, and then analyzed the market and updated performance appraisal programs.

Like this health care company, many other organizations need to get back to basics and take a hard look at their compensation philosophy, plans, and programs to ensure they are aligned with business strategy, market-based pay levels, and the organization’s own vision and values.

It is time for some housekeeping now that the business environment has stabilized and continues to improve.

Returning to compensation basics

Getting back to compensation basics starts with answering four important and sometimes difficult questions: 

  1. Are comp programs and levels supporting business goals, objectives and strategy? Employee pay is not only the largest expenditure for most companies, it is also one of the most powerful ways to communicate what an organization wants to achieve and how it expects to achieve it. If programs are not aligned with broader business goals, objectives and strategy, companies are unlikely to maximize the return on employee pay. What’s worse, unaligned pay systems can undermine an organization’s efforts to achieve its strategy. On the other hand, organizations that reinforce desired behaviors and results through strong management and the right incentives can gain a significant competitive advantage.

  2. Is pay still aligned with the market? In a competitive labor market, organizations that are underpaying relative to competitors risk losing their best talent. Keep in mind, too, that an organization that is out of sync with the market could also be overpaying for talent.

  3. Are performance metrics and incentives driving the right business results? You get what you pay for, so it is crucial that the measures used to evaluate employee performance and determine rewards are supporting broader business goals and objectives. There are too many examples of incentives gone wrong for any organization to risk a disconnect here.

  4. Do job descriptions reflect what people are actually doing in their jobs? Accurate job descriptions are important for many reasons—accurately pricing jobs to the market, hiring the right talent, and communicating about roles and responsibilities throughout the organization, to name just a few. Yet, many organizations overlook the need to keep job descriptions current—that is, until they need current job descriptions so that they can fill crucial positions.

Depending on the answers to these four questions, organizations can find themselves with a laundry list of necessary changes and modifications. A bit of triage can help prioritize and keep executives, managers and employees from getting overwhelmed with change. For example, one manufacturer trying to address a comp system it had neglected for years spread out adjustments over 3 years after it found itself anywhere from 20% to 40% below market pay rates. By starting with the top 10% of employees and working its way down, the company was finally able to get things back in sync.

This blog will feature a series of posts to address each of these questions in more depth.

 

Share with us! What have been the consequences you’ve seen when comp structures are not aligned with the market?  

Tags: compensation plan, compensation strategy, business, align business strategy and compensation