How to maximize the value of your compensation programs
While the “right” plan will look different for every organization, here are some suggestions to craft your compensation plan.
Decisions about compensation are tricky, with potential indelible impact on a company. A strategically designed compensation program helps a business elicit the desired behaviors, drive the right sales outcomes, do consistent and predictable budgeting and planning, enhance its overall performance, remain competitive in the market, and win the talent game. But when managed poorly, the effects can be devastating.
As 90% of top-performing companies utilize incentive programs to reward their sales associates and properly structured bonus schemes can increase employee performance by 44%, it is critical for boards and management teams to get compensation right.
Related: How companies are adjusting their compensation plans
While the “right” plan will look different for every organization, here are some suggestions that can guide you along the way to get the most value out of your compensation plan both in the short and long term:
1. Compensation plans must have the ability to achieve strategic and operational objectives
Before digging into sales territories and roles and crunching the numbers, you have to start at the very top and identify your exact business objectives. By starting with purpose, the compensation system can be designed in a way that aligns the company’s reason for existing with an employee’s motive for coming to work and making it happen.
Here are some ways to ensure that comp plans fulfill strategic operational objectives while cultivating an engaging organizational culture:
- Don’t go solo: Work with executive stakeholders to get a deeper insight into your organization’s strategic and operational objectives so you can devise a plan focused on measuring and incentivizing performance that will actually support your vision, mission, and values.
- Communicate effectively: Employees will have a harder time aligning their behaviors if they do not understand the company’s raison d’être (reason for being). Leaders must transparently communicate the strategic and operational objectives at all levels of the organization as well as the steps that need to be taken to achieve them. Results should be communicated clearly, too.
- Provide constant feedback: Don’t wait until the end of the year to update employees on the progress made and the milestones achieved. A compensation system falters if people feel their efforts are trivialized or taken for granted. Regular updates give team members a better sense of their performance, help keep them on track, and make them feel respected and recognized.
- Share success stories: When deemed appropriate, leaders should highlight a team’s or an individual’s efforts and accomplishments to the largest possible audience as it encourages collaboration and helps clarify organizational goals and values. However, praise should suit a person’s preference. While some individuals enjoy public attention, others prefer a more low-key acknowledgment.
- Link strategy to operations: Introduce a comprehensive and integrated management system that links strategy formulation and planning with operational execution. Use operational objectives for short-term compensation awards and strategic goals for longer-term ones.
- Define meaningful metrics: A comp plan must be agile and flexible to make it meaningful to the individual. Employees perform better if they are faced with something actionable. In general, if a metric measures impact, clearly indicates one’s performance, and can help make more informed decisions, then it is a meaningful thing to measure. Involve employees in the process of setting performance metrics when felt necessary. Also, incorporate team and corporate goals and balance those with individual metrics.
2. Compensation plans should help retain and recruit top talent while shaping the organizational culture
Nearly 70% of employees of all generations agree that inadequate pay is the top factor motivating them to leave their jobs. Now with competition for talent intensifying, every company needs a standout compensation plan to organize and strategize how they will attract and retain top talent.
The following are some best practices that can ensure compensation programs help with retention and recruitment:
- Link compensation plans to the overall recruitment and people strategy: While structuring your compensation plan, keep in mind a longer vision of building an employer brand. Establish what the different roles and levels are within your company, provide a total rewards statement to the recruit, share what the company’s strategic objectives are, and what the expectations of the new hire will be.In addition, consider offering alternate compensation plans for new employees during the onboarding and ramp-up period. Constantly communicate performance once they are hired and link their actions and progress to the reasons why they were hired.
- Make employees invested in the company’s future: Leverage long-term incentives to make employees feel like an owner of the company. For best results, learn how to balance control and trust to create a culture of collective accountability. Utilize equity or phantom equity and communicate the participation in these programs in real time as well as the future potential of those awards.
3. Compensation plans should reward performance in a fair, equitable, and transparent way
Members of your team need to know for certain that they are being fairly compensated in relation to their performance and their pay level is equitable both internally with other employees doing the same type of work and externally with the outside labor market.
The compensation should be determined in an objective, transparent manner based on merit without any favor or prejudice against any religion, ethnicity, gender, or similar factors. Being fair also means you take into consideration the skill sets and experience that each team member brings to the table.
Here are some helpful tips to ensure your compensation plans are fair and transparent:
- Tell employees how the bonus programs work: Take the time to explain to team members in detail how the compensation plan operates. Develop and execute an effective communications strategy to educate employees and test it frequently. Be transparent and equitable—employees will share this information between themselves so it is crucial that they understand treatment is fair.
- Keep it simple: Do not overcomplicate your compensation structure. You should be able to summarize it on a one-page document and easily relay it to employees. There are many tools, resources, and templates that can help you simplify your compensation formula.
A worthwhile endeavor
Companies taking advantage of an incentive program reported a 79% success rate in meeting their established objectives when the correct reward was offered, meaning that it is one of the most significant drivers of success and is an investment worth making.
Amidst the coronavirus pandemic that derailed incentive programs, the silver lining is that it offered companies a golden opportunity to revisit their compensation strategies and incorporate metrics that serve enterprise, stakeholder, and employee interests in a broader and more meaningful way.
This chance can be seized only if best practices are applied to cultivate a performance-based culture, which serves as the basis of a compensation structure. Get the foundation right and everything else will take care of itself.
Perry Doody is co-founder and CPO at CompTrak. For more than 18 years, Perry has brought organizational transformation to large organizations across the financial, health care and retail sectors.
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