Compensation That Supports Your Business Strategy

By James C. Fox

YOUR BOSS has returned from the executive retreat where they hammered out a new strategic plan that will revitalize the company and lead you into lucrative new markets. Internal rallies are held, employee energy is high, and everyone wants to get going. So who will take this plan from concept to reality? You will. As the director of compensation and benefits, you are charged with translating the strategic business plan into a pay strategy that supports the company's mission and vision. But do you know what your options are?

As recently as five years ago, pay plans were pay plans. Everyone worked for a salary-plus-bonus, and only the bravest of pioneering organizations offered stock options and other long-term performance incentives to anyone outside of the executive suite.

Since then, however, a number of companies have successfully implemented innovative compensation strategies that may serve as a model for your business environment.

As a case in point, I recently was asked to help realign the compensation program of a mid-size insurance company to fit its new organizational strategy. What had been a most conservative company within a tremendously conservative industry was now looking to take a few more risks, allow more job flexibility for its employees, and take on competitors with vigor. At the same time, the company wanted to preserve its founding values, such as fairness, accuracy and concern for the customer's welfare.

By following the process described in this article, I discovered that this company's culture discouraged risk-taking and rewarded accuracy—even at the expense of productivity and competitive advantage. In addition, they rewarded consistency in performance, which translated to a lack of cross-training and advancement opportunities for employees.

At this company, the employees' attention was directed inwardly "How am I doing relative to expectations?" rather than outwardly "How are my customers' needs changing? What are our competitors offering?" Their business development strategy called for approaching the customer with a menu of predeveloped products and services.

In contrast, the new vision for the company involved becoming more sensitive to market needs and developing customer-specific products. The company had experienced a wake-up call when banks began offering insurance products, and companies that had formerly only offered automobile insurance suddenly decided to offer life insurance as well. But they had not done anything differently in order to meet the competition. In fact, they had continued to behave as if there were no competitors at all! Clearly the company had to make changes in order to succeed.

Be careful of what you ask for...you just might get it

The compensation program that was in place posed a challenge, however. In the same way that product development and marketing were inwardly focused, so were the company's pay strategies. They had a very formal job evaluation plan; committees would spend hours making sure that the jobs were correctly evaluated. When employees were given questionnaires to evaluate their own positions, they would write volumes about the importance of their jobs, agonizing over every word in the hope that their efforts would be rewarded with upgrades.

The job structure was so rigid that when employees were asked to depart even slightly from their normal duties, they would ask if it meant a job upgrade and whether their pay would increase. There were no rewards or incentives in place for employees below management level. In other words, the compensation plan fit the existing company culture quite well, reinforcing the behaviors that management valued: accuracy, consistency and parity.

Under the new strategy, the company needed to reward new behaviors, such as greater flexibility in accepting work assignments, the willingness to take calculated risks, and a higher level of performance. In addition, they needed to stratify their compensation structure so that they could use different methods to recruit and motivate employees in different occupational groups. Finally, they needed to react more quickly to market changes, particularly the encroaching competition.

In order to realign the compensation strategy with the newly developed business plan, I took the company's human resource executives through an arduous but essential process of evaluation. Our task was to answer two questions: What internal and external realities characterize the company and make it unique? What behaviors will be needed from employees in order to meet the new strategic business plan objectives? These are the questions that you also must answer as you redesign your company's compensation plan.

Compensation mirrors company culture

To identify your company's unique characteristics, you will need to look closely at its history and current culture, its organizational structure and practices, its strategies for hiring, promoting and rewarding employees, and the competitive and regulatory environment in which it operates.

Following is a list of the most basic questions that you should be able to answer before you draft a new compensation and benefits strategy:

• What is your company culture? In other words, what sort of behaviors does your organization currently value? Is it honesty and teamwork, or is it individualism and cutthroat competition? Has the culture changed over time? Why? Be honest in your evaluation. The company in our example had fostered a culture that was based on solid values but was stifling employees' talents and ignoring important market signals.
• What competitive and regulatory factors influence your company's success? Is your industry regulated? Does your company do business with the federal government? What is the nature of the competition? What is the labor supply for critical positions? How does the political/social climate affect your industry? Any or all of these factors may limit the pay and benefits options that will be possible for your organization. In our example, the company was not regulated, yet it failed to take advantage of its head start in the industry, allowing new and existing competitors to nab market share.
• How does your company operate? How big is your organization in terms of revenues and people? Where is it along the maturity curve? Does it serve a focused market niche or are you diversified? Does product development and delivery require highly trained talent? What are the company's financial, intellectual and technological resources? Is your company generally risk-averse or freewheeling? Is the organization internally focused or market oriented? The company in our example had 1,000 employees who managed more than $15 billion in assets. While turnover was not a major problem, the company was so rigidly structured that it missed opportunities to get the best work from its people.
• What is your organizational structure? Who does the decision-making? Are jobs defined narrowly or broadly? Is work organized functionally, cross-functionally, in teams, or in a combination of ways? Do your various business units work well together, or do they fail to communicate? Are employees generally clear about the direction of the company and about their roles in accomplishing its mission, or do they work at cross purposes? In our example, an outdated job evaluation system pitted employees and functional areas against one another, discouraging teamwork and interfering with productivity.
• What are your human resource strategies? How does the organization attract, motivate and retain the people it needs to meet its objectives? Does your company grow its own talent or hire from the outside? Do you plan for and measure performance, link pay to performance, and measure the right things? At the insurance company, the value of fairness was interpreted as parity: when it came to compensation and benefits, including recognition, everyone was treated equally and there were no "star" performers to set the pace for change.

The reason for answering all of these questions is that companies must understand where they are coming from in order to know where they are going. You will need to compare your company's new business plan to the status quo and identify the areas that are slated for change. That transition from the old way of doing business to the new vision should drive the development of your compensation strategy.

Avoid creating a "bridge to the past"

The compensation program you design should bridge the gap between where you are today and where you want to be tomorrow. It should motivate the desired behaviors on the part of employees and reward them for creating the desired results. But the way most companies currently pay employees is very consistent with the types of behaviors they have valued in the past. This is why it is critical for you to determine which behaviors will accomplish the objectives set forth in the business plan.

The following chart shows examples of pay program options which, in the appropriate work environment, can lead employees to help achieve business objectives:

Keep in mind that compensation is just one of a number of factors that can affect employee behavior. Stock options alone, for example, will not ensure loyalty, and some people do not work well in a team situation no matter what incentives you provide. Also, the dynamics of each work environment are unique. Therefore, it would be a mistake to view the information given in the chart as absolute, but rather as a guide.

Use compensation and benefits to achieve your business goals

Obviously, the design of a new compensation system cannot be accomplished in a single afternoon. After our evaluation process, the insurance company made two decisions:

• To remain true to the values that had served the company well and that were deeply ingrained in the minds and hearts of the employees; and
• To define some new behaviors that would better support these values, and to communicate and reinforce the new expectations internally through the compensation and benefits program.

As a result, pay was realigned to better compare with industry averages, rather than with the company's historical pay patterns. Further, jobs were organized into occupational groups for the purpose of job evaluation, so that comparisons would only occur among positions requiring similar work and responding to similar markets. The company also broadened salary ranges and significantly reduced the number of grade levels. Job descriptions were shortened from four pages to one page, and now describe duties more generically. There were other changes, as well.

What has been the outcome of all of this change? While it may be too early to assess the long-term impact, anecdotal responses from the company have been quite positive. "We feel that we finally have the tools we need to respond to our customers' needs," said one manager. "And our employees now have greater opportunity to grow and develop while achieving objectives for the company."

Whether your company is larger or smaller, simpler or more complex than our example, one principle prevails: Your compensation program will succeed if it is clearly integrated with your business plan. Whether a new strategic plan has been announced or your company is just entering a new fiscal year, it pays to make sure that your compensation program is helping employees to meet business goals. That is the best way to make your boss happy and to keep the energy alive.

James C. Fox, Ph.D., is a partner in the firm of Fox Lawson & Associates, llc, helping companies align their pay systems with their business strategies. He has 20 years of experience in performance-based compensation and human resources consulting. Fox Lawson & Associates has offices in Minneapolis-St. Paul, Minn., and in Phoenix, AZ.

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