Successful business leaders recognize that a compensation philosophy mirroring the mission of their company is a key element in developing a strategy critical to ensuring competitiveness in the market place. Such a philosophy must simultaneously advance the financial health of the organization, link up the work that is desired to be done with the number of resources needed to effectively complete the work, and provide the necessary incentives to employees to buy into the company’s success. To these ends, the trick is to effectively reward and compensate employees within a performance-based pay plan that is understandable. This must be well-supported by both management and line positions, and directly link employee contributions to the success of the company.
To establish the basis for this performance-based pay plan, and its link to the business plan, the organization must be sure to articulate its vision and mission to its workforce. To be the most effective, objectives and initiatives for each division and/or department of the organization should be developed. This supports efforts to achieve the organization’s mission. Further, in developing these objectives and initiatives, the decision-making process should include an analysis of the number of exempt and non-exempt positions needed to successfully accomplish these objectives, and implement the identified initiatives.
Valuing the Position
In determining the market values for these exempt and non-exempt positions, the organization can plausibly rely on small regional and/or locally driven salaries for its non-exempt positions, and a larger regional or national geography for its exempt positions. Further, the market value, and range of key positions might reflect a pay philosophy in the organization of meeting 60% to 85% of this market value. The value or impact particular positions have within the organization to obtain its objectives and succeed in its mission (i.e., impact on the organization’s “bottom line”) must also be critically analyzed to ensure the internal equity among positions. Positions, whether exempt or non-exempt, are classified higher or lower within the pay plan based on these (i.e., external and internal) analyses. Bear in mind, the internal equity analysis, in particular, is an evaluation of the positions and not the persons occupying them. Importantly, evaluations of both external and internal equity must be reexamined and revised periodically by the organization to assure employees that their compensation is competitive in the market, and is maintaining the proper value and the impact positions have on the organization’s business plan. This better ensures that the organization’s investment in compensation of its human capital motivates its workforce, positively impacts retention, and thus advances its business plan.
Evaluating Performance
Elements of an effective performance-based pay plan ensures that employees are meeting or exceeding expectations for their positions, and that the evaluation system of the plan accurately reflects and documents personal performance. There are several keys to the effectiveness of the pay plan. Foremost is the proper training of supervisory personnel to conduct such performance evaluations. Success or failure hinges on the ability of supervisory personnel to effectively perform their roles as evaluators, and in the confidence employees have that the supervisors can do this competently. Recognition should also be given that movement up the range of a position’s compensation is based on continued and improved competency in meeting job expectations. Movement to the higher end of the range can be based on exceeding expectations. Importance must also be given in the performance evaluation to providing an effective feedback mechanism for the employees.
Investing in Human Capital
Lastly, a determination of the financial health of the organization is necessary to decide how much of a human capital investment the organization can afford to invest in the performance-based pay plan. For purposes of this brief, an approach might be to examine receipts over expenses in order to establish a health baseline measurement of 0 – 3 over, say, the past three (3) years, with 3 as the highest measure. What is the projection for the coming year? What might the organization expect its ongoing medical insurance costs to be for the coming year, as well as other key components of its benefits package? With this analysis, the organization can then decide where to establish its percentage increase pool for its pay plan. For example, the financial health of the organization might warrant a target 5.0% wage and benefit increase for the coming year. Within this targeted 5.0% pool, personal performance might be rewarded with varying percentage increases based on not meeting, meeting or exceeding expectations (example: does not meet = 0, meets = 2%, exceeds = 4% to 6%). Documented, concrete examples of not meeting, or exceeding expectations, are key to decisions on rewarding or not rewarding performances.
So many leaders are searching for a compensation philosophy that is equitable and fair, and the best place to start is from a supply and demand perspective relating human capital to the strategic needs of their organizations. Today organizations are heavily competing for talent and skills to effectively accomplish their business plans and create shareholder value. Making sure the talent and skills are performance and market based, along with being dedicated to the mission of the organization, secures its “bottom line” success and demonstrates an effective compensation philosophy.
By Bo Burch, Human Capital Solutions, Inc.
Leaders are Seeking a Compensation Philosophy that is Highly Linked to the Business Plan - To learn more about this author, visit Bo Burch's Website.
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Bo Burch
(Visit Bo's Website)
Bo Burch grew up on a small farm near
Lexington, VA and worked within a family
construction business prior to entering
and completing his undergraduate degree at
James Madison University in Virginia.
After graduating with honors within the
College of Business at JMU, he also
attended Michigan State University’s Labor
and Industrial Relations School and is
experienced at contract negotiations, the
grievance procedure, mediation and the
arbitration process.
He began his professional career with the
MASCO Corporation. Later, he was recruited
by International Paper, Coca Cola, Eaton
and Corning Inc. to lead organizational
transformations in highly competitive
global markets. He specializes in sizing
up and developing talent to meet the needs
of the business plan. Bo has authored and
developed technical and leadership
assessment centers emphasizing key
performance indicators, balanced
scorecards that optimize and demonstrate
the continuous improvement philosophy. He
has also contributed to a number of
articles on the subjects of compensation,
rewards systems and effective leadership
and organizational attributes.
In 2003, Bo founded Human Capital
Solutions, Inc. www.humancs.com in Wilmington, NC. Bo resides in
Wilmington with his wife Marian, their
three children Allyson, Abigail and their
son Palmer.
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