THE ULTIMATE

GUIDE:

Ho w to Bu i ld

a Co mple te &

C om pel l in g

Pay S t r a te gy

www.vladvisors.com ● www.phantomstockonline.com ● www.bonusright.com

2 | P a g e

Too often, by the time business leaders discover their compensation

offering is inadequate it’s too late. They lose a key player to another

organization that has offered her a “better deal” or fail to secure a top

recruit because their value proposition just isn’t compelling. In short,

a pay strategy cannot be an afterthought. It has to be approached

strategically and comprehensively or it will fail in its ability to attract,

develop and retain premier talent.

The word that could be used to describe the compensation approach

of most companies VisionLink encounters is—“incomplete.” If they

are successful businesses, they have inevitably done some good

things, but they just haven’t gone far enough in their pay offering. For

example, they may have a well thought out salary structure, a robust

benefit package and a solid annual incentive plan but they have no

means of sharing long-term value with those who create it. Or maybe

they do have a program that rewards sustained performance but the

company’s 401(k) plan doesn’t allow highly compensated people to

defer as much income as they would like. As a result, they are getting

hit hard by taxes and it is diluting the wealth building ability of those

employees.

So how does one approach the construction of a compensation

strategy that is both complete and competitive? Where do you start

and what does a “complete” value proposition look like? That is what

this guide intends to answer.

3 | P a g e

What Job are You “Hiring” Your Pay Strategy to Do?

Clayton Christensen is widely considered one of the world’s prominent

thought leaders on the subject of innovation. His observations on

creative disruption have changed the way businesses evaluate their

competition and shown how companies can remain not only relevant

but ahead of the transformation curve.

Christensen’s latest writings focus on a concept called the “theory of

jobs to be done” in which he posits: “When we buy a product, we

essentially ‘hire’ something to get a job done. If it does the job well,

when we are confronted with the same job,

we hire that same product again. And if the

product does a crummy job, we ‘fire’ it and

look around for something else we might hire

to solve the problem.” (Clayton Christensen:

The Theory of Jobs To Be Done, Harvard

Business School, Working Knowledge, Dina

Gerdeman, October 3, 2016)

Christensen’s premise doesn’t just apply to

the products we deliver to the marketplace. It

applies to all of the systems and strategies we employ in our business

including those related to compensation. His question is a good place

to start when developing a comprehensive pay strategy that can serve

the needs of both shareholders and employees in creating a unified

financial vision for growing the business.

Think about it. What if all CEOs carefully answered these questions

as they considered their approach to compensation: What job are you

hiring your rewards strategy to do? What is it intended to

achieve? What problem is it intended to solve? And how will you

know if it is performing its job?

How to Begin Answering the Question

To determine what job you are hiring your pay strategy to do, you must

start by addressing why you pay your people at all. Too often,

To determine what

job you are hiring

your pay strategy

to do, you must

start by addressing

why you pay your

people at all.

4 | P a g e

business leaders look at compensation as an issue they just have to

“deal with” and don’t give it much strategic thought. Perhaps they

institute an annual incentive plan because they think they need one to

be competitive, but then end up resenting the plan because

employees view it as entitlement. So, they “fire” their bonus plan and

“hire” another one in an attempt to change behavior or otherwise

rewire the way their employees think. In reality, employing an

incentive plan to make sure you’re offering a competitive pay package

could be a legitimate reason to “hire” (institute) a bonus

arrangement—if, in fact, that’s the job you need done. But you have

to know that going in before you can evaluate whether or not it’s

fulfilling its role.

A more strategic approach to

pay would be to adopt the

same mindset you bring to

building a go-to-market

strategy for the products you

develop. Presumably, when

you build a new offering for

your customer base, you think

in terms of the issues it is

going to solve for them. You

are careful to consider the

audience to which you are

appealing and then determine

what they will be able to do easier, faster, cheaper or better as a result

of your product. If you get it right, the market responds. When you

don’t, your sales reveal that you missed the mark.

Approaching compensation design is really no different. What is the

problem compensation needs to help solve in your business? What

is not happening organizationally now that needs to happen and how

might a given pay strategy be a potential solution? And who is the

audience to whom the value proposition needs to appeal if the

outcomes you’re looking for are going to be fulfilled? Here are some

of the core drivers and results that might be considered in defining the

“job” you want compensation to do for you.

5 | P a g e

Improve short and long-term

profitability (increased revenue,

improved margins, lower costs).

Improve shareholder value.

Accelerate innovation.

Increase the company’s ability to

attract and retain premier talent.

Provide clarity about roles,

expectations and outcomes.

Instill a stewardship approach to

employee roles.

Enable an ownership mindset on the

part of key people.

Link employee rewards to performance.

Build a unified financial vision for growing the business.

Christensen makes the point that until consumers find a product that

does the job they need it to, they will come up with “work arounds” to

get done what they need to get done. Similarly, business leaders are

constantly coming up with “work arounds” for their pay strategies

because there is no core philosophy driving the construction of pay

and no cohesive structure in which to manage, evaluate and adjust

their approach. (A pay philosophy and total compensation structure

are discussed in more detail later.)

Solving the Right Problem

Effective problem solving is

something with which every

organization wrestles. And few

are very good at consistently

solving the right problem.

Consequently, businesses

devote time and resources to

issues that aren’t central to

maintaining or improving a

company’s growth trajectory. Inefficiencies emerge and waste is the

result. Waste is an unrecoverable, real cost to an enterprise.

Business leaders

are constantly

coming up with

“work arounds” for

their pay strategies

because there is

no core philosophy

driving the

construction of pay.

6 | P a g e

Similarly, businesses often put pay plans in place that are designed

to address a particular issue without clearly identifying the problem

those strategies are intended to resolve. Consequently, they end up

encouraging behaviors or outcomes that not only don’t address the

key barriers the company is facing (the job they need their pay

strategy to do), they create new problems in their place. Here are just

a few examples:

In an attempt to overcome a lack

of stewardship for key initiatives

(original problem), a company

institutes an annual bonus plan. It

later discovers that an entitlement

mindset has emerged and the

company has put itself in the position

of paying out incentive income even

during unprofitable periods (two new

problems).

A private business begins sharing

stock with key producers in an

attempt to overcome attrition and the inability to compete for

premier talent (original problem). In doing so, the equity position

of previous shareholders is diluted and new shareholders have few

options for capitalizing on value increases in the business other

than waiting for a major transition event such as the sale of the

company (two new problems).

The owner of an enterprise wants to overcome a short-term focus

(original problem) and grow her business value in anticipation of a

sale. She institutes a phantom stock plan that pays out a benefit

only upon the sale of the company–which she anticipates

happening in 5-7 years. At the five year mark, she gets a second

wind and decides not to sell the business. Employees are left

wondering when they will be paid for the value they helped create

(new problem). What was intended as a positive, uniting incentive

becomes a morale breaker (additional problem).

Businesses often put

pay plans in place that

are designed to

address a particular

issue without clearly

identifying the

problem those

strategies are

intended to resolve.

7 | P a g e

Certainly, many more examples of this phenomenon could be given.

Hopefully, these adequately illustrate what happens when insufficient

attention is paid to addressing the right problem with a compensation

solution. In each of these examples, a valid problem had been

identified; however the analysis of a potential remedy was incomplete.

As a result, these companies not only didn’t fully solve the original

problem, they created additional (often worse) issues in its

place. There is nothing less effective than adding growth barriers to

a business when your intent is to remove them.

This tendency doesn’t stem solely from an inability to clearly identify

the problem business leaders are trying to solve. Rather, the issue is

they often just don’t go far enough in considering all the implications

of a given compensation strategy. They may be focused on the right

problem but the solution they intend to implement will create barriers

they haven’t yet considered. Business leaders need to be able to

envision this at the outset, not just recognize it in hindsight.

What this phenomenon leads to is an excess of unintended

consequences that become a drag on the organization. Instead, pay

should reinforce strategic outcomes that leverage the company’s

ability to achieve greater performance. If companies focus properly on

the “right” problem, and all of the implications of a considered rewards

plan, strategic byproducts will emerge and magnify the results a

company achieves. Here is an example of solving a problem in a way

that creates this positive effect while avoiding unintended (harmful)

outcomes.

8 | P a g e

XYZ Company is in growth mode and needs to attract certain

people to fill key positions. The problem is it doesn’t want to lock

in high salaries. However, it is in a highly competitive market for

talent. The best people have several career options within the

industry if they are good at what they do.

As a solution, the company decides to peg salaries between the

45th and 50th percentile of “market pay” but provide significant

upside potential through value-sharing. The latter will provide

unlimited “earnable” income that will be divided between short

and long-term value-sharing plans. Fifty percent of the

incentive will be earned as an annual bonus and the other 50%

will be applied to phantom shares based on a formula value.

The phantom shares fully vest over 60 months and start paying

out benefits in the seventh year. Thresholds and metrics of

company, department and individual performance are set to

define benefits under each plan

(earnable shares and bonus

ranges) by employee tiers. The

thresholds and metrics ensure that

benefits are only paid when

“sufficient” value has been created

(see discussion of productivity

profit later on in this guide).

An Employee Value Statement is

instituted to illustrate the total value

proposition for each key producer over the next ten years if a

targeted level of performance is achieved. Through the Value

Statement, employees can see that their financial partnership

with the company is not limited to a $175,000 salary plus

bonus. Instead, they are participating in a $2.5 million dollar

opportunity over 10 years (or whatever values and time period

apply to that company’s value proposition). And the company’s

pay philosophy explains why their pay package is constructed

Pay should reinforce

strategic outcomes

that leverage the

company’s ability to

achieve greater

performance.

9 | P a g e

that way and how the organization defines value creation; which

is the foundation of the value sharing in which the employees

participate.

Let’s think about how this

approach solved the problem

at hand while creating

“strategic byproducts” instead

of harmful “unintended

consequences.” The company

created a pay strategy that

offered potential recruits

significant upside earnings

potential while simultaneously

limiting the owner’s guaranteed

compensation exposure (solution). In doing so, it clearly framed the

financial partnership the owners wish to have with their key people

(strategic byproduct). The business differentiated itself in a

competitive talent market without over-committing on salary levels

(strategic byproduct).

Additional strategic byproducts of this approach include an increase

in the ownership mindset on the part of key producers and the creation

of a more unified financial vision for growing the business. Further,

the organization is able to construct a pay approach that significantly

drives value for shareholders while still creating rich payouts for

employees due to the “self-financing”

approach to value-sharing that is

adopted (see section on Pay ROI further

on). Benefits are only paid out of

productivity profit—a threshold of

value creation defined in the

company’s compensation philosophy

statement. This approach created a

“wealth multiplier” effect because all

stakeholder rewards were tied to unified,

business growth components.

Rewards solutions

should effectively

address the problems

you need to solve and

leverage the

opportunities on which

you wish to capitalize.

10 | P a g e

When you consider all of the things a pay strategy can help you

achieve as just described, thinking about the job you’ve hired it to

perform becomes a very logical and essential first step in the

development of your rewards approach. Christensen’s concept can

transform the way you think about compensation and lead to pay

solutions that effectively address the problems you need to solve and

leverage the opportunities on which you wish to capitalize.

Establish a Pay Philosophy

Once you have a general sense for the job you are hiring

compensation to do you are prepared to formulate your philosophy

about pay. Too many

businesses don’t take the

time to do this. As a result,

their employees don’t

understand what drives

compensation decisions or

the rationale behind their pay

package. And business

leaders end up trying one

rewards program after

another in search of a

strategy that “works.”

An article that appeared in Entrepreneur Magazine’s online edition

made the following observation about this issue:

Only 20 percent of people say they understand how their

employer determines pay, according to compensation research

firm Payscale. But that doesn't have to be the case, and it

shouldn't be. "Ten years ago, employers held all the

cards. Now, employees can be much better armed with data,"

said Tim Low, PayScale's senior vice president of

marketing. With sites such as PayScale and Salary.com,

employees have a greater ability to research what their work is

worth and a better opportunity to ensure they're being paid

fairly.

11 | P a g e

At VisionLink, in our work with CEOs across the country we hear

countless stories about employees making the case for a certain level

or type of pay (bonus, stock, etc.) based on the data they found on

the internet. Unfortunately, too many CEOs have a reactive response

when approached by employees about pay issues. As a result, they

often end up making matters worse instead of better with their knee

jerk remedies and band aid solutions. Frequently, the business leader

lives to regret his or her action because it either opens the flood gates

to further requests or creates an ad hoc approach to addressing

something that should have been handled strategically.

What’s just been described happens to

organizations that have no core

philosophy guiding how they make

compensation decisions and what their

rewards strategy will be. A pay

philosophy is a written statement that

company owners and senior strategy

leaders draft to spell out a value system

and construct that guides how people

will be paid in the company and why. It

should be constructed in a format that

can be easily shared and referenced

both when leadership makes decisions

about specific compensation programs and when it communicates the

nature of the organization’s pay system and its components to

employees. It acts as a kind of compensation “constitution” for those

charged with envisioning, creating and sustaining the rewards

strategy of the company.

A good compensation philosophy statement will define and articulate

the following:

1. How owners define value creation. This means

delineating and communicating the threshold at which owners

feel that business performance is attributable to people at work

in the business and not just shareholder capital (already) at

A pay philosophy

acts as a kind of

compensation

constitution for those

charged with

envisioning, creating

and sustaining the

rewards strategy of

the company.

12 | P a g e

work. (See discussion about productivity profit later in this

report.)

2. How and with whom owners believe value should be

shared. This addresses what happens with the value that is

created through the productivity and performance of individuals

and teams in the organization. Will the company share

equity? If so, under what circumstances? If not equity, how will

value be shared? And so on. (See also #5.)

3. How increased earnings opportunities can be

attained. Organizational leaders need to decide, for example,

whether they want higher income potential to be realized by

moving up through salary grades or whether value sharing will

be the primary means of increasing one’s compensation. This

means that, philosophically, leadership needs to spell out the

extent to which pay levels will be driven primarily by

performance factors—be they individual, team/department or

company related.

4. The balance the business wants to maintain between

guaranteed and variable compensation. This a further

refinement of #3 that defines how the company will address its

pay construct in real life terms and on what basis. For

example, where does the company want to be relative to

market pay for salaries? What about for total compensation? If

13 | P a g e

it believes it should be at the 80th percentile for salaries, what

will this mean for how much emphasis will be placed on value

sharing opportunities? Will the balance between salary and

variable pay differ for each pay grade or tier? (Probably) And

why does the company believe this is the right balance to

strike? All of these questions should be addressed in the

philosophy statement.

5. The rewards emphasis the company wants to put on

short versus long-term value sharing. This is really a

decision about whether the company will be focused

more on immediate or on sustained results. Business

leaders need to determine whether they want employees

focused on performance “sprints” (of say 12 months or less)

or longer-term outcomes. Again, will this vary by tier or other

employee classification? If so, what is the right balance at each

level? This is not an

“either or” issue but rather

one of emphasis. Pay

through value sharing is

one of the ways the

company communicates

performance and results

priorities. If both short and

sustained performance are

of equal value, the pay philosophy should articulate that.

6. How the company will finance its value sharing

plans. This is easily determined if company owners have been

clear in their value creation definition as described in #1. For

example, a business might say that value sharing must be “self-

financing”—meaning benefits will only be earned when

sufficient value has been created—and will be paid solely out

of a productivity profit. A business’s productivity profit is the net

operating income that remains after accounting for a capital

“charge” (from operating income) to protect the return

shareholders expect on their capital contribution. (A more

14 | P a g e

complete discussion of productivity profit is included in the

section on compensation ROI further on.)

7. How the company will address merit versus cost of living

increases. If an organization has clearly defined what value

creation means, and is committed to the concept of a

productivity profit, the philosophical framework is in place to

define what it intends for merit pay. When the other six factors

listed here are addressed properly, cost of living increases will

likely only apply to limited positions within the organization. All

increases will be merit-based. In conjunction with #4,

leadership just needs to determine how much weight it will

place on guaranteed compensation versus incentives and with

the former, what performance criteria will drive the salary

increases for which employees can become eligible.

A philosophy statement may address

more or less than those seven

issues. What’s critical is that an

organization thinks through what it’s

willing to “pay for” and why. If it has

made the effort to get clear in its

thinking about the role it wants

compensation to play, it can address

employee questions and challenges

from a position of operational

integrity and strength. When it can

communicate a well thought-out

philosophy, some employees may still disagree with or not like it, but

they can’t claim it’s unfair. This is because the philosophy statement

is merely reflecting the economic values of the organization in support

of the company’s vision, business model and strategy. In a sense, it

becomes a kind of screening device for recruiting and retaining

talent. If someone doesn’t relate to the rewards philosophy of the

business, there’s a good chance that person is not a good fit for the

organization. After all, the compensation philosophy in essence

describes the nature of the financial partnership company leadership

The philosophy

statement merely

reflects the economic

values of the

organization in support

of the company’s

vision, business model

and strategy.

15 | P a g e

wants to have with its employees. If an employee is looking for a

different kind of economic relationship, the pay philosophy will bring

that conflict to light.

The CEO’s Role

One of the core conclusions of this compensation philosophy

discussion is that pay requires strategic thinking. Strategy requires

leadership. As a result, CEOs must assume a governing role in the

discussion of a pay philosophy. An organization’s compensation

values emerge from the company’s performance framework—for

which the company’s chief executive is responsible. They must reflect

and support shareholders’ growth expectations and enable a

performance culture.

The CEO is the ultimate steward of the shareholders’ interests and he

or she relies upon a productive workforce to make sustained results

possible. That is why the chief executive’s role in building the

company’s pay philosophy and strategy is so important.

When a philosophy is defined and enforced, there is inherent

accountability built into the way people are compensated—thereby

making pay another engine of growth within the business. In that

sense, rewards can become a kind of growth partner to the

organization’s business leader. The accountability that is baked into

compensation rooted in a clear philosophy has two dimensions: 1) pay

becomes accountable for generating a positive return because it is

16 | P a g e

tied to value creation, and; 2) the way people are compensated ties

employees’ financial interests to the outcomes the company needs for

breakthrough growth to be achieved.

Too many chief executives want to keep compensation planning at

arm’s length and view it as a cost that needs to be contained as much

as possible. Leaders who approach things that way keep themselves

from using pay as the strategic tool it is intended to be. The result is

that compensation ends up hindering company performance instead

of being a growth driver. Conversely, the underlying assumption of a

rewards philosophy is that pay is a critical investment that has to be

properly allocated and measured for its return. Chief executives who

treat it as such find compensation to be a critical factor driving the

performance they need.

When a CEO engages in the practice of developing a clear

compensation philosophy, he or she will find most pay-related

decisions become much easier to

make. They essentially make

themselves. In addition, employees will

have greater clarity about the vision of the

future business, the business model and

strategy that will fulfill that vision, the roles

they play in that model and strategy and

what’s expected of them in those roles,

and how they will be rewarded for fulfilling

those expectations. And that kind of

line of sight is the primary source of

employee productivity, performance and

engagement. (A more complete discussion of line of sight is included

later on in this guide.)

The underlying

assumption of a

rewards philosophy

is that pay is a critical

investment that has to

be properly allocated

and measured for

its return.

17 | P a g e

Completing Your Pay Strategy

Now that we have decided what job we want compensation to do and

have developed a pay philosophy to define the underlying principles

that will guide our approach to pay, we are ready to start considering

what our rewards strategy should include. So let’s talk about what it

means to have a “complete” compensation plan—one that makes our

employee value proposition both compelling and balanced.

One of the “jobs” most

companies hire their pay

strategy to do is reinforce

the performance standards

the company needs to

maintain for its growth goals

to be achieved. Business

leaders have performance

standards because they are

trying to develop a

performance culture. That

environment exists when

virtuous cycles of focus,

execution and sustained success are reinforced and repeated. When

they are, consistent wins are the result and a culture of confidence

emerges; people know the company is going to succeed and they are

invested in its victories. So the question we need to answer for

ourselves is this: What approach to pay will reinforce and encourage

that kind of cultural mindset and unleash employee commitment and

engagement instead of stifling it?

Unfortunately, there is not one magic plan or strategy that ensures a

performance culture will take hold in an organization. However, there

is a secret to developing rewards strategies that unleash greater

motivation on the part of your workforce. The secret lies in appealing

to what might be referred to as the employee “financial hierarchy of

needs” when it comes to constructing a pay approach. Borrowing

from Maslow’s concept, we can examine compensation in the context

18 | P a g e

employees apply as they evaluate whether or not their employer’s

value proposition is “motivating.”

Fostering Trust Accelerates Performance

There are five levels to the

pay “hierarchy” that your

people evaluate in making

a determination about the

quality of the value

proposition you offer

them. While each level

serves a different purpose,

as a total unit they

communicate whether or

not your organization

demonstrates integrity in the way it operates. Employees want to see

continuity between the company’s vision, its business model and

strategy, their roles and what’s expected of them in those roles and

how they will be rewarded for achieving those expectations. If that

kind of line of sight doesn’t exist, employee dissonance takes

root. Left unaddressed, the incongruity individuals are experiencing

breeds distrust, which is the enemy of engagement and performance.

In his book The Speed of Trust, author

Stephen M. R. Covey asserts that the trust

level in an organization affects two things:

speed and cost. When trust goes down, speed

goes down and costs go up. Conversely,

when trust goes up, speed goes up and costs

go down. We could probably also deduce from

this that when trust and speed go up,

sustained performance also goes up.

In short, trust has a huge economic impact. Accelerated results

coupled with diminishing costs are the epitome of the performance

most business leaders seek. Simply put, trust means confidence. The

Distrust is the

enemy of

engagement

and

performance.

19 | P a g e

opposite of trust, mistrust, is suspicion. Covey makes the point that

whether it's high or low, trust is the "hidden variable" in the formula for

organizational success. The author explains it this way:

The low trust environment is a result of violating principles--not

only individually, but organizationally. Leaders are missing the

solution because they are not looking at the systems,

structures, processes and policies that affect day-to-day

behaviors. They are focused on the symptoms instead of the

principles that promote trust.

This misalignment creates symbols that represent and

communicate underlying values to everyone in the

organization. A symbol can be either negative or positive; from

a 500-page employee handbook, to a newly appointed CEO

who refuses to accept a pay raise because it might send the

wrong message to workers.

In summary, get compensation right and you will see trust increase in

your organization. If you increase trust, you increase speed--and

when you increase both, costs go down and sustained results go up.

Employee Financial Hierarchy of Needs

With that framework in mind, let’s examine the five levels within the

employee financial hierarchy of needs and how, when they are

effectively addressed, employee trust in the organization

improves. This sequence is the secret to building a pay strategy that

builds confidence and, therefore, higher performance and

engagement.

20 | P a g e

1. Cash Flow and Living Standard. Employees make

decisions about where to live, where their kids can go to school,

what kind of vacations they can take, how much they can invest,

what kind of car they can afford to buy and a host of other

financial decisions based on the compensation they anticipate

receiving from their employer. This is one of the most basic

evaluations your employees make. If they sense their level of

skill and experience should allow them to maintain a standard

of living above that which your pay offering is allowing them to

enjoy, they will likely constantly be on the lookout for a better

economic opportunity. Conversely, when you apply a pay

philosophy that articulates an income opportunity (both short

and long-term) that is tied to value creation, your employees

feel in control of their earning capacity—and therefore are less

likely to be thinking the “grass is greener” elsewhere. When

push comes to shove, your people will typically pick a higher

standard of living over intrinsic rewards every time.

Companies address this need by

constructing an effective balance

between salary and annual

incentive compensation. Those

are the two primary means your

people look at to determine the

kind of living standard they will

have under your compensation

offering. A company’s pay

philosophy should articulate what

kind of balance it will strike

between guaranteed and incentive

pay, including annual bonuses. It can then use pay data to

decide where it wants to be relative to the market on both

issues. Some may determine it’s best to be at a mid-range

percentile of market pay for salaries but provide high or

unlimited upside potential through value-sharing. Others may

feel a better strategy is to be at the high end of the market for

salaries and provide modest incentives. It’s all dependent upon

When you apply

a pay philosophy that

articulates an income

opportunity that is

tied to value creation,

your employees feel

in control of their

earning capacity.

21 | P a g e

the outcomes a given company wants to achieve and who it

needs to attract to produce those outcomes.

2. Risk Protection. Employees evaluate their financial

vulnerability differently depending on where they are in their

careers and in their family life. For example, a millennial

employee who is single and in her first or second career

position is not likely heavily focused on the quality of her

employer’s health plan and the amount of life insurance her

beneficiaries will receive if she dies. Conversely, a highly paid

and high-performing executive with a family might insist on

flexibility in how his benefit dollars are allocated. He may want

to have access to a

range of health plan

options, a group legal

benefit or disability

income insurance that

replaces his earnings if

he is no longer able to

work. He wants to have

control over how to

manage the financial

risks to which he is

vulnerable at this stage

of his career.

Where companies run into trouble and lose the confidence of

their workforce is when they take a “one size fits all” approach

to constructing benefits. At a minimum, organizations should

consider having an executive benefit arrangement that

supplements its general plans so the needs of both key

contributors and entry level employees are properly

addressed. This again breeds confidence and trust in company

leadership because it reflects an awareness of who their people

are and where those employees place this need in their

financial hierarchy.

22 | P a g e

3. Retirement Planning. Most employees look to the company

for whom they work as the channel through which they can

accumulate funds for retirement. However, as with the benefits

category, this area needs to reflect the distinct needs

employees have depending on their career and life

circumstance.

The most common deficit that exists in this regard is in providing

for highly compensated employees. Qualified retirement

programs such as 401(k) create a kind of reverse discrimination

for high income earners. The amount of contribution they can

make to a qualified plan is dictated by what non-highly

compensated people contribute. As a result, they are not able

to accumulate as high a retirement value relative to their

incomes as people with more

modest incomes. In addition,

employees with high incomes look

to their retirement plans as a

means of sheltering income from

current taxation. This becomes

almost as important to them as the

amount they can accumulate

towards retirement.

Smart companies solve this issue

by offering their executive and

other management level employees some kind of supplemental

401(k) or deferred compensation plan. Often, they will include

a match that is tied to performance so key people are incented

to drive better results—knowing that the increased value they

are creating is going to inure to their long-term financial benefit.

4. Long-Term Value Sharing. Of paramount importance

to “catalysts” and other top performers in your organization is

participation in the value they help create. Those of superior

talent are attracted to the value sharing concept because they

want and expect to participate financially in the growth they help

Retirement planning is

an area that must

reflect the distinct

needs employees

have depending on

their career and life

circumstance.

23 | P a g e

create. Here we are talking about

those possessed of abilities that

can dramatically change the

growth of the business. Catalysts

represent the kind of talent

most businesses should be

trying to attract. There is

competition for these people

because there is such a

shortage of highly-skilled

individuals in today’s talent

marketplace. And businesses are not just competing against

other companies for them. Most catalysts will start their own

businesses if the opportunity with a given organization doesn’t

mirror the entrepreneurial experience they’re looking for—

including and especially financially.

In an interview with TV talk

show host Charlie Rose not

long before Facebook went

public, Mark Zuckerberg said

this:

I actually think the

biggest thing for us is

that a big part of being

a technology company

is getting the best

engineers and designers and talented people around the

world. And one of the ways that you can do that is you

compensate people with equity or options. Right?

So you get people who want to join the company both for

the mission because they believe that Facebook is doing

this awesome thing and they want to be a part of

connecting everyone in the world. But also if the

company does well then they get financially rewarded

and can be set.

Of paramount

importance to

“catalysts” and other

top performers in your

organization is

participation in the

value they help create.

24 | P a g e

… we`ve made this implicit promise to our investors and

to our employees that by compensating them with equity

and by giving them equity that at some point we`re going

to make that equity worth something publicly and liquidly

-- in a liquid way. Now, the promise isn`t that we`re going

to do it on any kind of short-term time horizon. The

promise is that we`re going to build this company so that

it`s great over the long term. And that we`re always

making these decisions for the long term. (From a

transcript of an interview on Charlie Rose, PBS, on

November 12, 2011; emphasis added.)

The point Zuckerberg was making had little to do with whether

or not a company should share equity or go public. There is a

larger principle he is defining. When companies can attract and

retain the kind of people that think and perform as he describes,

they are in a unique position to sustain results. This is because

a distinct and lasting interdependency emerges between the

employees’ skills and the company’s resources that extend

those skills (capital, co-workers, suppliers, products,

technology, etc.). Talented contributors soon learn that their

skills are not as unique and applicable outside the company as

they are within the enterprise. That’s a mindset a company

should want its talent to have because of the mutual

dependency it creates. Long-term value sharing reinforces that

sense of shared dependence and therefore leads to higher

performance.

25 | P a g e

5. Wealth Accumulation. In an employee’s mind, all of the

above translates to the total wealth accumulation opportunity

your value proposition represents to them. Each person has a

different contribution ambition in mind for their future which will

require a certain wealth standard to

achieve. As a result, your key

people in particular take a

composite view of the pay programs

you offer and evaluate whether they

will provide them the accumulation

opportunity they’re looking for. If

your value proposition doesn’t, they

will search for an organization that

will provide it. On the other hand,

when your offering is consistent with

their personal growth ambitions,

they feel motivated to realize the full

benefit of what their compensation

provides. It’s not that any specific program is a motivator for them,

per se. It is the comprehensive yet personal impact of their value

proposition that makes achievement of the company’s financial

goals more relevant to them; thus driving them to higher levels

of performance.

This secret to building pay

strategies that motivate

employees to perform on a

higher level requires a different

mindset about compensation

than most company leaders are

used to adopting. No longer can

organizations deal with their

pay plans as necessary “evils”

they have to just “deal

with.” Business leaders must

embrace pay as engine of performance which, when

constructed properly, can help a culture of confidence to take

root and success be sustained.

When your wealth

accumulation offering

is consistent with your

key people’s personal

growth ambitions,

they feel motivated to

realize the full

benefit of what their

compensation

provides.

26 | P a g e

The Four Parts of a Complete Strategy

Once we have an understanding of the employee financial hierarchy

of needs, we can turn our attention to how those areas of focus

translate to a compensation approach a company should adopt if it

intends to address those expectations. A pay strategy is complete

when it includes four critical parts. Each of these elements assumes

the company has already thought through its compensation

philosophy and will develop specific plans within each of these

categories that reflect the principles to which its leadership has

committed in that written document.

1. A Value-Centered Salary Structure. Companies normally

tie their salary levels to market pay in one form or another. At

VisionLink, we are certainly proponents of looking at market

data in making those evaluations and many of our clients

engage us to help them with that analysis. However,

companies run into trouble if they rely too completely on those

surveys to build their salary structure. Heavy emphasis must

also be placed on evaluating data in the context of the

organization’s value creation standards and performing an

“internal equity” analysis. This means that salaries tied to roles

and stewardships which have a direct impact on company or

even department performance are defined and adjusted based

on the value employees create—or at least should be able to

impact. Internal equity means that the company acknowledges

27 | P a g e

certain positions should be measured for their value creation

impact and opportunity relative to other positions and not solely

based on what market data says that role is worth.

With that understanding in mind, an organization must then

decide what salary construct it is

going to use. In a traditional

approach, positions are organized

within a variety of salary ranges,

each with a minimum, midpoint,

and maximum. Rewards eligibility

and targets are determined by

those levels. In a broadband

structure, positions are

categorized within a few wider

ranges to allow for maximum

discretion in pay decisions.

Rewards eligibility is flexibly

determined by band. A hybrid salary structure allows for broad

elasticity inside a progressive pay hierarchy by blending the

traditional and broadband approaches.

There isn’t a right or wrong approach to creating salary

bands. What’s important is that employees know what the

salary hierarchy is and how one moves through it. In

addition, they want to understand the company’s philosophy

about fixed pay. For example, one company may decide it

wants to be at the 45th percentile of market pay for its executive

level employees while another will target the 80th to

90th percentile. In either case, the philosophy needs to

articulate the company’s position on salaries as it relates to the

value creation and internal equity elements just discussed

(whether the company’s philosophy is high salaries with lower

value sharing or vice versa).

All of this points to the need for companies to have a system for

gathering and evaluating market pay data. Because data is

There isn’t a right or

wrong approach to

creating salary bands.

What’s important is

that employees know

what the salary

hierarchy is and how

one moves through it.

28 | P a g e

imperfect, it is recommended that three to four surveys be

obtained and then averaged to determine a justifiable market

level for each category of positions. Again, the organization’s

philosophy statement will (or should) address what roles may

fall outside the dictates of the data and where it wants to be

relative to market pay for others.

2. Balanced Value Sharing (Short and Long-Term

Incentive Plans). This has to do with using pay to reinforce

the importance of maintaining the revenue engine of the

company while simultaneously focusing on growth—and doing

so in a way that helps employees achieve their wealth-building

goals while still protecting shareholder growth interests and

ambitions. If your compensation strategy rewards only one or

the other (short or long-term performance), employees will likely

have only half the focus you want them to have. The value

sharing approach you adopt needs to emphasize both priorities

and help the company sustain a kind of performance

equilibrium. This allows incentive plan participants to realize

significant earnings potential by being completely aligned with

the growth goals of the company in their performance.

Although there is no silver bullet for how to strike the exact right

balance between short and long-term rewards in every

organization, here are some general guidelines to keep in mind.

29 | P a g e

A. Short-term value sharing should reward the successful

maintenance of the company's revenue engine. You

want a reward system that reinforces the execution

of the business model

but with an eye on

the leverage points that

impact the growth trajectory

of the business. This

will require you to define

clear roles, outcomes

and expectations. Since

the business model

defines how the company

generates revenue, if some

component of pay is not

tied to it you can’t expect it

to be an area of focus for

your people.

High performers feel empowered by this approach. It

affords them a level of control over their annual earnings

contingent on their ability to impact value creation. They

see this component of pay as a means to maintaining the

living standard they

feel they’ve “earned”

at this stage of their

careers while also

building wealth. And

by tying value sharing

to roles, outcomes

and expectations, the

company is able

to provide superior

income opportunities without putting shareholders at

risk. This is because the value sharing approach

promotes accountability; you share only in the value you

create.

Balanced value-sharing

has to do with how

you use pay to

reinforce the

importance of

maintaining the

revenue engine of the

company while

simultaneously

focusing on growth.

30 | P a g e

B. Long-term value-sharing should reward sustained,

"good" profits. When the first guideline (just discussed)

is followed, profitability should—at least in theory—occur

regularly. However, you shouldn’t be interested in

just any kind of profits; you want good profits. Good

profits are those that build lasting value. "Bad" profits,

on the other hand, come with an offsetting long-term

cost—diminished customer or supplier relationships,

lowered cultural morale, impaired growth leverage,

and so on. The right combination of short and long-

term value sharing creates operational integrity

and accountability

in your pay

strategy. The dual

focus encourages

participants to pay

attention to what

needs to get

done “this year”

without sacrificing

the long view—

because both their

immediate and

long-term economic well-being is tied to both

performance periods.

Each organization needs to determine which long-term

value sharing approach is best for its company.

Sometimes offering stock is inevitable, but there are a

range of options available that don’t involve giving equity

away. Most organizations need outside help in

determining both the right balance between short and

long-term incentive plans and what kind of plan will best

accommodate the results they are trying to achieve.

However, regardless of the specific plan chosen, a

competitive pay strategy must include a means for top

producers to participate in the growth they help

31 | P a g e

drive. This makes them feel like a true partner in the

company’s success and allows them to have an element

of their earnings opportunity that mirrors that of

owners. That creates a unified financial vision for

business growth.

3. A Flexible and Comprehensive Benefits Package.

Premier talent is looking for ways to maximize its wealth

building opportunities. As a result, when it comes to benefits,

high performers want options. As indicated earlier, some may

be married, have children and are concerned about superior

medical protection. Others may be single and would prefer to

have “adequate” coverage for health risks but want to make

sure their income will be replaced in the event of a

disability. You may have employees who will embrace vision

care while others would prefer to use those dollars for a legal

benefit or to increase the funding of their health savings

account.

The message here is that you shouldn’t assume a “one size fits

all” approach to benefits is going to work when

you’re competing for talent. You must understand the profile of

the people you want to attract and retain and then think in terms

of the range of needs and desires different groups will have

when it comes to this rewards element. Flexibility but with limits

is a good philosophy to assume in today’s environment. You

can’t be everything to everyone, but you can provide a range of

benefits that makes your people feel like they have choices.

32 | P a g e

4. Executive Benefits. You make a mistake if you assume

you can treat key producers like everyone else in the

organization. Again, in a competitive talent environment, the

best people have options. Others will offer them a car

allowance, flextime, sabbaticals, education funding or other

perks. As with the flexible benefits

approach addressed above, you

will need to determine what

combination of offerings the

people you are trying to attract will

find most valuable.

Security benefits are an

inexpensive but meaningful way

to address the needs of the primary growth contributors in

your organization. Cash value life insurance plans,

supplemental disability replacement coverages and even long-

term care insurance (for those over 50) can round out your

offering in a way that makes participants feel like you

understand the financial vulnerabilities they face. This can be

an important differentiator when competing for premier talent.

One of the most critical

executive benefit areas for

attracting and retaining

highly compensated

people is some form of

401(k) mirror or deferred

compensation plan. These

programs serve two

purposes. First, they

allow key contributors to

build a retirement account that will replace a higher percentage

of their earnings than a qualified retirement plan is able

to. Second, it offers participants a means of deferring income

to a future date so they can save current income taxes. The

limitations on contributions to 401(k) plans make it difficult for

You make a mistake if

you assume you can

treat key producers

like everyone else in

the organization.

33 | P a g e

high income individual to experience any meaningful tax relief

through that kind of channel. And this is an important issue for

high income earners.

More could be said about each of the four elements of a “complete”

compensation strategy. Your organization should explore what

additional plans or approaches would best bolster each particular area

within your offering. Regardless of what should be added or

subtracted to meet the demands of your circumstance, hopefully the

framework just covered gives you a sense for what it will take to build

a value proposition that allows you to compete in the talent wars that

are raging. The competition is only going to increase.

Build and Maintain a Total Compensation Structure (TCS)

A TCS is a framework you build for managing and analyzing the range

of pay and benefit plans you are offering. Ideally, it gives you an “all

in one place” view of every employee tier, what plans each is eligible

for and at what level. It allows you to evaluate your entire value

proposition as a whole instead of each individual component in

isolation. Within this framework, it is easier to make decisions and

adjustments in specific pay plans because you can measure

each against its impact on the whole picture.

When properly designed, a pay structure becomes the practical, “real

life” manifestation of a company’s rewards philosophy. Ideally, a

34 | P a g e

company’s TCS is consulted before adding any new program. That

way, as plans are developed, they are

always measured against their impact on

the composite pay strategy. A total

compensation structure gives company

leadership a comprehensive lateral view

of all rewards programs and the degree

of their alignment with the organization’s

rewards philosophy. A pay structure is

much more than a salary structure

(although a salary structure is part of it).

If a pay philosophy is the company’s

“North Star,” the TCS is its sextant

guiding the organization to the desired

rewards and results destination.

A pay structure can be used by an organization of any size. Let’s

assume that the pay structure illustrated below was built based on a

company’s pay philosophy for its unique organization. Rewards

eligibility is classified by grade level (1-14). Each position within the

business falls into one of the assigned grades. The structure defines

competitive salary ranges, identifies bonus and long-term incentive

targets, shows the retirement plan match percentage and establishes

budgets for health and other benefit plans.

Min Mid Max

1 203,531 271,375 339,219 50.0% 100% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 15,000 20,000

2 150,078 200,103 250,129 35.0% 75% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 10,000 12,500

3 119,497 159,329 199,161 25.0% 50% 100% 0% 5% Yes 5% $11,141 25 5 5,000 8,000

4 102,632 136,843 171,054 20.0% 25% 100% 0% 5% $6,127 25 5 5,000

5 81,293 101,616 121,940 15.0% 5% $6,127 25 5 5,000

6 69,720 87,150 104,580 15.0% 5% $6,127 15 5

7 58,564 73,205 87,846 10.0% 5% $6,127 15 5

8 50,176 62,720 75,264 10.0% 5% $6,127 15 5

9 44,038 51,809 59,580 5.0% 5% $6,127 15 5

10 37,211 43,777 50,344 5.0% 5% $6,127 10 5

11 30,784 36,217 41,649 5.0% 5% $6,127 10 5

12 23,562 27,720 31,878 5.0% 5% $6,127 10 5

13 19,529 22,975 26,421 0.0% 5% $6,127 10 5

14 17,354 20,417 23,479 0.0% 5% $6,127 10 5

Annual Car

Allow

Grade/

Band Sick Days

Salary Range

Bonus

Target

LTIP

Target

Financial

Planning

Perk

Deferred

Comp

Elegible

Deferred

Comp Max

Match

401k

Match

Max %

Vacation

Days% Phantom

Stock FV

% Phantom

Stock AO

Health,

Dental,

Life

A total compensation

structure gives

company leadership a

comprehensive lateral

view of all rewards

programs and their

alignment with the

organization’s rewards

philosophy.

35 | P a g e

When a TCS is built properly, it allows you to have integrity in how

you operate your overall compensation strategy. By integrity we

mean there is continuity and consistency between the company

vision, the business model and strategy, the pay philosophy,

employee roles and expectations and specific rewards for achieving

results. That structure creates the assessment symmetry needed to

achieve the right balance between salaries and incentives—and every

other part of your pay offering. The chart referenced above illustrates

what a Total Compensation Structure

dashboard might look like once it is

complete.

In the end, perfect design is rarely

achieved in an organization’s approach to

compensation. However, if you use the

Total Compensation Structure in your

planning, you will be able to quickly

identify gaps and deficiencies and move

more efficiently to make the alterations

and adjustments that are needed.

From “Complete” Compensation to Total Rewards

Many business leaders conclude compensation is not a factor in

engagement because they read that pay (and incentives more

specifically) is not a “motivator” when it comes to employee

performance. It’s an age-old conflict in search of a resolution.

However, the question of whether compensation does or doesn’t

impact motivation really misses

the point. In the context

addressed here, we’re not talking

about pay being used to “motivate”

anyone. Rather, compensation—

including value-sharing—should

be part of a larger Total Rewards

framework an organization adopts

of which financial rewards are just

When a total

compensation is built

properly, it allows

you to have integrity

in how you operate

your overall

compensation

strategy.

36 | P a g e

one component. Growth-oriented companies use a Total Rewards

approach to ensure their employees’ intrinsic drive is not stifled by

factors that inhibit the autonomy, mastery and purpose--elements

authors like Daniel Pink point to as the primary forces motivating

performance. In a Total Rewards construct, equal attention is paid to:

1. Compelling Future. This means the company paints a clear

and persuasive picture of where the organization is headed and

why it’s meaningful. More importantly, it communicates why a

given employee (in the context of his or her role and unique

abilities) is critical to the fulfillment of that vision. This

addresses the purpose element upon which intrinsic motivation

relies.

2. Positive Work Environment. For

intrinsic motivators to be

unleashed, employees need to feel

as though they are working within

the realm of their unique abilities,

that other team members have

complimentary capacities, that they

are sufficiently empowered to

produce the outcomes for which

they have responsibility and that

they share the values of the

organization. This produces the

autonomy component essential to

motivation.

3. Personal and Professional Development. Motivation is

fueled when employees feel as though they work in an

environment that accelerates their ability to improve. This

usually happens when the combination of resources to which

an employee is exposed within the organization creates a

unique learning experience—one that allows him or her to

excel. This enables the mastery factor to take hold that intrinsic

motivation feeds upon.

Growth-oriented

companies use a

Total Rewards

approach to ensure

their employees’

intrinsic drive is not

stifled by factors that

inhibit their

autonomy, mastery

and purpose.

37 | P a g e

4. Financial Rewards. Value-sharing gives shape and definition

to the wealth multiplier opportunity that is the natural outgrowth

of organizational success. It performs a kind of continuity role

in the Total Rewards make up by putting a financially codifying

exclamation point on the relationship. As previously indicated,

in essence a value-sharing philosophy sends the following

message to success-oriented employees: “We consider you to

be an essential growth partner in this company and have

confidence in your ability to help us achieve the future business

we’ve envisioned. As a result, we want you to be clear about

the financial nature of our partnership and what it can mean to

you as we achieve sustained success.” This speaks to all three

motivational areas—purpose, autonomy and mastery—and

allows the employee to see how their role in the company will

help them fulfill their contribution aspirations.

A pay strategy is only “compete” if it is constructed within the

framework of a Total Rewards philosophy and approach.

Measuring ROI on Compensation

Return on investment. How often is that term spoken of in

business? It's what shareholders expect. It's what CEOs are paid to

achieve. Yet, when it comes

to pay, ROI is seldom

referenced. As a result,

rewards programs are not

typically held to account for

their contribution to

shareholder value and

business growth in the same

way other corporate

investments are measured. Well, we live in a business age where

that lack of accountability isn't acceptable anymore. As a result, a

rewards strategy isn’t “complete” unless it is generating a measurably

positive return. So, let's talk about one way a chief executive can get

a better handle on the ROI on compensation his company is

generating.

38 | P a g e

Improved investment return in business is driven by a combination of

these three factors: 1) new or increased revenue streams and

sources; 2) better margins, and; 3) lowered expenses. A beneficial

result in these areas results in profit. In short, when performance is

improved in these measures, profitability increases. When it

isn’t…well, CEOs begin looking for other work.

Shareholder value, however, is improved

when there is economic profit—or what

some call value-added profit. Economic

profit is a measure of return on residual

business income—that amount of income

remaining after accounting for financial

capital costs. These typically include

interest, depreciation, amortization and cost

of equity.

Let’s now use those principles and standards to determine how you

can measure the return on your company’s compensation

investment. We’ll do so by

working through an exercise

together. Each part will begin

with a question that you should

answer for your business. This

guide will offer some sample

numbers, however, to show

how the calculation works. For

our purposes, don’t worry

about gathering precise

numbers for your organization

before proceeding. You can

return to this exercise and be

more thorough with it later. For

now, just estimate and focus

on the concept.

A rewards strategy

isn’t “complete”

unless it is

generating a

measurably

positive return.

39 | P a g e

1. What is the amount of your total rewards investment for

this year (salaries, commissions, bonuses, deferred award

accruals, core benefits, executive benefits, retirement

contributions, payroll taxes, etc.)?

Write that number down. We’ll refer back to it in a minute. In

my example, I’ll peg the total rewards investment at $25 million.

2. If your company were to identify a shareholder’s capital

account, what would owners calculate its value to be? How

much is in the capital account? (This would include equity,

debt, accumulated interest and any other amounts owners

consider to be part of their capital contribution to the

business.)

Again, just estimate here and keep track of that number. For

my sample business, I’ll identify a capital account of $20

million.

3. What do your company’s shareholders consider

to be the cost of that capital? (Cost of capital refers to what

owners consider it

“costs” them to have

those assets tied up in

the business. In other

words, if that capital

weren’t invested in the

present enterprise, they

could invest it in some

other entity or source

and drive a real return. As a result, having those assets tied up

in the company represents a real cost to them.)

For purposes of this calculation, some organizations use their

corporate borrowing rate while others arrive at a percentage

based on some other means or measure. Anything from 8% to

25% is typical.

For my example, I’ll use 12%.

40 | P a g e

4. Now calculate a capital “charge” by applying the

percentage you just chose against your capital account.

If we were using my figures, the calculation would look like this:

$20,000,000 (capital account) X 12% (cost of capital) =

$2,400,000 (capital charge).

This figure is important in identifying the amount of profit that

should be attributed to capital already at work in the business

before human capital is involved. It is also one way of

measuring a value creation threshold for your company.

In other words, in my

example, profits would have

to exceed $2.4 million before

shareholders consider added

value to have taken

place. Added value, in this

ROI measurement, is that

which is attributable to the

contribution of people.

5. What will your net operating income be for this year?

Again, just estimate. For this exercise, I’ll assume $10 million.

6. Now calculate your productivity profit by subtracting the

capital charge from your net operating income.

Productivity profit works on the same principle as the economic

or value-added profit referenced above. It is the amount of net

operating income in your business that can be reasonably

attributed to the contribution of people at work in the business

as opposed to other assets at work (those accounted for in the

capital account).

Applying the figures I’ve been using as examples, the

calculation would look like this: $10,000,000 (net operating

income) - $2,400,000 (capital charge) = $7,600,000

(productivity profit).

41 | P a g e

7. Let’s now calculate the return on your organization’s

investment in pay by dividing your productivity profit by

the figure you identified at the start of this exercise (your

company’s total rewards investment).

What you’re trying to isolate here is the ratio between your

productivity profit and what you’re investing in compensation

and benefits each year. We’ll talk in just a minute about the

significance of that ratio and how to use it.

Using my figures again, the calculation would look like this:

$7,600,000 (productivity profit) / $25,000,000 (total rewards

investment) = 30.4% (return on total rewards investment or

ROTRI™).

When most business leaders first go through that calculation,

they look at the ROTRI™ percentage and ask: “Is that good or

bad?” The answer is it’s neither. Right now, it just exists as a

baseline measure. Companies’

ROTRIs™ will cover a broad range

because assumptions for margins

and the economic profit factors

discussed earlier differ widely from

business to business and industry to

industry.

Your return on compensation

investment is tied to improvement in

your ROTRI™ ratio and productivity

profit. You want to see growth in each. If not, your

compensation ROI is suffering—and shareholder value is likely

following suit.

This approach to measuring the return on pay for your company can

be helpful in a number of different ways. Perhaps foremost, it gives

you a means of defining value creation for your business (value

created after accounting for a capital charge). It also puts you in the

Your return on

compensation

investment is tied to

improvement in your

ROTRI ratio and

productivity profit.

42 | P a g e

position of transforming incentive plans into value sharing plans that

are “self-financing.” This means incentives

are paid out of productivity profit—and only

when that measure meets the threshold you

set for value sharing.

Chief executives have an obligation to

shareholders to be prudent stewards of the

investment being made in human capital

through compensation. Measuring the

return they are generating on pay—typically,

the largest investment the company

consistently makes—is one way that

stewardship can be effectively fulfilled.

Build “Line of Sight”

One of the “jobs” most business leaders want their pay strategy

to do is create greater employee engagement. That’s one of

the ways they know their value proposition is compelling. And a key

to greater engagement and

performance is improved

line of sight. This concept

has to do with the ability

an employee working

within a business to see

the relationship between

certain interdependent

elements that drive the

company’s success and

how they relate to his or her

role and rewards. When

individuals come to work

every day with a clear view of how those components are

connected—and can relate them to their personal vision and

motivation—they find meaning in their work. Engagement follows.

Business leaders

have an obligation

to owners to be

prudent stewards

of the investment

being made in

human capital in

the form of

compensation.

43 | P a g e

CEOs are responsible for creating line of sight. They certainly need

the assistance of executive and managerial surrogates to help

communicate and reinforce each of its components, but the

overarching messaging has to come from the chief executive. That

requires the primary business leader to

have clarity in his own mind about how

certain engagement factors are nurtured

and a commitment to a communication

effort that consistently and relentlessly

reinforces the connection between those

elements.

So, what are the components of line of

sight and how do you improve each in

your business? There are six. Let’s

define each and talk about what you

can do to magnify their impact.

1. Articulate a Clear Vision. Too many enterprise leaders

take for granted what their employees understand about the

future of their companies and why it matters. Articulating a

vision of the prospective business is not simply a matter of

communicating next year’s sales and profit goals—or even

those of the next three, five or 10 years. A vision can only be

considered clear once all employees can explain why the

company is in business, what purpose it serves, the standards

and principles that guide the cultural norms the organization is

committed to and what it will mean to customers, employees,

communities and even the world if the business succeeds in

fulfilling its purpose—and there is consistency in how the

workforce explains that vision.

This idea is what author Simon Sinek described as “Start with

Why” in his best-selling book. When employees have

embraced a clear vision of the future company as just

described, revenue and profit goals have context and are

When individuals

come to work every

day with a clear view

of how line of sight

components are

connected, they find

meaning in their

work. Engagement

follows.

44 | P a g e

drenched in meaning and

purpose. “If we meet these targets,

here’s the impact we’ll be able to

have and what it will mean to

you. Your role is critical because it

impacts our ability to (fill in the

blank).” The significance of every

other engagement element

depends upon a clear and

compelling company vision.

2. Define and Reinforce the Business Model. The

company’s business model describes how the company

produces, sustains and grows revenue. There are virtuous

cycles that perpetuate the revenue cycle of the model. A key

area of focus for the CEO should be to identify the leverage

points in those cycles—the performance areas that provide

potential for growth—

and what roles and

outcomes need to

be fulfilled to obtain

that leverage. The

business leader needs

to then be able to

communicate those

roles and results to the

employees and teams

responsible for them in

a way that makes those

people want to assume

stewardship over their

achievement. This can only happen when a chief executive

effectively reinforces the connection between the business

model and the company vision.

The significance

of every other

engagement

element depends

upon a clear and

compelling company

vision.

45 | P a g e

Few employees can explain what

the business model of their

company is—no less what their

role in it is. If that’s the case, it’s

the failure of company leadership

not the workforce. Getting people

to understand the revenue engine

of the company and how they

impact it requires consistent, clear

communication in a variety of

contexts and settings.

3. Define and Reinforce the Business Strategy. Whereas a

company’s business model describes how the enterprise drives

revenue, its business strategy expresses how it will compete in

the marketplace with that model. The success of a business

strategy relies upon the development of the performance

culture described earlier which is the product of a performance

framework a CEO defines. The business strategy answers

certain key questions that define how the company will succeed

with its product or service. “What is our core value

proposition?” “What is our competitive advantage?” “What

differentiates our offering from any other product, service or

experience in the marketplace?” “What kind of talent do we

have to bring into our business if we’re going win?” “What is

our strategy for recruiting that talent?” And so on.

The culture of an organization determines whether

that business will have a competitive advantage or

Getting people to

understand the

revenue engine of the

company and how

they impact it requires

consistent, clear

communication.

46 | P a g e

disadvantage. When chief executives are able to grow and

sustain a culture of confidence—one that “wins” consistently

and is a magnet for premier talent—they are able to perpetuate

success. That kind of repetitive high performance forges its

own engagement virtuous cycle. The factors driving success

become so deeply embedded in the culture that a kind of

“flywheel effect” kicks in, as Jim Collins described in his

book, Good to Great. The CEOs role is to make sure everyone

is clear on the business strategy that makes that kind of

sustained winning possible.

4. Recruit to a Role—not to a Position—and then Define

Success. All workforce data indicate that we are entering a

period of significant scarcity when it comes to recruiting highly

skilled talent. And the kind of skilled talent organizations need

is catalysts and strategic leaders as previously indicated; people

who can come in and positively impact the growth trajectory of

the business. Catalysts are entrepreneurial-oriented individuals

who either want to use the resources of a winning organization

to create something meaningful and rewarding or start their own

business. These people aren’t looking to fill a position on your

organizational chart. Instead they want to fulfill a role that will

positively impact the future of your business. They are strategic

leaders with unique abilities who want (and you need) to spend

all of their time focused on issues that have strategic

impact Because of the increasing scarcity of this kind of

employee, companies will find themselves in heavy competition

for their services—making the success and reinforcement of all

the elements discussed here all the more important.

47 | P a g e

The responsibility of the chief executive is to clearly define

these kind of high impact roles in the organization and

effectively communicate their

relationship to the vision, business

model and business strategy of the

company. This needs to cascade

down through the ranks so

everyone in the company knows

what his or her role is and how

success is defined for that

role. You can have a great vision

and a stellar business model and

strategy, but if your people just

think they’re being paid to carry

out a position instead of fulfill

a role, there will be a dilution of

performance. This is because line

of sight has been short-circuited at

the most rudimentary level.

5. Preach Productivity Profit. For full ownership of results to

take root in an organization, employees must come to

understand how value creation is defined for the business that

employs them. Defining and then teaching employees

about productivity profit is a way of doing that. As explained

above, productivity profit

is the net operating

income that remains

after assessing a capital

“charge” to account for

the return shareholder’s

expect on their capital

investment. It’s a way of

isolating the profits

attributable to people at work in the business as opposed to

owner capital at work.

You need to clearly

define these kind of

high impact roles in

the organization and

effectively

communicate their

relationship to the

vision, business

model and business

strategy of the

company.

48 | P a g e

CEOs need to preach value creation and productivity profit at

every turn. They need to effectively communicate how these

two factors are keys to the company becoming a wealth

multiplier, where all stakeholders benefit from the growth

multiple the business is able to sustain. When productivity

profit increases, it tells the company that everyone is winning—

customers, shareholders and employees. Once a company is

able to clearly define and communicate what value creation

means, it makes the formation and reinforcement of an effective

pay philosophy natural and easy. The company shares value

with those who help create it. The greater the value creation,

the greater the wealth sharing that can occur—and faster the

company’s vision can be realized.

6. Build a Financial Partnership with Employees. The

natural culmination of forging an effective link between the

elements just described

is to define how

people will be rewarded

for having success

in their roles. Value

creation should lead to

value sharing. And

all employee earnings

potential should be tied to

the productivity profit of

the company and defined

in the organization’s

compensation philosophy

statement. This allows CEOs to codify a financial

partnership with key recruits and those already in the

organization in a way that seems fair and compelling. When

employees are able to embrace the company vision, know how

the business produces revenue and competes in the

marketplace, understand their role and how success is defined

for that role, see what it means to create value and why

productivity profit matters, and are given a rewards package

49 | P a g e

that reflects a true financial partnership,

then they feel free to engage to a fuller

extent.

By framing compensation as a financial

partnership, a chief executive is building

and communicating continuity. The

rewards approach conveys organizational

and operational integrity. Employees

sense there is consistency to every

element of their experience with the

company. That consistency breeds trust

which accelerates performance and lubricates the engines of success

the company needs to fulfill its vision.

If you lead a business and want your value proposition to be both

complete and compelling, focus on these six elements.

Measuring the Success of Your Pay Strategy

Compensation plans are strategic tools that can only wield only so

much power. They are primarily intended to communicate to

employees "what's important" to the organization. Their role is to give

proportion and timelines to priorities and place a value on their

fulfillment. If effectively designed, pay plans should introduce then

promote a consistent and unified financial vision for growing the future

company. They should also reinforce a person's role in the business

model of the company and what their financial stake is in meeting the

Consistency breeds

trust which

accelerates

performance and

lubricates the

engines of success

the company needs

to fulfill its vision.

50 | P a g e

expectations associated with that role. While the metrics associated

with some specific pay plans might be tied to company performance,

it isn't the compensation plan's job to

achieve that result. It is simply a

mechanism for defining the financial

partnership that exists between the

company and the employee when roles are

fulfilled. And here's the key, it is also (or

should be) a gatekeeper that protects

shareholders from paying out value if it

hasn't been created (see ROI discussion

above).

So, if that's the appropriate role of a pay strategy, how do you

measure pay strategy success? Well, the measure should be

whether or not it is fulfilling its role, if it is doing the job you hired it to

do as we discussed at the outset. So, to determine if your pay strategy

is successful, here are some questions that can guide you to the right

conclusion.

1. Value Creation. Before designing the rewards plan, did

you clearly define what value creation means for

your business? Does the pay strategy you implemented

include metrics consistent

with that definition?

Does value-sharing occur

out of productivity profit--

the threshold at which

shareholders have already

received an appropriate

return on their capital

account? If the answer is yes

to these questions, then it

means the plan is only paying

out value when value has been created—it is self-

financing. This also suggests that during periods of economic

A compensation

plan should be a

gatekeeper that

protects

shareholders from

paying out value if it

hasn't been created

51 | P a g e

decline or stagnation, the plan is self-restricting in its

payouts. This should be considered a successful approach.

2. Pay Philosophy. Have you defined a clear pay philosophy

and written it down? Is the pay philosophy communicated

effectively to employees? Are the company's compensation

strategies consistent with the pay philosophy? If you answered

each of those questions affirmatively, then the company is

being clear about what is willing to "pay for" and is implementing

plans that follow that rule. This again should be considered a

successful approach.

3. Market Pay. Do you compare your compensation plans and

salary levels to market pay standards? Does your philosophy

statement define where the company wants to be relative to

market pay both in terms of salaries and total

compensation? Do those in charge of evaluating these

standards also perform an "internal equity analysis" to compare

the data with the value the company places on given roles and

positions? If this is the approach being adopted, then the

company is using some outside metrics to determine whether it

is over or underpaying for certain roles and positions in the

organization--particularly for salaries. When it follows this

methodology, it knows that it is keeping itself “competitive” in its

attempt to attract and retain the best talent. If it likewise offers

significant upside potential relative to the market, but within the

value creation parameters defined above, then it knows it has

a competitive advantage in attracting key producers. That is

also a successful approach to pay.

52 | P a g e

4. Total Rewards. Do you market a

future to employees? Do you offer a

compelling vision? Do you nurture a

positive work environment? Are

there opportunities for personal and

professional development? Is the

financial partnership with your

employees clearly defined and

communicated? These questions

point to what is known as a "total

rewards" approach to building a

value proposition for employees. If

you adopt this framework, you are

not expecting financial rewards to be

the sole issue upon which attracting and retaining key

producers is based. If you pay attention to each of those

questions, and work hard to ensure evaluation and

implementation in all categories, your company will become a

magnet for the "right” talent. And companies that get great

people usually get great results. Hence, a total rewards

approach is a successful one.

5. Line of Sight. Can employees articulate the organization’s

vision—where it is headed and the purposes it is serving by

achieving its growth goals? Can they explain the business

model and strategy of

the company? Can

they clearly define their

role in the business

model and strategy

including the outcomes

for which they are

responsible? Do they

display a sense of

stewardship in that

regard? Can they clearly explain how they are rewarded if they

fulfill the expectations associated with their role? If so, then you

have created line of sight and your pay strategy is succeeding.

If you pay attention

to each of those

questions, and work

hard to ensure

evaluation and

implementation in

all categories, your

company will

become a magnet

for the "right” talent.

53 | P a g e

If you feel good about your answers to these questions, then you can

safely assume you have a complete and compelling compensation

plan in place. Your strategy is complete and compelling because it is

based on a sound definition of value creation and a clear philosophy

about value sharing. It is complete and compelling because it protects

shareholders. It is complete and compelling because there is a clear

basis for the pay levels that have been set. It is complete and

compelling because it effectively defines the financial partnership

between employees and owners. It is complete and compelling

because it markets a future that attracts the best talent and creates

line of sight.

So, as you consider what “job” you’ve “hired” your compensation

strategy to do, commit to “hiring” the most effective plan possible. Be

complete and be compelling. Hopefully, this guide has helped you

towards that end.

54 | P a g e

Ready to Speak to a Compensation Specialist?

If you would like to speak with a pay expert about your business goals

and pay strategy, call us at 1-888-703-0080.

About the Author

Ken Gibson

Senior Vice President, The VisionLink Advisory Group

Ken has been consulting with middle-market

private and public companies on executive

compensation and benefits issues for over 30

years. In addition, he has authored numerous

articles and white papers addressing

compensation and rewards topics that modern

businesses face. Ken also conducts monthly

webinars for business leaders on compensation

best practices. His client work centers on the

development of compensation and rewards

strategies that drive performance and transform employees into

growth partners. He is one of VisionLink’s five principals.

7700 Irvine Center Drive, Suite 930 ● Irvine, CA 92618

888-703-0080 ● www.vladvisors.com ●

www.phantomstockonline.com