Compensation Cafe

Cafe Classic: Hey Startups! Tomorrow IS too late!

Editor's Note: Dan Walter shares his Classic advice about the perils of waiting too long (startups, we are looking at you) to get your compensation act together.

We’ve all heard the phrase “It’s never too late.” I am sorry to tell you that everyone has been wrong. As it turns out when it comes to compensation issues, today may not be too late, but tomorrow almost always is.

One of the most consistent and pervasive issues that I deal with is helping companies fix what they didn't do (or what they didn't do correctly.) This is especially true with small companies who often don't have a dedicated compensation professional. The problem may come to light when a key employee is lost, but it is often identified far earlier then lost in the shuffle of focusing on day-to-day business.

If you haven't gotten started on your compensation philosophy, structure and long-term incentives, please get started when you finish this article.

The repercussions of waiting can be expensive, time-consuming and distracting at the exact time your company is hitting its stride. First, every company should understand its approach to compensation, often referred to as a “compensation philosophy.” Your philosophy should define why and how you plan to pay people.

If your goal is to align your employees to investors through equity compensation, you need to act immediately. If you make promises or even suggestions regarding equity that are not formalized concurrently, you are likely to find yourself delivering compensation that meets no ones expectations. Even worse you may find expectations so high, that satisfaction borders on impossible.

It no longer surprises me to have a group of 8 or 10 key employees earnestly explain how each should receive 15% of their employer’s stock. It no longer surprises me when an owner or founder believes that they are doing something great by rolling out a new program only to find out their staff was imagining something far greater. I have seen companies lose great employees. I have seen companies pay huge mediated settlements to staff members whose understanding differed from their employer’s. I have seen companies deliver compensation programs so late that any chance of gains were lost before they got started.

Are you still reading? Have you made a note to get started on fixing your compensation today?

I know you have incredible employees that are passionate about the success of your company. I know they have bought into your vision of a successful future. What I also know is that they expect things to be formalized, finalized and actualized. Every day you wait, your employees’ passion and hard work will build value in their minds faster than your company can keep up. While it may “never” be too late to get started, I promise you that “never” refers only to today. Tomorrow IS too late.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is a leading expert on incentive plans and equity compensation issues. He has written several industry resources including a resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or follow him on Twitter at @DanFutureSense.

 

Cafe Classic: The Innovator's Dilemma, Reward Plan Edition

Editor's Note:  A salute to the late, great Clayton Christensen, the academic and management consultant who developed the theory of "disruptive innovation." 

Think that premium employment brand and strong reward package are going to help you succeed in the age of disruption?

Think again.

In his revolutionary bestseller The Innovator's Dilemma, the late Harvard Business School professor and innovation expert Clayton Christensen explored the dilemma behind innovative, well-managed companies who seem to do everything right and yet encounter a dive in their market share or even disappear entirely.  In fact and most disturbing of all, Christensen's research showed that the things that bring and secure an organization's initial success can often become the most powerful reason behind its failure.

In their chapter within the Oxford University Handbook on Organizational Climate and Culture, Mercer consultants Richard Guzzo, Haig Nalbantian and Luis Parra tell the story of a company that experienced the reward plan version of the innovator's dilemma.  Organizations -- the authors note (and many of us know from our experience) -- often become what they reward, and pay is considered a critical expression of an organization's culture.  When a company's culture, which has been a key reason for its business success, becomes an impediment to necessary change, the reward system may be a primary culprit.

The authors share the example of Digitt, a global technology and information services company.  Digitt was renowned for a strong culture that emphasized innovation, teamwork, employee participation in decisions and performance-based pay.  In studying Digitt, the authors took a "big data" dive, conducting an internal labor market (ILM) analysis that drew on up to 10 years of employee data in order to statistically measure, model and ultimately understand the most important drivers of workforce outcomes.  In addition to other findings, the analysis revealed the following two characteristics of the company's reward program:

• Digitt had a strong internal labor market that was insulated from outside labor market dynamics.  Talent was built from within, with the most successfu employees entering the organization right from school and advancing internally.  Mid and late career professional hires were infrequent.  Most open positions were filled internally through promotion or transfer.
• Because Digitt's performance rewards were predominantly group-based, pay variations reflected business unit performance much more than individual performance.  As a consequence, an employee's tenure and business unit location were the biggest drivers of pay.  There was little variation in the level of rewards flowing to the lowest performers versus the highest performers.  (In fact, the authors concluded that close to $100 million a year in rewards flowed to lowest quartile performers when all elements of "performance-based" pay were added up.)

Digitt, in the face of rising competition and technological change, found itself in a place where it had to transform both its business model and its product/service offerings -- a transition that had enormous implications for the skills and capabilities of its workforce.  It needed, in essence, to renovate its talent base. Unfortunately, the company's cultural reality, driven substantially by its reward practices, threw some substantial roadblocks into its path:

• Being handsomely paid based on their tenure and their position in declining yet still profitable business units, there was little incentive for those with outdated skills and capabilities to leave.
• In contrast, newer employees with more relevant skills and experience were disadvantaged pay-wise by a system that rewarded tenure and reflected their placement in newer business units that were still ramping up and not yet profitable enough to reap the rewards of existing incentive and profit-sharing plans.
• The problems above were exacerbated by the insulation of Digitt's internal labor market and the lack of market-sensitivity in its reward programs.  As the authors noted:

Internal labor market signals about relative value were telling lower-performing analog engineers to stay at Digitt, even as external labor market signals would have communicated depreciation of their value...

The lesson is this:  When business conditions change, as they now do at an ever quickening pace, the very culture and reward programs that created success could now be an obstacle to sustaining that success ... or even surviving.  That speaks to a level of vigilance that I suspect few of us are keeping.

I'll bet some of you are living your own version of this innovator's dilemma. 

Ann Bares is the Founder and Editor of Compensation Café,  Author of Compensation Force and Partner at Altura Consulting Group LLC, where she provides compensation consulting and survey administration services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and enjoys hiking, reading and hanging out with family in any spare time.

 Creative Commons image "Oops - Part II" by Kyle May

Cafe Classic: A Basic Truth of Compensation Communications

Editor's Note: Margaret O'Hanlon urges us to face up to the truth of pay communication with this Classic post and helpful advice.

Managers are the compensation communicators in your company. Not HR, not Legal, not even the CEO whose job is to explain why your compensation program makes good business sense -- but doesn't have to explain another 3%ish increase to a new parent.

Do your managers have everything they need to make your work successful? After all, you are asking them to finish your compensation communications project for you, and you need them to do it well.

How do managers feel about being the messenger THIS year? Make sure you know or there is no way you can predict how things will turn out.

Have you invested enough time and dollars making the whole compensation communications process easier for them? They are the ones who will go eyeball to eyeball with their employees which means that, in one sense, they are going to the line for HR. Give managers discussion outlines, FAQs that will help them prepare to talk with employees comfortably, in some cases even give them scripts. If your managers get together for calibration meetings, include communications on the agenda and make it easy for the individuals to speak frankly.

How do managers feel about your company's leadership? If there are issues of trust or questions about resources, don't expect managers to hide their feelings. HR can't fix these problems over night, but you should acknowledge that they play into end-of-year discussions. Go out to talk with managers individually. Show that you can be open-minded but still hold them to a standard. This isn't an area where email communications will have any effect.

How do managers feel about your company's pay practices? Do they believe you are paying competitively? Do they know how you go about it? Even if you do pay competitively, once rumors start you can bet that it's going to be difficult to change peoples' minds. Educated managers are unlikely to give rumors any credence, plus they will be able to spot the real problems for you.

Margaret O'Hanlon brings deep expertise to discussions on employee pay, performance management, career development and communications at the Café. Her firm is re:Think Consulting. Earlier, she was a Principal at Willis Towers Watson. A former Board member for the Bay Area Compensation Association (BACA), Margaret coauthored the popular eBook, Everything You Do (in Compensation) Is Communications, a toolkit that all practitioners can find at everythingiscommunication.com. She is a member of U.S. Masters Swimming.

Cafe Classic: Let Your People Go... Gracefully

Editor's Note: In this Classic post, Jim Brennan encourages us to see the benefits of "maximizing your good quits" and the downside of taking your retention policy to a damaging extreme.

It is smart to maximize your good quits.

There are good quits and bad quits.  Good quits include those whose departure brings an enthusiastic celebration of ebullient joy that lasts for months.  Then, there are the other kind.  Good quits also include people you hate to lose, even though it really is time for them to move on.  You can’t hold everyone indefinitely.  Virtually every employer suffers from usually inevitable career-enhancing moves by valued contributors who find themselves at the cusp where they must leave your employment to most effectively serve their long-term personal goals and ambitions.  As both Compensation Café founder Ann Bares and contributer Laura Schroeder have observed, laudable retention efforts can all too easily slide into an atmosphere of suffocation and detention.  Let’s take their thoughts a step farther.  If you are going to lose someone, lose them well.

You can’t keep superstars forever.  Very few employers have the resources to productively retain the very best workers in their field for as long as they wish.  Only extremely unique environments will entice truly talented people to stick around for their entire careers.  Superstars, in particular, will draw the attention of recruiters and you will not always be able to insulate them from legitimately better offers.  You win some and you lose some; but the parting need not be destructive.

If those who depart your enterprise look back with gratitude and speak well of you thereafter, you should be happy.

Rather than obsess about retaining every good performer, think about options you can implement to make separation as mutually beneficial as possible.  A good quit from a competent worker may be more valuable than an excellent new hire.  Not talking about discarding toxic personnel, of course, but about ways to make the evolutionary process of transition for both sides as painless and positive as you can. 

There is a lot to be said about gaining a reputation as a wonderful graduate school.  When those who move on do so with positive attitutes, the place they describe in thankful and appreciatiative terms will reap benefits for many years.  Happy “graduates” build your reputation as a wonderful place to work, easing recruiting and reducing pressure on direct pay.

Letting people leave gracefully can be a talent-building strategy.  The tactic of retention can backfire.  Locking people up in golden handcuffs is both expensive and ultimately fruitless; it only buys time, at best.  Honestly admitting that, “yes, it is time for you to spread your wings, leave the nest and fly, so go with our blessings…,“ can resonate longer and stronger than the best LTIR plan with platinum chains.  Folks who speak of their positive seminal developmental experience with you can be the most effective recruiters (and retainers) in the world.

Have you tried it?  Experiment, and see what the results are.  How people are treated when they leave an employer might be an excellent indicator of the state of the morale of those who remain.  What do you think? 

E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience in most industries.  After corporate HR posts and consulting CEO roles, he was Senior Associate of pay surveyor ERI before returning to consulting in 2015. A prolific writer (author of the Performance Management Workbook), speaker and frequent expert witness in reasonable executive compensation court cases, Jim also serves on the Advisory Board of the Compensation and Benefits Review.