Business is Changing Rapidly: Information technology has had a dramatic impact on business. The instant flow of information across departments, businesses, industries, and continents causes dramatic turbulence in today’s markets.
In order to be flexible and change directions quickly, businesses must move beyond the limitations of outdated compensation programs that limit the effectiveness of human resources.
The Implied Workforce Commitment: Historically, the unspoken employment contract consisted of an employee’s hard work and demonstrated loyalty in exchange for long term caretaking. The downsizing and “right-sizing” in the past 15 years has redirected employees’ loyalty to themselves and their careers first, requiring a vastly different compensation strategy.
Disconnected Business Goals: Many businesses subconsciously disconnect their values and goals from the behavior drivers by delivering the wrong compensation plan. For example, the business may promote and preach teamwork, but reward individual performance. Let’s say that a furniture retailer’s goal is to increase gross sales by 22%, but still rewards associates based on their individual sales. The incentive in this case will be for top performers to only focus on increasing their own sales. Chances are, as well, that they won’t take the time to provide the mentoring and support other staff members require if the store is to reach its stated goal.
The Way We Work: Taylorism taught us that managers manage, and workers work. But the 80’s and 90’s taught us that thinking workers work harder, smarter, and far more effectively. This removal of the middle-tier means organizations run flatter, and theoretically with more efficiency. However, top-down compensation plans are ineffective for the cross-function role of today’s typical employee.
Sharing in Success and Failure: The goal of compensation is ultimately to get more done, more efficiently. But if the compensation structure offers no reward or personal gain for working harder or smarter, employees won’t be motivated to improve themselves or the company.
Compensation – More than Money
Traditional compensation generally consists of two phases – what you know, and who you are. Businesses hire based on what a prospective employee’s resume, past experience, education, and knowledge bring to the table. Then over time, the amount of loyalty and tenure is rewarded with higher pay throughout the years, ultimately leading to the promise of a comfortable retirement and lifetime commitment. Compensation is made up of salaries, bonuses, status, and in some cases increased responsibilities, acknowledgement, etc. In today’s hyper-competitive marketplace, however, companies need to focus on a total compensation mindset, linking the compensation plan to the corporate strategy and rewarding the superior performance of individuals and groups by paying for productivity. To be effective though, these plans and the pursuit thereof, need to be simple, and well communicated. Instead of paying for and getting a person’s time, compensation plans should focus on productivity and results.
To develop a strategically impactful compensation plan, the first requirement is to clearly define what needs to be accomplished to effectively execute the business plan. In retail, most of what is done by people consists of value-added services to support the customers’ buying process.
The basic strategies of the business are critical to defining the appropriate compensation plan. For example: a service-based retailer offering complete design services should not have the same compensation structure as a retailer focusing on being the low-cost market leader. The customers are different, and the compensation plan needs to reflect both the business goals and the required efforts to achieve them.
Plan Concepts and Building Blocks
Planning begins with identifying the key concepts behind the underlying compensation strategy. Basic questions should begin with:
What behaviors and actions should be “compensatable?” For example – few employers wish to pay for unproductive downtime, but recognize that some downtime is a normal part of each employee’s day. By listing the actions and behaviors that add value to the organization and compensating employees based on their success in meeting that criteria, employees are motivated to increase productive work-time.
What is the rank or importance of each compensatable action or behavior? In many businesses, certain processes or activities provide significant returns for the company. For example – the addition of fabric protection or fabric warranty may be a profit center, and the entire staff shares unit or dollar volume goals.
How does each compensatable action or behavior address our competitive posture in the market? Can the compensatory model and behavior be leveraged to enhance the competitive strength of the offering by lowering the overall costs and only paying for successful transactions?
It is important that the leadership team develops and documents a total compensation philosophy, including the results desired, the actions and behaviors necessary to achieve them, and the ways in which these efforts position the company in the marketplace. In essence, the incentive compensation program becomes part of the company’s overall strategic plan, delivering the promise of motivated execution of the business plan.
To get started in defining the building blocks, it’s often helpful to begin by gathering some of your key people in a room and sketching out the customer’s value chain or value process. In other words, from the first impression through product delivery and beyond, what are the things that link you together to satisfy the customer? While it sounds rudimentary, this simple exercise can open many eyes to the complexity of true customer satisfaction, and help some people understand how what they do affects the compensation of their teammates. For example, In stores where merchandisers and buyers share in sales commissions, the level of effort in choosing the right product mix with the right price points becomes an ingrained behavior. But if the people who merchandise the store are rewarded regardless of the customer demand, what motivation do they have for ensuring the salespeople have the right products to sell. In effect, the companies who have chosen to compensate merchandise buyers right alongside merchandise sellers have linked them together creating a team that understands how what they do affects the company, the staff, the customer, and themselves, with immediate feedback through their paycheck.
This series will continue in the July/August issue with a detailed discussion of how to build and implement a compensation plan that rewards superior performance and is supported by management and current employees.
If your organization is considering the implementation of a performance-based pay system, and would like more information and materials to assist in the process, contact the author at firstname.lastname@example.org for a CDROM with materials such as checklists, examples and ideas.
Ren Baker is the president and CEO of CDS Solutions Group, a business and software solutions company. Dedicated to bringing emerging technologies to the home furnishings industry. Baker assists companies in implementing business best practices and automating through software and operating systems. He also writes for a number of industry publications and conducts workshops on business/retailer issues and technology. Questions can be sent to Baker at email@example.com.