Why a Compensation Strategy Is a Must

How many of you reading this article have a piece of paper that you can lay your hands on, one with the title, “Compensation Strategy”? Do you know if such a document exists in your organization?

The common response at this point is usually a blank look. But why is that? If paying employees is the single largest expense item for most organizations, why don’t they have a plan to manage it?

That’s what a strategy is – a plan of action, a guideline or directional map that outlines down a series of principles to be acted upon. It’s a plan helps you avoid the let’s try this and see what happens” tactic.

Look around you; if marketing has a plan, as well as manufacturing and finance, then why not a plan that encompasses how to spend a lion’s share of the organization’s money?

When prodded a bit, most managers do seem to come up with an answer to my question – though they often sound reactionary, if not defensive.

  • “We already have a mission statement.” But broad, aspirational phrases like “market leader,” “shareholder value,” “supplier of choice,” etc. are little more than a series of vague terms and buzz phrases meant to capture media attention. There is no meat here.
  • “We know what we want to do.” As if the plan for effectively and efficiently spending the organization’s money is somehow intuitive – that everybody knows it. Sort of like a secret plan.
  • “We use our annual objectives.” A claim that annual organization or department objectives are in fact the strategy – offers little more than short-sighted thinking often vulnerable to swings in corporate focus.

So what we’re often left with are excuses, not effective responses.

The importance of strategy

Then what should be the focus of a compensation strategy? And why is it helpful for an organization to lay down a tactical, well-considered outline for present and future action?

  • It provides specific, motivating direction. Having a plan establishes a pathway for action – for what you intend to do – and it helps point everyone in the same direction
  • It helps guide and engages the workforce. Telling employees what you believe in, and how you intend to convert those beliefs into concrete action always pays dividends in the court of employee opinion.
  • It identifies the focal points. It focuses attention on key program design elements (i.e., competitiveness, specific marketplace, pay-for-performance, cost sharing, etc.)
  • It helps leverage the company investment in people. It makes a commitment to employees regarding how they will be treated, thus elevating their worth as a true asset important to organization success.
  • It brands the company in a positive light and helps recruit talent. A compensation plan provides an opportunity for the organization to identify itself in a way that attracts potential employees.

If one accepts the importance of a plan for controlling costs and managing the effective and efficient use of payroll dollars, what are the barriers that stand in the way?

  • Senior leadership disagreement. Lack of consensus over what to say (broad vs. focused, basic compensation vs. total rewards, commitments vs. aspiration, etc.) stymies progress as the debate could take on a life of its own.
  • Vaguely worded messages. Using generic phrases that are vague and meaningless, which don’t differentiate you from any other organization, or puffery and “mom and apple pie” phrases that sound great but mean little.
  • Ineffective communications. Fears of raising employee expectations, high-brow corporate-speak messages that employees ignore and cultural insensitivities on a global playing field all serve as minefields for the unwary. These are usually compounded when the message is prepared by professional writers little versed in the subject matter.

What if you do without?

Sounds like a lot of trouble, doesn’t it? So why not do without? Others have; so could you. Which would then leave your single largest expense – employee pay – without a guiding principle, without a plan to ensure that such a large amount of money is spent in an effective and efficient manner. Money would be wasted, like a steadily dripping faucet – day in and day out.

Without a standard universal message the risk of multiple messages increases. The information being communicated gets confused, blurred and often at odds between the messengers themselves. Plenty of room then for inconsistent and inequitable treatment.

You would see your employee costs rise as a direct result of a no-plan environment. Because the vacuum left by not having a plan will be filled by multiple pay practices that lack consistency, standards and internal equity. Squeaky wheels and political insiders will be favored.

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Not for the faint of heart

Developing a compensation strategy isn’t an easy process, and even the strongest advocate would acknowledge the challenges.

First, building a consensus philosophy among senior management is a difficult, often time-consuming endeavor.

You should expect a degree of passive resistance from naysayers and supporters of the status quo. Or from anyone else who would benefit from your failure.

In order to push the project across the finish line, you’ll need the active support of senior management. This doesn’t mean the lip service memo authored by professional writers, or even a brief appearance at a kick-off project meeting. Organization leadership needs to be seen as effectively leading, pushing this initiative, walking the talk, so to speak. The strategy needs to have a highly placed sponsor, one whose support is visible and easily heard.

And you will have to keep at it, too. Monitoring adherence, updating as necessary and constantly reviewing that policies, procedures, and practices remain in sync, mutually supportive and offering employees a consistent message is no small task.

It’s a lot of work, but worth it for the organization and the employees.

This article originally published on Compensation Café.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR consulting firms as a contributing consultant. Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation. He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a clowder of cats.

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