THE CHANGING WORLD OF COMPENSATION

by Catherine M. Meek
President, Meek and Associates

"Organizations have to be willing to share their successes.
If employees are asked to share the risks,
then they have to share the rewards."

Most compensation systems are boring. Most compensation systems do not pay for performance. Few encourage commitment to the organization. And while they can send powerful messages to employees about the kind of organization they work for and the skills and behaviors it values, most of those messages -- and systems -- are uninspiring. In fact, they often inhibit organizations and employees from achieving their highest levels of performance.

The following table illustrates some messages that organizations send through pay:

For example, if your company's program is composed only of base pay and paid benefits, the message is: "We are an organization that values security; we guarantee the same rate of pay every two weeks; and, we don't want you to take risks because we're not willing to reward you". Similarly, if you always pay your managers more than technical or individual contributors, the clear message is "become a manager."

It's important to identify the messages you are currently sending through the pay program and make sure those are the messages you want to send. If not, you can change them by changing your pay system.

CATALYSTS FOR CHANGE

The world of compensation is changing dramatically throughout corporate America, regardless of industry or size. Many forces are causing this change process. I've categorized them into four major areas:

• Business environment
• Values and culture
• Contract with employees
• Organization structure.

Let's look at how these catalysts are changing traditional compensation systems.

1. Business Environment

The globalization of the U.S. economy, the shift to service-based industries, and the impact of technology on how we work has led many organizations to change business strategies. Today, companies need to engender a work environment that is focused on the customer, encourages increased productivity, reinforces teamwork and allows flexible cost structures that vary with competitive markets. Yet, most compensation systems do not support this business environment:

• The majority of compensation is fixed, with no or limited variability
• Individual, not team, performance is typically rewarded Most companies, despite the rhetoric, do not pay for performance
• Compensation is rarely linked to customer service or satisfaction
• Employees from the top to the bottom of the organization feel entitled to increasing levels of pay, regardless of productivity or results.

It is becoming increasingly clear that organizations will have to adapt pay systems to meet these business realities.

2. Values and Culture

For all the talk today about company values, many organizations don't realize the contradictions between what they say and what they do. Talk is cheap. Conflicts arise when organizations don't walk their talk. As the following table indicates, conflicting messages are communicated when a company's pay programs are not aligned with its values.

Conflicts Between Values and Pay Elements

Bear in mind that employees are more likely to look at what a company pays rather than what it says. If quality is an important value, it should be reinforced through some element of the total compensation system.

If customer delight is to be more than "happy talk", consider what one of our clients does -- the threshold for the incentive plan is feedback from customers about service quality. If the company does not achieve the customer satisfaction threshold goal, no incentives are paid, regardless of financial performance.

Non-cash recognition awards are a very effective way to reinforce your values. They can be a low-cost, high-impact element of the total compensation package.

One of the consistent findings in our studies of pay and motivation is that cash compensation, while always important, is often overshadowed by employees' needs for growth, challenge, and the feeling of being valued and appreciated.

Consider a small bank in California that has managed to thrive in a highly competitive market. Its strategy is simple: it focuses employees on improving service and reducing costs, and rewards them for their efforts.

For example, employees who provide outstanding or innovative customer service receive special awards. Employees are nominated by customers, supervisors or their peers. Another program recognizes employee teams that come up with cost-saving ideas. If ideas are accepted, team members become part of the "Cost Busters Club." Large posters of the team are prominently displayed throughout the bank and club members have the opportunity to be part of the implementation team.

Think about the types of awards that make sense for your specific employee group. Here are some examples:

• Provide a day off with pay
• Provide tickets to sports, music or cultural events
• Establish and name an award after an exceptional employee
• Take out an advertisement in the local newspaper thanking your employees for their contributions
• Provide a donation in an employee's name to the charity of his or her choice
• Let recipients visit customers
• Have an Oscar-like awards banquet with trophies and plaques
• Have the president or manager of choice do the recipient's job for a day.

3. Contract with Employees

The third catalyst for changing pay is the so-called contract with employees. The old contract has been broken, but what do we put in its place? As the following table illustrates, organizations need to tie employee pay to organizational success and results. Organizations can't continue to pay guaranteed income based on effort or service. We can't increase fixed payroll costs every year. The days of automatically passing those costs on to customers are long gone.

Employee Contract

4. Organization Structure

The fourth change catalyst is how you are organized. When companies were structured vertically, decisions were made at the top. The managers' role was to control, and employees did as they were told.

Pay systems reflected that type of structure:

• They were vertical -- pay increased as you moved up the ladder
• They were stable and predictable -- you could count on a 5% increase every year
• They were functional and scope-based -- marketing and sales were typically paid more than operations; and the more employees you supervised, the higher your pay.

But most operating structures have changed. They are flatter and horizontal, team-based, flexible and cross-functional. And so we need pay systems to reinforce and support these structural characteristics. It doesn't make a lot of sense to have a predictable, functional pay system in these chaotic days of cross-functional teamwork.

SHARING SUCCESS

So where do we go from here? In my opinion, both organizations and employees have to change. Organizations have to be willing to share their successes. If employees are asked to share the risks, then they have to share the rewards.

Today, the gap between the highest-paid and the lowest-paid is wider in the US than anywhere else in the industrialized world. This is happening at a time when productivity and corporate profits are steadily rising, and executives are continuing to receive huge salaries and bonuses, in many cases, regardless of their companies' results. Is it any wonder that employees are angry and distrustful? Employee commitment to company success is not a one-way street.

The days of loyalty and long service are gone, and companies must do a far better job of gaining employee commitment and decreasing the trust gap with their workforce.

• Organizations need to rethink how they view employees. If employees are perceived as costs, then they can, of course, be cut. If, on the other hand, employees are treated as assets, then perhaps the mindset will change to finding ways to increase the return on these assets.

• Companies have to make empowerment more than a buzz word. Most of today's employees operate in a high discretion workplace. Employees need to be encouraged to use their discretionary work time to the Company's advantage and not be held back by their lack of decision-making authority.

• Companies have to invest significantly more than they do today in educating and training the workforce. Skills that are in high demand today will be obsolete tomorrow. And the education has to include business and financial training.

Employees, for their part, will also have to change to be successful:

• Employees have to recognize the need to continuously upgrade and improve their skills and knowledge.

• They have to accept the responsibility and accountability of empowerment. If employees are involved in decision-making, they can't blame the boss for the quality of the decisions.

• Employees have to learn to change their behaviors and commitment to results, customer service and teamwork.

CHANGE IS GOOD, BUT DOLLARS ARE BETTER

So what about compensation in this constantly changing environment? Here are some factors to consider as pay -- as it inevitably will -- moves from controlled, stable and fixed dollars to pay that varies with success and results:

• Make sure your program is integrated with your business strategy.

• Design it to focus employees on areas critical to organization survival and success by rewarding results employees can influence.

• Be sure the plan and the process reflect your culture and values.

• Focus on the customer, both external and internal. Use some element of your total pay program to recognize and reward customer service and satisfaction.

• Make sure the program is cost-effective. If your company is squeezing out profit margins to survive, participate in that effort by maintaining or reducing fixed compensation costs.

• Don't be stingy. If you want outstanding results, pay outstanding rewards.

• Employees typically feel the results of the downside of performance. It is equally important that they benefit on the upside.

• Don't expect perceptions to change overnight. Traditional systems have been around a long time. Changing to a variable pay philosophy is not a short-term project.

• Be prepared to spend time and effort to train and educate managers and employees, alleviate their fears, and gain understanding, acceptance, and credibility for any new approaches.

• Do this through clear, ongoing communications. These messages must reinforce the link between the company's ability to achieve business goals and succeed in the marketplace and its ability to support an effective compensation plan.

• Above all, inspire. Do whatever you need to do to get people excited and focused on improving performance and results.

• Make the program important. Publicize it, promote it, market it. Make sure everyone knows and understands its importance to them and to the organization.

There is much talk today about compensation. Much of the talk centers on the motivational impact of pay and incentives. While motivation is, of course, a key element, as we have reviewed, there are other catalysts pushing organizations to change the way they pay employees. Not the least of these is the critical need to vary cost structures. For most organizations, compensation is the largest element of operating costs. If business dictates a reduction in costs, companies are forced to reduce labor costs by layoffs and downsizings.

However, many organizations are changing the way they view people and pay -- away from traditional, cost-of-doing-business programs to programs that focus employees on improving business performance and rewarding them for their contributions.

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