Compensation Strategies

Not Having a Plan Could Break the BankPresented byJames C. Fox

Strategy and Pay

• Pay is a reward for behavior• How and what you pay should

support what you want to reward• Pay also needs to reflect who you

are as an organization• Pay should reflect the situation that

your company is in

You get what you pay for

• Internal focus vs. external focus• Focus on products vs focus on

services• Focus on fairness vs. focus on

competitiveness• Focus on risks vs. focus on no errors

You pay what you have

• Small fish in big pond or big fish in a small pond?

• One of a kind, or one of many?• Organized or “un” organized?• Lay offs or full employment?

Pay with what?

• Money• Bonuses• Premium pay, shift pay• Ownership• Cash recognition• Benefits• Perks• Career advancement• Training• Personal growth

• Employment security• Advancement

opportunities• Organizational support• Work environment• Title• Organizational affiliation• Work variety• Work challenge• Autonomy• Work meaningfulness• Feedback

Pay with what?

• Direct Financial– Money– Bonuses– Premium pay, shift pay– Ownership– Cash recognition

Pay with what?

• Indirect Financial– Benefits– Non cash recognition– Perquisites

Pay with what?

• Affiliation– Organizational support– Work environment– Organization citizenship– Title

Pay with what?

• Work content– Variety– Challenge– Autonomy– Meaningfulness– Feedback

Pay with what?

• Career– Advancement– Personal Growth– Training– Employment security

Balance

• Your compensation philosophy and the kind of company will lead you to answers on how to balance each of these compensation vehicles

• You may “underpay” in one area, but “over” pay in another

Examples

• Large government contractor– Largest employer in

the area– Non union– Most of work done

under contract with government

• Small, start up, dot-com– Highly competitive

market for talent– Other companies

raid employees– Non-union

Base Pay

• Base pay should be considered the price you pay for membership to the club

• It ensures you that the employee– will show up at work– that you may call them at night or

weekends with business questions– that you can send them out of town and

disrupt their personal life

Base Pay

• Must be within 5% of market to be competitive

• Most companies highlight the 50th percentile

• Some companies will target the 75th percentile

• Lately, companies are targeting the 60th percentile

Incentive Pay

• The price you pay to get employees focused on what is important to the company.– Addresses motivation and reward for achieving

a pre set goal– Should be related to critical areas that the

employee can impact– “line of sight” should be direct– Should consist of no more than 3-5 goals– Simple and measurable is best

Incentive Pay

• Balanced Scorecard Approach– Financial– Operational– Customer– Learning and growth

• Multiple levels of organization– Corporate– Division– Business unit– Individual

Incentive Pay Targets

• Top Executives 50-100% of base• VPs and Directors 30-50% of base• Mid-Management 20-30% of base• Supervisors 10-20% of base• Others 0-10% of base

• Needs to be at least 5% of base to have an impact.

Long Term Pay

• The price you pay to retain employees– Addresses long term security– Should tie individual to the company’s

future– Should be tied to the growth of the

company over time– Spans multiple years (3-5 or longer)

Long Term Pay

• Stock options for public companies• Phantom stock for public and private

companies• Long term incentive plans for public

and private companies• Traditionally tied to value of the

company, or some long term goal (achieving $X in gross revenues)

Long Term Pay

Level Grant value* Est. Future value*

Executive 60-100% 30%

Director 50-70% 25%

Manager 30-50% 20%

* As a percent of base

The Balance

Pay Component

Starting Market Growth

Mature Declining

Base Low Mod High High

Incentive Low Mod High Mod

Long term High High Mod Low

Perquisites Low Mod Mod High

Benefits Low Low Mod High

The Balance

• Large government contractor

– Base: high– Incentive: low– Long term: low– Perquisites: low– Benefits: high

• Small, start-up, dot-com

– Base: mod– Incentive: mod– Long term: high– Perquisites: low– Benefits: low

Consequences of More

• More of one thing does not solve problem

• Balance of rewards is important• Key words

– Meaningful– Relevant– Timely– Valuable

• Examples

There is no silver bullet!