Tie compensation to company performance
July 5, 2004
Compensation and benefits represents the largest expense on the P&L of almost all companies.
In many industries compensation is well over 50 percent of total expenses.
Yet while the CFO will spend days agonizing over the return on investment of the purchase of equipment, a new marketing campaign, or a building addition, most companies spend little or no time evaluating the return on your biggest investment – compensation! Indeed most middle-market companies look at pay as a necessary fixed expense and then work to minimize the amount, without considering how they can get more from their compensation investment dollar.
Compensation to the workforce is your company’s biggest and most important investment and should be treated as such.
A well-designed total compensation program is one of the most effective ways to:
* Communicate the company’s goals and expectations to employees
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* Get agreement and buy-in of the roles and expectations of key employees
* Motivate and reward for exceeding performance expectations
* Retain key employees by meeting their economic and psychological needs A well-designed compensation program should accomplish two primary objectives: Result in enhanced performance and the attainment of company, function, and individual objectives – getting a “return” on your investment, and Recognize the short- and long-term objectives (“visions”) of both the owner/shareholders and the employees.
Key employees should know “what’s expected of them” and “what’s in it for them.” By linking their pay to company success and meeting their needs and organization can truly unlock their full potential to work on the company’s behalf.
The visions of both the owners and the employees can be effectively met through a well-designed total rewards program predicated on company performance.
The total “investment” in compensation includes not only base salary, but also the other key components of total rewards that some or all employees need and desire.
The six primary components of a welldesigned pay program are: base salary, short-term incentives, long-term incentives, core benefits, retirement, and executive benefits.
Ignoring any one of these may result in an unbalanced total pay program.
Within these broad categories are the tools that will enable the company to effectively position compensation as an investment:
* Short-term incentives such as MBO and EVA plans
* Equity incentives such as stock options and restricted stock
* Long-term cash incentives such as PUPs and SARs
* Executive retirement such as SERP and DCP programs.
The development of an effective total rewards program that fully supports the company’s long-term strategic plan include the following steps: Define the long-term company vision – “Where are we headed?” Determine the strategy required to obtain the vision – “How will we get there?” Communicate employee roles and expectations – “What’s expected of me?” Design compensation and benefits programs – “What’s in it for me?”
Well-considered programs will enhance company performance and effectively link the visions of owners and employees to truly unlock the potential of the company.
Hawley MacLean is a partner of VisionLink Compensation Advisory Group and President of MacLean Financial Group in Reno.
Contact him at firstname.lastname@example.org or (775) 329-3041 ext.