THE 24-KARAT & STICK APPROACH:  Tie your compensation carrot to a strategic measuring stick

Leader's Edge Magazine, March 2005
Author:  Robert J. Lieblein

Have you started building a strategic plan? Perhaps you have one in place that you’re just dusting off. Or maybe you’re looking at your list of strategies and objectives and saying, how in the H-E-double-hockey-sticks am I going to pull this off? Calm down, back away from the ledge. This article will discuss a key component for enacting your plan: strategic compensation.

Strategic compensation gives you the ability to transform a strategic plan from ideas on paper into results. Even if you are the agency owner, CEO or top manager, successful implementation does not fall entirely on your shoulders. The answer is in your people. Skilled, informed, motivated staff will make it happen and make you look good. More importantly, they will make your business more financially successful. Under the tenets of strategic compensation, if your employees succeed, you must reward them. And nothing says reward like a big, fat bonus check. The size of the checks, how you calculate them and how you decide who gets them are all important elements of strategic compensation. First, though, it’s best to put this in the context of the larger strategic plan.

To successfully implement a strategic plan, it is critical to set standards of accountability for individuals and teams and then to reward them for accomplishing strategic results. The reward system is where insurance brokerages usually fall short. Even if companies have many of the right ingredients, most compensation systems are too heavily focused on rewarding today’s success and not tomorrow’s. Keeping your eye on the long term is the essence of strategic compensation.

Money Changes Everything

We all know, on a gut level, why compensation plans should include rewards. Money is a great motivator. The lure of a bonus may account for as much as 25% to 30% of an employee’s productivity. Of course, there are other motivators, too, and creating a great work environment is necessary and commendable. I’d venture a guess that most of the companies recognized as being among the “Best Places to Work” have competitive, creative compensation plans as well as desirable non-monetary benefits.

It’s not just the employees who benefit from strategic compensation. The business owner benefits, too.

A robust compensation structure will help you and your team meet the goals of your strategic plan. A strategic plan has short- and long-term objectives that are both strategic and operational, and rewards for both need to be tied to measurable standards of accomplishment. Achieving both strategic and operational objectives enables you to reach the ultimate objective—increasing shareholder value.

Strategic compensation promotes the hiring and advancement of people who are leaders, who can take action, and who execute the strategic change needed to help your company grow according to the plan. If the rewards are flowing, that’s a good sign that your plan is a success, and that will translate into growth and a more valuable company.

A major downfall of traditional compensation plans is that they lack the flexibility to take into account long-term goals. Merit pay can be mystifying to employees, and a typical base-pay-and-bonus arrangement rewards short-term goals. Did you meet your sales quota for this quarter? How did the numbers work out for the year? Fine, here’s your year-end check. If you tried to apply that model to long-range goals, you might be in the position of holding that bonus-check carrot out there for three or four years. Can you imagine your employees being motivated by that? No. Not only do your people have to see themselves as integral team members for the long term to reap those types of rewards, they have to see incremental successes that translate into performance pay. It can be done, but it requires thinking outside the box of traditional compensation models.

Strategic compensation will help you align individual incentives with short- and long-term corporate goals and objectives. The same pitfall of looking only short-term occurs here. Some strategies make the compensation plan reward tomorrow’s successes as well as immediate gains.

Rewards to Fit the Goals

Looking at the big picture, you’ll see three distinct and unique types of incentives in a strategic compensation plan: those that meet corporate goals, business unit goals and individual personal goals. At its simplest, this approach can be broken down by percentages of reward. For instance, the plan for a senior executive or vice president might be structured this way:

• Corporate goals: 60%

• Business unit goals: 30%

• Personal goals: 10%

For a more hands-on manager or department director, however, the structure might look a bit different:

• Corporate goals: 40%

• Business unit goals: 40%

• Personal goals: 20%

This plan must be flexible and include employees at all levels of the organization. In this way, your strategic compensation plan is a careful balance between motivating traditional operating performance and pushing strategic initiatives.

Let us analyze in further detail corporate, business unit and personal goals.

Corporate goals are typically the bigger-picture items tied to strategic numbers such as shareholder value (economic value added), net income, or strategic priority issues (entrance into a new market or geographic expansion). These would typically be of most concern to CEOs and senior managers who have a more long-term view of the business.

Business unit goals can be short- or long-term. For example, a sales manager might set business unit goals such as achieving a certain dollar amount of new commission income, maintaining certain retention rates, hiring new producers, or increasing organic growth by a certain percentage. Overall, while these items may appear to be rewarding today’s successes, they are actually corporate goals that may be part of the company’s vision statement.

Individual goals are fairly straightforward. Producers typically would aim for more short-term goals, such as the individual reaching a specific dollar volume of new revenue or a producer’s personal goal of increasing account retention on a book of business to a target percentage.

The key is that individual performance should not be more important than business unit or corporate goals. In traditional compensation, bonuses are often tied to individual performance, which does not necessarily mean the company is doing well. With strategic compensation, you strive to avoid significant rewards for individual performance when the company did not hit overall goals and objectives.

Erecting Clear Signposts

Incentive pay works because it is tied to results. Desired results are the product of a well-designed strategic plan, one that creates realistic, measurable goals. Those goals must provide the employee a broad, open highway to follow, so he or she can easily stay focused on the plan. There must be a clear connection between an employee’s behaviors and developed skills.

Plan details are the billboards along the road that act as reminders on that long haul toward distant goals. As you zip down the road, the signposts flip by: hit this target, develop that skill, increase your efficiency, X distance to the next mile marker. In this manner, you and your employee can fine-tune for better results by making course corrections to behaviors or supercharging necessary competencies.

Rewards come as a result of team efforts as well as individual actions. Your strategic plan should include teams that are formed to empower change, fix broken core processes and change the company culture. When you devise cross-functional teams, you must also create milestones and deliverables for their actions and make very clear that compensation will be tied to the success of the team in meeting those actions.

Team members can share equally, leaders can be offered further incentives, or a sliding scale can be used that reflects each person’s level of contribution to the team. In one situation, team members were allowed to decide for themselves how to split up the bonus, voting on how much of it should go to the leader before allocating the rest among members.

A strategic compensation plan for each employee may be quite extensive if that person is a core staff member involved in many team and individual actions.

Keeping Score

A successful strategic compensation plan begins with measurable performance. Salespeople today get beyond their base pay only by performing well, and their financial success is directly related to how far they exceed their goals. If you realize that every person on your staff is on his or her own personal path, you can see ways to apply strategic compensation to most, if not all, of your people. At every level of the organization, seek out measurable actions and create work plans that support the strategic plan. Then tie significant compensation benefits to successful implementation.

The best way to lay this all out for your staff is through the use of a scorecard. Here are a few guidelines to help structure the scorecard:

• Build in “actionables” at all levels. Each achievement and the actions to get there need corresponding incentives. Develop this for individuals, business units, departments and cross-functional teams. Create a clear “line of sight” between the goal and the reward. Employees not only can see it clearly, they also can calculate how to do what’s necessary for success.

• Take a granular approach. Evaluate each objective and goal individually. Separate operational functions from strategic actions, and weigh each according to its contribution to the mission statement and the strategic plan. Consider what behaviors you want to encourage, and devise a method for measuring how well the employee is exhibiting that behavior. Remember that a strategic plan is a long-range effort, so incremental results that move your plan along should be valued and rewarded. These are perhaps even more important than the immediate bottom-line results.

• Spread rewards over time. To keep the change agent alive, you want your people to constantly be directed forward. Motivation can be sustained through a series of short- and long-term rewards. Priority actions result in tangible results. When those results are achieved, new or revised priority actions take their place. Meanwhile, strategic initiatives are given milestones, and deliverables result in incremental rewards.

• Offer significant gain. Be careful to not slice your reward system too thin. Financial rewards must be significant enough to put a smile on the recipient’s face and clearly provide a financial jolt. Smaller payments, like the occasional pat on the back, can be fleeting. How much is motivational? How about 50% of the staff person’s base pay? When you shoot for big results, you must think big in the rewards department as well.

• Keep it flexible. The possibility of a greater reward for truly extraordinary actions will be a great motivator for some employees, so it is valuable to include a “spot bonus” element to the plan. Because a strategic plan is a living document, you can count on it changing as you work through it. You must plan for this, being flexible enough to amend the plan as you go. That may mean amending the compensation strategy as well. It’s important to communicate this to employees.

Is It Working?

Once your strategic compensation plan is in place, evaluation and revision tracks along with your strategic plan. It must be reviewed regularly to determine if the goals and objectives are the right ones, are achievable, and are providing the rate of return and equity commensurate with the cost and effort put into them.

Confirm that your reward system is aligned with your overall plan. Is it rewarding the behaviors you want to encourage? Are the scorecards properly weighted to heavily promote the performance that is most vital to the company’s success? Are employees fully informed and engaged with the compensation system?

Once your strategic compensation plan is in place, step back from it and view it as an overall program. The program should gain buy-in from every member of the organization. If not, why not? Identify a problem? Change the program.

As you go down this path toward a new compensation system, remember that any problem is an opportunity. Employees will be understanding of your revisions. Moreover, such actions should serve to further motivate them because they will pattern your flexibility. Change breeds change. Well-managed change, that is a result of careful strategic planning and continual scrutiny, is a commendable behavior to be rewarded. Your ultimate goal, of building long-term value in your company, has a direct correlation to your willingness to embrace change, which is the heart of strategic planning.

Lieblein is a contributing writer and President of WFG Capital Advisors.  rlieblein@wfgca.com