Compensation Plans in the Future

Friday, November 29, 2013

 

At one time the standard model  for many compensation plans was to annually price jobs based on internal job evaluations and market data comparison to external competitors with similar organizations, benchmark jobs, labor forces, revenue streams, even down to regional variations.  Organizations often employed a merit matrix, designed to allocate specific salary percentage increases based on a combination of comp-ratio and performance levels.  It was not unusual for most employees to come to expect an increase simply because they had clocked one more year of service with the organization.  “Just doing one’s job” qualified many employees for an annual increase, although it was the same level of performance as the prior year.  While many employers reported they had a “performance based pay” system, many of those systems were performance based in name only and were neither robust nor valid.

 

But “the times they are a-changin’”, organizations have begun to re-think who, when, how, and. why employees are rewarded.  A trend that has been emerging for some time now is that employers must reward and recognize the continuous creation of “value” by their workers.  Current compensation design has already built into “base” pay, remuneration for an average level, i.e., “meets” level of performance.  Only those employees who can demonstrate creation of value for the organization should be rewarded.

 

But exactly what is “value creation”?  Value creation is whatever makes an organization more competitive, effective, efficient, and compliant either to its internal or external customers.  Value creation includes, designing new profitable and competitive products and processes, eliminating and reducing cost, waste, errors or re-work, developing new profitable markets, and customers, avoiding or limiting litigation, regulatory penalties, … etc.  How does an employee create value for an employer?  It starts with engaging and empowering workers to think like owners and entrepreneurs.  Even small changes in a process can yield significant results.  Often this change requires “creative destruction” of the existing process or product, which can make many organizational leaders uncomfortable.

 

Compensation plans in the future must reward an organization’s talent who recognize opportunities and convert those opportunities into desirable outcomes for their employers, thus adding value.  Merely continuing to “do one’s job”, will only delivery last-year’s results, which in today’s hyper-competitive world is no longer acceptable.  Organizational managers who inhibit innovation, change, and value creation must be re-educated to become coaches, mentors, and enablers of talent.  Future compensation systems must reward those managers who routinely produce a flow of talented employees for the organization.  While many managers consider themselves to be a control point, reward and recognition methods must reinforce their talent development and growth-enabling characteristics.

 

Finally, future compensation systems must be designed in a way which meets the organization’s needs today yet be flexible and robust enough to continue meeting its ever changing needs as the organization evolves, growths, and re-invents itself.