Where is the Innovation in Compensation?
Let me start off the year with a topic I haven’t written much about previously. The topic of compensation plans and design has been on my mind as of late. Too often, at least in China, our hiring managers “complain” that we are unable to afford the talent we need to hire. Offering competitive salary packages is a challenge. Often times, prospective candidate’s existing compensation plans are out of range. Line managers often have employees going to them with offers from another companies, resigning from their current position.
Purpose of Compensation
There are multiple purposes of compensation in an organization. The primary is to pay for the people skills and competencies needed to run your business. We also want to motivate employees to do their very best. We want to employee to focus on the mission of the company aligning to the business objectives. Employee retention is also a key outcome of a strong compensation program. The cost of a replacement hire is often more than a new hire.
There is the desire to make compensation a cornerstone of a company’s brand and culture to employees. The aim is to design compensation and reward programs as a differentiator when competing and retaining critical talent.
However, I believe many compensation plans often fall short of these lofty goals.
Aligning to Market Practices
A key annual practice of compensation professionals is the participation in salary survey benchmark. They may take part in job evaluations to align on responsibilities and scope of work. The key outcome of this routine is to benchmark against peer-company practices. The results are used to tweak pay programs which end up “more or less” like their peer company’s pay programs.
- When I am recruiting I sometimes find it difficult to develop competitive offer packages for high performers, let alone the majority of the typical performers. Their pay, bonuses, equity plans are somewhat similar.
- In order to make a competitive offer or, at least one that is meaningful enough to jump to another company, the resulting base salary can often be at the top end of salary range. HR and compensation managers often discourage paying at the top end of the range.
- Rather than compensation being a cornerstone I often resort to other intangibles to the job and company to prospective candidates.
Pay for Performance
Compensation managers design pay programs that reward employees for innovation and for positive results, contributing the company’s bottom-line. Companies utilize performance and/or profit sharing bonuses in attempt to align employee actions to company goals.
- Especially at the lower levels of an organization it is often difficult for an administrative assistant or a project analyst to see how their day-to-day work contribute to the company’s profits.
- The R&D team while at the heart of innovation is being paid a performance bonus for today’s profits. But, it is often unclear how the profit share paid out today is tied to innovation product, culture or practices that were created five years ago.
- The only group that benefits from a pay for performance program is the sales team. There is often clear line of sight between objectives and targets. However, this still fall short when you want your sales team to drive for long-term sustainable sales strategy that go beyond the current sales quarter.
Incentives for Innovation
Very few companies have strong incentive plans that reward individuals and teams for innovation. I suspect that most companies are intolerant of failures. However, innovative services and products come only after multiple iterations of failures. It is unclear to me how companies reward employees for taking risks.
This reminds me of Clayton M. Christensen‘s book, The Innovator’s Dilemma, where he examined the disk drive industry where disruptive technologies continue to push traditional and predominate players out of the market where smaller innovative companies take over. For the existing large players, their revenue stream is not from new technology, where there is not a ready market. Thus, companies often do not reward nor incentivize employees to work on disruptive technologies, while at the same time risking and cannibalizing current revenue stream.
- Incentives for innovation is especially important in the technology industry where companies live and die by their ability to bring new products to market, often with very short product life cycle.
The Need for Innovation in Compensation
For most companies, the existing compensation programs falls short of attracting and retaining key talent, let alone trying to motivate talent. We we benchmark we constrain ourselves to those select group of companies within the survey. We miss the opportunity to see what true innovators are doing, those who fall outside the peer group of companies. When we become a part of the same we do not standout in a crowded space vying for a small pool of top talent.
HR and compensation managers should look for break-through compensation design truly help organisations reach its full potential. Rather than seeing compensation as a cost of human resources taking a “investment” approach and seeking an ROI may yield a more coherent strategy to compensation design.
Share your thoughts…
What ideas to you have on innovative approaches to compensation?