Is Compensation about the Money?
Posted Monday, October 7th, 2013

Published in SatNews Worldwide Magazine, November 2013, Bert Sadtler, Senior Contributor

To assist with career and leadership issues, SatMagazine asked Bert Sadtler of Boxwood Executive Search to provide his insight. Boxwood is a management, consulting recruiting firm with offices just outside of Washington DC and in Bradenton, Florida. Boxwood’s services involve job growth, maximizing the performance of critical, senior level talent and addressing the shift in the recruitment and compensation paradigm for employers.

Yes, it is about the money

What else makes such an easy and immediate reward to an employee? Employers can offer creative benefits, an energetic workplace environment, flex schedules and extended leave, but all take second place to “the money”. Various forms of stock options and equity can fall into a version of “the money” depending upon the structure of the employer.

Employers have the responsibility to protect their cash while simultaneously incentivizing their employees. Employers are trying to motivate their employees to get the “biggest bang for the buck” through alternatives to cash compensation. CEO’s and Senior Leaders tell me that they support a simple business philosophy. It is rarely being implemented today: Senior Leadership will pay significant compensation to employees who deliver extraordinary value to their employer.

Employers agree that today’s workplace is very dynamic. Creative approaches are welcome and are being implemented frequently. However, many employers continue to use the same compensation model from years past. The model says: If the employer meets certain goals (usually revenue targets) then all employees qualify for a bonus on top of their base salary. This approach is designed to serve the employer, not necessarily the individual employee. It suggests that all employees deliver a similar value.

By working as a team, both employee and employer will benefit. In theory, it sounds great. Unfortunately, there exists an avoidable and unintended outcome. While the outdated model does universally reward the employees for the employer’s success, it does not drive excellence. It does not speak individually to each and every employee, challenging and encouraging the highest level of achievement. It does not encourage passion. The one-for-all and all-for-one model is more socialistic than capitalistic. Mediocrity is the biggest enemy of an aggressive, growing, capitalistic organization. The outdated model is unable to promote sustained excellence and allow “average” to creep into the organization, also known as mediocrity.

The outdated compensation model is saying to the employee: “you are agroup and your employer holds you accountable as a group, rewarding you as a group”. The employer wants this group to be a TEAM, but has modeled them to be a GROUP. So, if the old compensation model is more socialistic than capitalistic, allows mediocrity, and creates groups, rather than teams, what is the better model?

First, there must be agreement that today’s marketplace is faster paced, and more demanding of results. In this market, everyone needs to be delivering value. In essence we are “interviewing for our job” each day. Our output is not equal. Employees are not equal in their talent and their value. Some are smarter, some are creative, some choose to work longer hours. Some have 40 hours for their work-life and spend significant additional time on commitments outside of “work”. Some employees have a unique drive to over-deliver whatever they are doing. Since employees are different, why not weigh compensation more heavily on performance?

Don’t employers run their business on a pay-for- performance basis? Highly performing companies win business, deliver quality and grow their revenue. Underperforming companies don’t. By the employer directing the company’s goals through a performance plan, goals can be individually allocated to each employee in a way that ties back to the employer. If the employee can meet the goals, a smaller bonus is paid. Great results deliver a larger bonus. Extraordinary results deliver an extraordinary bonus thus recognizing, encouraging and rewarding excellence.

By defining the goals for each employee, the employer can still incentivize employees to collaborate and be “team-like”. Individually defined goals drive accountability and excellence, eliminating a socialistic model and eliminating mediocrity. Smart leaders realize the business value of rewarding extraordinary results with extraordinary compensation. Traditionally, variable compensation and performance based compensation has been associated with sales producers. Why limit performance to just revenue producers? Instead of measuring sales revenues, the employer identifies and defines critical key objectives for the employee to complete. While the objectives can be developed as unique to the employee, all of the objectives are in harmony with the company’s short and long term goals.

Under this performance model, compensation is viewed as “OTE” or On-Target-Earnings, comprised of base salary, bonus, stock, equity, etc. The base salary represents 40%-60% of the total OTE with attainable goals and the related bonus components making up the remaining 40%-60%. Then, there are stretch goals and rewards for extraordinary performance with no limit or cap to slow down or discourage over achievers.

Finally, while most compensation cycles run for 12 months in parallel with a company’s financial year, why not cut it in half and run a 6 month cycle in order to incorporate adjustments to the dynamic changes in the marketplace? This structured approach only works with a companywide commitment by all managers to spend the necessary time establishing appropriate individual goals and then providing timely feedback to the employees. No, it is no easy. To those of you who find this to be a significant change as well as a significant time investment to implement, ask yourself what is more costly than NOT realizing the full potential of an organization’s talent? Time and time again, employees tell me their compensation model does nothing to motivate excellence. They feel they are compensated the same for good work as they would be for extraordinary work. So, stay the course if your mediocre compensation model is good enough….but consider a change if extraordinary is your company’s destination.

Good hunting!