Aligning Compensation to Achieve Organizational Goals

A prior article discussed the effective use of the performance planning tool to achieve organizational goals.  That tool is very powerful.  This article discusses the most powerful tool available to management—your incentive compensation system.

Most people strive strongly to do what they are paid to do.  And they will do it--  even if management sets the wrong objectives—often rationalizing that there must be a valid reason for those objectives being selected.  For example, if staff, or a portion of it, is given incentives to increase sales, sales will increase.  But consider this: there may or may not be any profit margin on those sales.

Setting appropriate objectives that the employer is willing to pay for requires asking what the owners truly would like to achieve.  Executives can make that much more difficult than it need, or should, be.  

Owners of for-profit companies basically want two things—growth and sufficient profitability.  Sure, they also want to be ethical and compassionate, as well as a good corporate citizen.  But if the company doesn’t grow or doesn’t produce an adequate profit, it could well eventually cease to exist and none of those other things really matter!  So, here’s a radical idea- pay people for growth and profit … and nothing else.  Anything else has the potential to distract them for the main mission!  The best way to ensure the company complies with the law is to expect much of your recruiting HR team and hiring managers to ensure that the skills and competencies outlined in any job description are updated and achievable, not a boilerplate.  An employer that onboards people with the wrong priorities will develop a stunning array of problems.

To best align all staff and ensure they don’t work against each other is to give them all the same incentive objectives.  Compensating sales people for sales and product people for profit margins is a sure way to lead to all kinds of counter-productive activity and to ensure that both goals won’t be met.  All of the staff should be paid for both growth and adequate profitability.

A company that really wants to do it right will take one more step—to have the measures of growth and profit levels judged not on an absolute level but rather in comparison to its competitors.  Is it enough to grow, or would you prefer to grow faster than your competitors?  A company that wants to exist indefinitely needs to outperform the competition.  Accordingly, I’ve always sought to set relative goals rather than nominal ones. At Insurex, we work with emerging and established companies in the insurance industry who benchmark fiercely.  The successful enterprise has a thirst for compensation structures elsewhere, even when it hurts.  

Another advantage of using relative goals is that they reward staff for outperforming the competition regardless of what is going on in the company’s industry.  That is particularly important in cyclical businesses.  If the industry is down but the company is performing better than its competitors, then the staff is out-performing and should be rewarded.  Similarly, if the industry is doing very well but others are out-performing our company, no staff should be rewarded for being laggards.  It may be time for a major discussion on alignment, benchmarking and compensation that is fair.  

Combined with an effective performance planning tool, which directs staff on the needed activities to produce optimal results, pay systems are very powerful tools to let them participate in the good outcomes that result from executing those activities well. Basing the pay systems on growth and profits aligns the staff with ownership—they get paid when the owners get paid. 

Does all of this work?  While it is admittedly my personal take, this approach worked in every institution I ran.  All three key results items--sales, operating income and return on equity--increased in nearly every single year.  Is it time to do a deep dive so you become the envy of your sector?  

Let’s do it.