Compensation Strategy Essay

1466 words - 6 pages

Before you think about designing and implementing a compensation plan, you must first develop a clear and compelling compensation strategy. To develop a successful compensation strategy you need to take the following steps:

Define your compensation philosophy.
Link compensation to your overall business strategy.
Change the culture and reinforce it with compensation.
Reward the behaviours that drive the results.
Think total compensation.
Measure your return on invested payroll £s.

1. Define your compensation philosophy  

A sound compensation programme begins with a clear, focused compensation philosophy that defines and answers fundamental questions such as:

What do we want to pay for? ...view middle of the document...

Compensation provides a very effective tool for getting employees to move in the same direction and follow the same path.

For example, suppose a young, growing company wants to increase market share. Its compensation plan needs to reward people for bringing in new customers and clients. In contrast, a more mature company might need a better balance between growth and profit. Accordingly, its compensation plan should equally reward activities that generate growth and profit.

Another company might identify world-class customer service as one of its top strategic objectives. It would need to reward the activities (in all areas of the organisation, not just the customer service department) that lead to outstanding customer service.

If compensation doesn't have a direct connection to corporate goals and objectives, employees will take any direction because they don't know which one to take. Compensation strategy starts with identifying your top strategic objectives, defining what they mean in terms of organisational behaviour, and designing your compensation plan in a way that rewards and recognises those behaviours.

3. Change the culture and reinforce it with compensation

A good compensation strategy alone won't get the results you want. In order to get permanent behaviour change, you must first change the culture and the environment. Then use compensation to reinforce those changes.

If all you do is dangle money in front of people, you get short-term blips in behaviour and then people go right back to the old ways of doing things. You don't get sustained productivity improvements unless you change the culture. That involves identifying the results you want to achieve as an organisation, identifying the behaviours that lead to those results, and then designing a compensation programme to reinforce and reward those behaviours so that they become permanently instilled in the organisation.

Compensation provides a very effective tool to reinforce organisational values. Too often, CEOs talk about values but then don't walk their talk. For example, many companies say they value teamwork but continue to reward individual performance. Or they talk about customer service but reward only financial performance.

Compensation sends powerful messages to your employees about who you are as an organisation, what you value and what skills and results you reward. If you want to instil certain values in the organisational culture, reward them through your compensation programme.

4. Reward the behaviours that drive the results

In order to reward behaviour that drives results, you have to know what creates value in your company. Value gets created in two ways. First, as an organisation you must do the things your customers want, need and desire. This represents the qualitative side of the business. Second, everyone in the company has to help the company to do those things in a profitable manner. This represents the quantitative side of the business. Without...

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