monetary rewardsLast week I was talking with some folks about using compensation to drive employee behavior, and it occurred to me that I have never shared anything about that topic here. While I might not be the world’s foremost expert on the topic, I do have a few basic principles that I have relied on over time. The thing that I would like to note is that these apply to organizations of virtually any size. Even small companies (I’m looking at you, Mr/Ms HR Manager of a company with less than 250 employees) can incorporate these elements into their compensation planning without too much stress.

The other caveat I want to mention up front: money is not always a motivator for everyone. We want to instantly think that we can drive performance or discourage behaviors through monetary incentives. While that may be the case at times, it’s also worth noting that we humans are unpredictable creatures. That’s why motivation discussions are based on theory, not law. We have laws of physics. We have theories of motivation. Keep that in mind. If you implement something we talk about today and it doesn’t work, feel free to change it. It’s about finding what works for your organization and your people.

Everyone Needs a Variable Element

When it comes to compensation we have two basic elements: base pay and variable pay. Base pay is what someone earns as a condition of their employment. The fun comes when we start talking about variable pay, its elements, and how to use those pieces to really drive the behaviors we’re looking for in the workplace.

The most common area we see this in is for sales professionals. Base+Commission is the longstanding model, and it’s fairly easy to understand. What’s more difficult is figuring out how that sort of structure applies to other professionals, such as engineers, accountants, clerical staff, or even HR. How can you implement that?

A Few Types of Variable Pay

So, what types of variable pay might you commonly see? Here are a few:

  • Bonuses
  • Profit sharing
  • Deferred compensation
  • Group incentives

Each of these types can be combined and/or configured in a wide variety of ways to target specific jobs, types of workers, and even company culture. Test, measure, and revise as necessary.

How to Afford It

One of the first hurdles I always face when it comes to getting management on board with a compensation change is pretty obvious:

Can we afford it?

The good thing about incentive compensation that is tied to performance metrics like sales or profitability is yes, you can afford it. Here’s a good illustration for how that works.

Imagine that your friend has a lemonade stand valued at $5,000 that you want to purchase. You could go out and get a loan for $5,000 to buy it, but that increases your risk (what if you don’t have the cash flow to make the payments?) and jeopardizes the future operation of the business. The smarter, and less risky, way is to negotiate a purchase price that comes from periodic payments of net profits. If your net profit runs $1,000 per year, you’ll pay for the business over five years, but you are not at risk if there is a downturn in the market–it just takes longer for the final payoff. 

Variable compensation tied to business performance is the same thing. You are only on the hook for paying out when the business performance is good enough to cover the increased compensation costs.

This is identical to the fixed/variable cost discussion as it pertains to economics as well. Your fixed costs (base pay) will be there always. The variable costs/compensation will only be applicable if certain conditions are met. That, my friends, is how you afford it. You structure the incentives so that the growth in revenue/sales/profit/productivity/whatever-you-choose is enough to cover the cost of the incentive compensation.

This Hinges on Performance

If you haven’t already figured it out, this setup is going to require something that might not already be in place. We have to be able to properly measure performance for our staff in order to compensate them appropriately. If you’re not willing to measure performance and hold people accountable for it, then you might as well scrap this whole incentive compensation thing before you even start.

But if you are willing, then you need to try to find some objective metrics to tie into the jobs you’re trying to create incentives for. That’s a whole other discussion for another day, but in the initial planning and setup you’ll need to determine those performance objectives, because those are the basis for who earns variable compensation, how much they earn, when they earn it, etc. This is important, because you have to be offering incentives for the right thing.

It’s easy to focus on rewarding people for following the process instead of rewarding them for actually achieving the desired results. Be careful about that common trap.

Check out the free employee performance management guide for more on the whole performance topic, if you’re interested.

Shorten the Distance

There are two things that I have observed with incentive compensation that really help to drive results, and they have to do with control and reaction time.

If you can shorten the distance so employees have more control and a shorter reaction time, the rewards will be more meaningful.

Money Isn’t Everything

As I wrote about a while back, there are some great things that motivate people at work other than money. Sometimes it’s easier to assume money will work in all cases, but it’s often a more complex arrangement of details that ultimately drives people to do (or not do) things at work.

Do you currently use incentive based pay? How is it working for you? What types of positions do you use it for? 

I got a pitch the other day for some new research from the CMO Council. At first glance I started to trash it (I’m into marketing, but I’m willing to bet most of you aren’t!).

Then I took another look. I think the principles in the summary can shed some light on how HR pros can improve their position, make more money, and be seen as more competent overall. Got your attention? Read on!

CMO compensation is directly related to reporting structure. Those making more… are more likely to report directly to the CEO.

driving results

You have to be more innovative if you want more reward.

This one makes sense, but it’s a good reminder. Want to earn more? Work your way up until you’re reporting to the CEO. Or be good enough to become the CEO, but that’s another post for another day.

The highest paid CMOs have developed strong alliances with CIOs and CFOs.

Success in business is driven in part by the key relationships you develop. This applies to the HR function as well. Learn to connect with CFOs and other executives. Speak their language, earn some credibility, and put that network to use.

CMOs earning the highest levels of base compensation tend to be focused on driving business performance (e.g., top-line growth, market share, efficiencies, etc.).

Want to be successful long term in your role? Focus on driving business performance. The rest will take care of itself.

CMO base compensation is correlated with firm size. The larger the company, the more likely that the CMO will make more in base compensation and the more likely they will have bonus compensation.

Want to earn more money? Work for a larger company (and referring back to the first example, work for a larger company in the top tiers of management).

Digital marketing skills are important. CMO salary tends to increase as their firm’s digital marketing performance improves.

This is an easy one. The more value you can prove your function is bringing to the organization, the more you can command in terms of compensation. Have an HR mission statement that describes your aims and then make them happen.

Marketing titles (i.e., CMO, VP of Marketing, SVP of Marketing, etc.) don’t significantly correlate with base compensation.

Titles matter less than what you do. Your value is not in a title–it’s in your performance and the performance of your team.

Key accomplishments of the top earners… are centered on restructuring marketing to drive results, improving the yield/accountability of marketing, and building digital capabilities.

The top earners focus on results, not “the way things have always been done.” Improving capabilities, driving results in areas that are traditionally not seen as value add, and making tough choices are the activities that are rewarded. Keeping up the status quo not only isn’t rewarded–in many of these types of organizations I’d say it is probably weeded out.

So, what are your thoughts? Anything here that particularly rang true for you? Any action items that stepped on your toes to drive you to action? 


Ratio of CEO pay to worker payAKA I’m putting on my capitalist hat

I have been reading so much lately on the CEO to worker pay ratio numbers, and frankly it’s making me sick. I’m channeling the devil-may-care attitude of Tim Sackett today, so I’ll probably make half of you mad at me. You’ll get over it and we can still be friends. Promise. :-)

There are several common threads to the stories about the ratio of CEO pay to worker pay, fairness and envy being the most often. I think the arguments are irrelevant at a minimum and an attempt to stir up class warfare at worst. Let’s look at each of the issues above and how they play into the CEO to worker pay disparity discussion.

Hint: life isn’t “fair”

Some calculations put the CEO to worker pay ratio at 300+ times the average wage earner. While that might on its surface seem unfair, consider the fact that the CEO of a company like Wal-Mart makes decisions on a daily basis that impact the future profitability of the company. The average worker does manual labor or customer service work. Not exactly an apples-to-apples comparison.

I don’t work there and never have, but I would much rather have someone running the organization who brings more value than they cost the company. Trying to use the executive pay ratio is just an easy way to stir up the masses at the low end of the pay scale.

Don’t hate ’em, join ’em!

The (easy) and popular thing to do is talk about how selfish and greedy corporate executives are.

So. What. 

The majority of the time it’s just some guy (or gal) trying to work and do their job well. Yes, they get paid a considerable amount of money for what they do, but in the end they are still people who have hopes and dreams when it comes to the work they do. Instead of trying to use envy as a wedge between “us” and “them,” why not seek out ways to become like them?

That brings to mind a  quote I’ve heard before: jealousy is wanting what someone else has–envy is wanting to take it away from the other person because you think it’s out of your reach.

Not everyone is motivated and driven to become a highly compensated executive. But you shouldn’t hate those who are. If you’re that jealous of what they have, learn how they became successful and follow in their footsteps.

That goes for nonprofits, too

I often read the work of Harvard Business Review author Dan Palotta. He recently wrote “An Executive Pay Witch Hunt,” detailing New York Governor Andrew Cuomo’s attacks on nonprofits for paying their executives “high” salaries. I look at it this way: if a nonprofit can help a thousand homeless people in their current operating state, but they can hire a better (and more expensive) CEO whose leadership and guidance allows them to help ten thousand homeless people, then why ridicule them for making that choice? Again, this ignores the small percentage of organizations and people who defraud others and behave unethically, because that’s an entirely different discussion.

All said, I’m a fan of the government staying out of the way as long as a business is operating within the confines of the law, and that “staying out of the way” involves executive compensation and the CEO to worker pay ratio, too.

Let the comments begin! :-)