03 Sep Compensation Strategy: It’s Not About How Much You Pay
By Tom Wilson (Adapted from a chapter, authored by Tom Wilson, of an upcoming book and published by McGraw Hill).
The cost of compensation for most organizations runs between 40% and 60% of revenue. Paying your people is likely your single largest business expense.
To put this in context, consider the time and energy that would be devoted to the purchase of a major piece of equipment or the due diligence conducted prior to the acquisition of a company. In each case, significant effort would be focused on researching the cost and benefit associates with the investment.
Now consider the external marketplace for talent. Most companies pursue compensation strategies that are similar to those of their competitors. If your marketing department proposed development of a new product with the same characteristics and features as a competitor’s product, top executives would not be impressed. So why take the copy-cat approach with your compensation plan?
I propose that companies think differently about compensation. While it’s always important to evaluate “how much” you pay, it’s even more important to create an effective strategy that addresses “how” you pay. There are many compensation “best practices” and alternative approaches advocated today, companies need to develop their own total compensation and rewards programs, aimed at aligning pay with the strategy and core values of the organization.
The benefits of developing a compensation approach based on company strategy and values include:
- Reduced chance of failure due to aspects of a “standard” compensation plan that don’t take into account unique aspects of the organization
- Opportunity to ensure that compensation philosophy adjusts over long-term with changes in strategic direction and market conditions
- Ability to identify the features of your compensation strategy that have the greatest impact on value-creation
- Opportunity to create a competitive advantage in the marketplace
An effective total compensation and rewards strategy can attract the best talent and encourage work behavior that differentiates a company from its competitors. It’s just that simple… and that important.