Few executives and business owners are aware of the power of their compensation systems to focus attention on, and to drive, organizational goals. In addition to failing to optimize the allocation of their financial resources, they are settling for lower than necessary levels of productivity, employee engagement, and commitment to organizational goals. Here are ten suggestions that every employer, regardless of the size of his/her organization, should consider.

1. Align pay with organizational goals.

Make sure that the performance you are rewarding supports the organization’s mission and goals. For example, if you want employees to act as a team but you pay them based on their individual performance, guess what you’ll get?

2. Make sure you communicate the message you want your compensation system to send.

Every compensation system sends a message to employees. Make a conscious decision about what message you want to send, and ensure all elements of the system are aligned with it. For example, if management says, “Employees are our greatest asset” yet pay levels are below market average, what message do you think the employees receive? If you don’t shape the message, your employees will - and the results may dismay you.

3. Think broadly.

Define “compensation” as including more than just pay and benefits. I encourage my clients to use the term “total rewards,” and to include everything that rewards or recognizes employees for their performance. This approach gives management a great deal of latitude to show how much they value individuals’ contributions to the organization’s mission, even during times of economic uncertainty.

4. Leverage the power of recognition.

In my experience, recognition is a “best kept secret” in the workplace. As a result, it is seriously underutilized in most organizations. This is a huge mistake, as (a) there are hundreds of no- or low-cost ways of recognizing employees, and (b) employees tend to remember a form of recognition long after they have forgotten a monetary reward. I advise my clients to find out what non-monetary forms of recognition are meaningful to their employees (e.g., autonomy, challenging work, the ability to learn new skills), and incorporate them liberally into their total rewards system.

5. Connect rewards with performance that employees can control or influence.

Few things are more de-motivating to employees than being offered rewards for achieving outcomes over which they have little or no control. For example, I have seen employers make individual bonuses contingent on completing projects that require things outside of the employees’ control, such as key input from others, approval by management or other decision-makers, or funding. You are better off not offering any reward at all. In addition, I generally advise clients against companywide annual profit sharing programs, partly because the majority of employees cannot connect their performance clearly with the payouts they receive. This type of program does little or nothing to create a motivating environment, so from a strategic point of view, those compensation dollars are wasted.

6. Watch the timing and form of rewards and recognition.

To maximize limited resources, management should pay attention to the timing of rewards and recognition. Desired performance should be rewarded as quickly as possible: employees will see the cause-and-effect relationship, and will be more likely to repeat the behavior. Annual bonuses, such as profit sharing plans, are notoriously ineffective (except possibly at a senior level) in helping employees make this connection. In addition, bonuses should be one-time lump sums rather than increases to base pay. The effect of the latter is to reward employees in perpetuity for something they did well at one point in time.

7. Establishing a clear line-of-sight is priceless.

You have established a clear line-of-sight when every employee is able to articulate clearly the contribution he/she makes in achieving your organization’s mission or goals. When this happens, you will have a workplace in which people are engaged, motivated, committed to organizational goals, creative, and have high morale. Money cannot buy this type of environment.

8. Ensure the compensation system is procedurally fair.

Managers often cannot control the outcomes of the compensation system - i.e., the amount of pay they can provide. However, there is one key factor over which they always have control, namely the process by which rewards and recognition are determined. Research and experience demonstrate that when employees perceive that the process by which they are paid is fair - e.g., it is transparent, free of bias, and allows for their input - they will accept the outcomes even when they are not entirely happy with them.

9. Formalize the system, then don’t mess with it.

Once you have established your pay structure(s) formally and identified clearly how and when pay and other forms of rewards will be adjusted, do not change it arbitrarily. While I advise clients to conduct annual reviews to ensure the system still is aligned with their goals and to determine whether structure-wide pay increases are appropriate, that’s all that should change. Your compensation system is a reflection of management’s strategy and its philosophy about how it values its employees. These things should be relatively stable. In addition, employees should be able to understand how and on what bases they are paid.

10. Implement an excellent and measurable communication plan.

No compensation system can succeed without a clear, concise, and comprehensive communication plan. The plan should cover the development and on-going administration of a compensation system, as well as changes that occur over time. Here are two measures of such a plan: (a) every supervisor and manager is able to explain it accurately and clearly to their staff, and (b) individuals can articulate how and on what bases they are rewarded and recognized.

Pat Lynch, Ph.D., is President of Business Alignment Strategies, Inc., a consulting firm that helps clients optimize business results by aligning people, programs, and processes with organizational goals. You may contact Pat or call (562) 985-0333.

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