It’s not surprising that the cost of labor was cited as the second-largest executive concern in CFO Magazine’s Global Business Outlook Survey, as the total cost of employee compensation often accounts for 40 percent to 70 percent of a company’s operating budget. The challenge is in finding a way to attract, motivate and retain top performers without breaking the bank.
“You can’t succeed by taking a one-size-fits-all approach,” says Jed DeVaro, Ph.D., chair of the Department of Economics, College of Business and Economics, at California State University, East Bay. “Companies need to analyze historical data, elicit employee preferences and strategically allocate expenditures to maximize their return on employee compensation.”
Smart Business spoke with DeVaro about the process of aligning employee compensation with critical business goals.
How can aligning compensation boost the success of major business initiatives?
While compensation alone won’t ensure the attainment of the business plan, customized, strategic alignment of total rewards increases the likelihood of success. The key is taking a data-driven approach so that pay and benefits are allocated toward the positions and workers that yield the greatest return, require in-depth training or who are difficult to source.
Most companies are sitting on a treasure trove of historical data, making it possible to ascertain the cost and output for each position at specific tenure levels and strategically apportion compensation to yield the best return. For example, you probably need to pay market rates for software engineers and project managers because unplanned turnover of these scarce professionals can increase development costs and the productivity of these professionals increases over time. However, you may be able to pay below market for customer service agents who reach maximum productivity levels within a few weeks.
In addition, a review of previous successes and failures helps companies tweak designs and allocate expenditures toward programs that have successfully attracted, retained and motivated top performers in the past.
How can early stage companies gather the necessary data to calibrate compensation?
While the basic tenets of the compensation alignment process remain constant, early stage companies need to adapt their approach due to a lack of historical data and their need to attract and retain nontraditional candidates. For example, startup firms often want energetic risk-takers who are willing to accept a smaller salary in exchange for stock options.
It’s important to gather current market intelligence instead of waiting until turnover occurs or relying on third-party wage surveys that are often out of date. Human resources can help ascertain competitive positions and employee preferences, and proactively design an effective plan by following up with lost candidates, conducting exit interviews and informally surveying referred candidates.
What kinds of compensation practices can boost employee retention and productivity without breaking the bank?
Employers often think they have to pay top dollar to attract, retain and motivate employees, when these innovative, budget-friendly techniques are equally effective.
- Positive work environment. Being nice to your employees may not be the first thing that comes to mind when you consider compensation strategies, but workers are less likely to leave or become disenchanted if they feel appreciated and appropriated challenged. Salary usually comes in second or third in surveys of employee preferences, while a positive work environment is often their top priority.
- Reasonable hours. Even if you can’t give large raises or bonuses, you can boost hourly pay for salaried employees by reducing their work hours and letting them go home instead of scheduling a two-hour meeting for 4 o’clock on Friday.
- Customized benefits. Instead of offering the standard fare, optimize benefits expenditures by creating programs that resonate with your employees and your prospective talent pool. For example, young tech workers may prefer career development, training and certification stipends, while more mature workers with family obligations value flex time and a robust retirement program.
- Team incentives. Group incentives boost overall performance by encouraging top performers to mentor and train neophyte or less-skilled workers. Team incentives aren’t a substitute for individual rewards, but they serve as a rising tide that raises all boats.
- Deferred compensation. When strategically applied, deferred compensation can help employers retain scarce-knowledge workers or control the exodus of retirees to coincide with long-term business cycles or shifting labor market conditions. Examples include unvested stock options, which act as a cost lever by slowing or hastening the departure of employees.
What else can employers do to maximize their return on total compensation?
First and foremost, listen to your employees, because they will tell you what they value and whether they’re motivated by raises, bonuses or other perks. Informal conversations are the best way to gather intelligence because employees can become disgruntled if employers conduct surveys and then disregard their opinions. Second, ensure that top performers receive the largest raises and bonuses relative to actual, observable differences in productivity. Awarding raises based on discretionary criteria or a manager’s desire for reciprocal favoritism in 360-degree surveys can result in pay inflation or compression and erode the efficacy of a pay-for-performance program.
Finally, treat employees well. It’s easy for executives to lose sight of the fact that compensation goes beyond salaries and benefits. A positive work environment and a windfall of free time may be more valuable than working 60 hours a week for a nominal raise.
Jed DeVaro, Ph.D., is chair of the Department of Economics for the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-3289 or email@example.com.
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Most companies want to grow, the issue is just how and when. And determining an advantageous growth strategy can be challenging for executives. Less than 1 percent of companies ever reach $250 million in annual revenue and fewer still eclipse $1 billion. Unless you judiciously evaluate your options and select the right growth strategy, your small business may stay that way.
“Some companies boost revenue through organic growth while others diversify their products/services or build strategic alliances,” says Yi Jiang, assistant professor and associate director of MBA for Global Innovators for the College of Business and Economics at California State University, East Bay. “The key is understanding your options and selecting a growth strategy that fits your situation.”
Smart Business spoke with Jiang about growth strategies and what executives should consider when making a selection.
How have growth strategies evolved over time?
History and experience have altered our thinking about growth strategies. For example, vertical integration was a popular diversification strategy in the 1960s and 1970s. Companies decided to boost profits by expanding into upstream or downstream activities, thereby seizing control of the entire supply chain.
Oil companies were among the first to embrace vertical integration. They ventured beyond traditional petroleum exploration activities by purchasing refineries and distributors. However, the strategy’s popularity waned when several large, multinational companies were accused of monopolistic practices and their diversification efforts were thwarted by U.S. and European anti-trust regulations. In addition, many companies struggled to manage a slate of unfamiliar entities.
As a result, smart companies turned to building a network of complementary offerings to create synergistic expansion opportunities and economies of scope. For example, Amazon boosted e-book sales by introducing Kindle, and Sony grew from a tape-recorder company to an entertainment provider with a wide range of movie and music products, which helped it to edge out Toshiba in the format war.
What kinds of companies should focus on organic growth?
Niche companies with limited market penetration should focus on building brand equity before incurring additional risk by venturing beyond their core competencies. Organic growth maximizes existing resources and helps companies gain market recognition without diluting their brand. Organic growth is a good way to show the strength of innovation to investors who are interested in paying more for a strong brand with a loyal customer following and continuous growth potential.
The downside to organic growth is time. Executives have to be patient, committed to the company culture and willing to make additional investments without succumbing to the instant revenue gratification that accompanies cultural divergence.
When should executives consider strategic alliances?
Strategic alliance is a viable expansion strategy when the joined forces in technology development and market dominance benefit all players in the coalition. Google TV is an example of a collaborative effort in which a few strong players have united to make an even stronger team. Google, LG, Sony and Samsung are contributing technology and resources and joining market power in an effort to develop a smart television platform that may revolutionize the home entertainment industry.
The bottom line is: Why risk being left behind when you can be part of a winning team?
Are companies changing the way they view and integrate acquisitions?
We used to believe that fully integrating acquisitions was the best way to lower operating costs and reap the union’s financial rewards. But assimilation is tricky and executives often failed to meld disparate cultures and people.
Instead of making integration mandatory, companies should selectively and strategically integrate parts of an acquired organization. They may combine rudimentary functions such as distribution and accounting, while allowing areas of strength to flourish autonomously.
For example, Disney wanted to strengthen its market position with young boys by acquiring Marvel Comics’ cast of super heroes such as Iron Man, Thor, Captain America and the X-Men. However, if Disney execs were to force the influence of Disney’s culture on Marvel, Marvel’s brazen creativity would be stifled.
What should executives consider when selecting a growth strategy?
Time and timing are key considerations because organic growth and synergistic expansion tend to be slow and safe, while an acquisition or merger is risky but jumpstarts new growth. History shows that growth is rarely sustained when it results from knee-jerk reactions to unanticipated competitor moves or industry changes. Executives need time to build consensus and socialize their ideas, and half-hearted alliances or acquisitions often fail because it takes commitment and tenacity to work through the inevitable challenges.
CafePress, a San Mateo company that debuted on Nasdaq last month, has been growing slowly and steadily through both organic growth and acquisition. CafePress committed many years in organic growth and developed the strength in print-on-demand services. The acquisitions helped it to diversify the portfolio and establish a network of partners and customers. Without clear positioning and dedication, CafePress may have jumped into other services and diverted from its competence.
Lastly, even the best marriages sometimes fail. So with alliance or acquisition, executives should hope for the best but plan for the worst by developing an exit strategy to end the relationship and still be friends.
Yi Jiang is an assistant professor and associate director of MBA for Global Innovators for the College of Business and Economics at California State University, East Bay. Reach her at (510) 885-2932 or firstname.lastname@example.org.
Insights Executive Education is brought to you by California State University, East Bay