How to strategically align employee compensation with your company’s objectives Featured

3:23pm EDT August 29, 2012
How to strategically align employee compensation with your company’s objectives

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 appropriately 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 jed.devaro@csueastbay.edu.

Insights Executive Education is brought to you by California State University, East Bay