Every business owner knows that they can’t have a first-tier company with second-tier leaders. In response, one of the most frequently asked questions is, “How can we afford them?” More on point, how do the better businesses attract and keep the leaders they need to be industry front-runners?
In most cases, company owners have poured themselves into launching and building a competitive enterprise. They are successful in producing their products, providing a business or professional service, or managing goods through the supply chain. Most of their businesses are reasonably efficient and profitable. In these successful companies, employees are typically loyal, dedicated and compensated fairly.
Too often, leadership teams in mid-size and smaller companies are being paid a fixed salary. At the end of the year, if there’s enough residual, they may receive a year-end bonus. And beyond that, we’ve found with many businesses of this size there’s limited consideration of compensation structure or how to most effectively incentivize and reward leaders – for the ultimate benefit of the business. When there are ill-defined discretionary bonuses, they squander the opportunity to provide a year-long direction for leaders and others that is consistent with the annual business goals.
But the thought of offering improved rewards to upgrade company performance is uncommon, despite the reality that this model pays for itself!
A simple variable compensation structure deferentially rewards performance, retains the best talent and helps to attract the right new leaders. Proven competent executives want to be paid for what they contribute. They’re not well motivated by just a competitive base salary, even when supplemented by a discretionary year-end bonus. According to a PayScale Compensation Best Practices Report, nearly 75% of organizations provide some type of variable compensation program.
The best leaders in business are highly motivated by significant challenges that hold out significant rewards for significant results.
Back to the observation that this model pays for itself … Really? Absolutely!
With a simple plan tied to a few bottom-line metrics we can have a structure to incentivize and then reward success. In a simple and real example, where bottom line company performance is increased by $100,000 (for example), a well-defined incentive plan may pay a bonus of $30,000. Does the Company’s remaining incremental $70,000 profit provide a solid added return for the business? Companies routinely gauge returns when considering capital investments in buildings and equipment. They gauge financial opportunity when hedging raw material procurement.
Better businesses also apply these disciplines to their investments in leadership.
For the reasons cited and for the benefit of all stakeholders, a variable compensation plan is not only important, but it could also very well be a key to keeping valued employees that you’re afraid you may one day lose. Keep the plan simple, measurable, and tied to what’s important to the company. Be sure that any plan shares the fruits of performance through meaningful rewards – that will pay for themselves.
*Zachary Weinberger, Managing Consultant at Remuneration Resources, contributed to this article.
Stan Davis is the Founding Principal of Standish Executive Search, a New England-based firm that advises business owners, executives and boards who are positioning their companies for accelerated growth, change or succession.
*Zachary Weinberger is an experienced global consultant and business advisor and an expert in compensation, benefits and global rewards. www.remunerationresources.com