Finance: Money Talks
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Written by Amy Buttell Crane   
Saturday, 01 August 2009
Finance: Money Talks
Compensation experts share their secrets for creating compensation packages that drive directly to your organization’s goals.


When it comes to executive compensation packages, there is no one-size-fits-all solution. More than ever, individual companies need to figure out exactly what they want to accomplish with their compensation packages and tailor individual solutions based on that information.

In this economy, precisely calibrated executive compensation packages are critical—not only to attract the talent that is best suited to your company but also to retain top executives and employees who are the public face of your company. Missteps such as requiring improvement in metrics over which an executive has no control and incentivizing executives over rank and file employees can quickly sink a program.

“The first thing you have to do, before starting to design a package, is to understand what your company and board of directors are trying to accomplish that may be different from your competitors,” said Brent Longnecker, chairman and CEO of Longnecker and Associates, an executive compensation consulting company in Houston, Texas. “You have to know what you are trying to do and what kind of people you are trying to find to help you accomplish that goal.”

With that information in hand, you then need to look at the entire organization, said David Harap, healthcare practice leader for executive recruiter Stanton Chase International. “The truly effective programs affect the entire organization. If there is a pay-for-performance mechanism, every employee from a temporary employee all the way through to the CEO will participate in it,” he said. “The really effective programs drive the culture and the behavior of the entire organization.”

Below are some specific ideas on building an effective program.

Locate appropriate peer groups and benchmarks
Using inappropriate peer groups and benchmarks to design your package not only throws off a compensation package but may draw the unwelcome attention of regulators, Longnecker said.

Peer groups are not always obvious, especially in small and mid-sized cities, where your peer group may include other large employers that, while not in your industry, directly compete with you for talent, he added.

Benchmarking your package to similar companies in the same industry is important so that you don’t end up over or under compensating your executives. Think about where you want your company to be in a few years, rather than where you are, when benchmarking.

“If you and I are trying to build our company from $500,000 in sales to $2 billion, we’re looking for people who can run a $2 billion company, so we might look for people who are working for a company with $1 million to $1.5 million in sales and pay them a bit more,” he said.

Design multiple-component programs
Creative programs that employ more than one component are more likely to succeed than programs made up of just a salary and a yearly bonus. This could include an annual review with a potential bonus, on-the-spot bonuses, merit raises, tuition reimbursement, and even stock options for publicly traded companies, Harap said.

Multiple-component programs are particularly important for retaining employees, not just attracting them, especially the key front-line employees that a healthcare organization needs. “What we want to do is to keep people on board and make sure what they do and how they act is in line with the goals of the organization,” he added.

Harap is particularly taken with compensation programs that employ spot bonuses. These programs tie rewards directly and immediately to the types of performance that an organization wants to encourage.

“Say a patient really thinks they received superior service from an LPN or RN and telephoned in about it after they got home. If that clinician is rewarded, even with something as small as a couple of movie tickets, it is that near instant gratification from doing something good and being rewarded for it that is going to have a huge impact,” he said.

Longnecker has seen organizations take it a step farther by personalizing the spot bonuses to something that a particular individual values. “If you’ve got an employee who loves golf and especially likes a specific course, get him an outing for four at that specific place, as opposed to giving him money or an outing at just any golf course,” he said. “That resonates with the employee because it shows that the employer did some research and knows that the employee has a favorite spot and sent someone to get the package.”

Create transparent performance targets
If there’s one sure way to doom a compensation package, it’s by tying performance to murky metrics or ones that a particular individual has no control over, Harap said.

“When people look at the bonus program and see that it is based on something that they don’t think they have the ability to influence or change the outcome on, that hurts motivation because they realize that part of their compensation is tied to something they don’t have the ability to influence at all, and that is a huge negative,” he said.

The bottom line
In the end, creating an effective compensation package for your executives and all of your employees involves far more than setting pay rates, calculating fringe benefits, and designing a bonus package. It’s ultimately about communicating to your employees the type of organization you want to be and reinforcing that behavior.

“The most important factor is communication, communication, communication,” said Harap. “What you are doing has to be viewed as something that is a priority from senior leadership on down. If the senior leadership is doing it, that is going to have a cascading effect, and everyone in the organization will start paying attention and acting that way as well. The people who don’t act that way will eventually leave the organization, either voluntarily or involuntarily.”

And the good news is that if you are a mid-sized or small organization, change is easier to effect through a finely tuned and well thought out compensation package than at a larger organization, say both Harap and Longnecker.

Amy Buttell Crane is a freelance writer and editor based in Erie, Pa. She can be reached through her Web site, www.amybcrane.com.

 
 
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