Does Your Comp Strategy Align?

How is your company going to win in a competitive environment? The answer to that question is really your business strategy. You might try to win by offering the lowest price or by delivering the highest quality or by offering the best value (of price and quality) or by finding some unique niche. You must clearly understand how you are going to win.

Compensation strategy must follow and align with business strategy. Based on your strategy, certain roles in the organization may generate a higher return on investment than others. Some roles may be easier to train and develop, while others are more difficult to develop and may be scarce in the marketplace. 

Here are some tips for controlling labor costs and increasing your return on your labor investment:

1. Make sure you are a good place to work to begin with. Companies that have a negative culture with bosses that are simply hard to work for typically must pay a premium to attract and keep employees. I sometimes refer to this phenomenon as the "a$$hole premium." If you regularly schedule two hour meetings on Friday afternoons at 4:00 or jump down people's throats every time they make a mistake, you are probably paying it. You can avoid this premium by simply becoming a better employer. 

2. Understand market rates. Some roles in your company should be paid at or above market rates (based on your business strategy). Other roles may achieve a satisfactory result at or below market rate (if the cost of turnover is relatively low and the time to proficiency is relatively short). It's important to know which roles matter more and what the general market rate for those skills is.

3. Align your rewards with the behaviors you want. Commissions, individual performance bonuses, team performance bonuses, etc. should align with the behaviors that you want repeated. Want collaboration? Look at team rewards. Think competition is the best motivator? Look at individual rewards (and hire competitive people). It's easy for a company to inadvertently reward behavior A when they really want behavior B. One example might be paying commission on gross sales when your business goal is to improve profitability. Your commission structure may be encouraging sales reps to offer discounts at the very time you don't want that behavior. 

It's really easy during times when unemployment is low and competition for talent is high to start throwing money at your labor force. But taking some time to analyze where your cost of labor should be, structuring it to get the best bang for your buck, and looking for appropriate ways to make a portion of total compensation variable so that you can reward the behaviors and the performance that is important to you in a way that is self-financing, is an important strategic initiative. Now might be a good time to revisit those questions in your organization.