The Balancing Act – Compensating Performance

Over a recent coffee in Sydney’s CBD area with a small business owner, I discussed her strategies for compensating her high performers. Her retention strategy for pillar leaders was to give them equity and pay them, on target, 50% above the market. On further exploration, she revealed how fearful she was of key members leaving the organisation. However, despite showering this leadership team in gold, there had been a recent defection. There were shock and self-recrimination on what could have been done better to retain this “key” leader in the organisation.

People leave organisations. The reasons vary. It is rarely just for compensation. In a talent-short market, great talent will always have a choice. The best strategy is to provide a culture which aims at developing its people and compensating them fairly — at the same time mitigating risk by not having the organisation too dependent on any one individual. That includes you, the business owner.

Sharon Koss writes that compensating performance needs to address three levels:

  • Talent attraction

  • Peak performance

  • Talent retention

In my experience and discussions with clients, this is as much about art as it is a science. However, one certain thing is anomalies and outliers in the compensation agreements across the organisations need to be minimised. There are always arguments from within for exceptions, but I have usually found that bending to the special demands that are outside the company’s comfort zone or norms do not produce the proportionally expected performance outcomes.

Your compensation strategy could choose to go down one of three paths compared to the market:

  • Lagging

  • Matching

  • Leading

There is an associated cost with each level but also, less tangibly, related talent pools. The market-leading compensation packages may attract top talent, but equally, by the talent, you can recruit. In my experience, “A” Players love working with “A“ Players and therefore, attract the same.

What is most important is to have confidence in the culture that you have established and the compensation strategy you implement. Prepare marketing collateral or presentation on your mission and related strategic intent and be prepared to sell the journey on which you are taking your team. Continue the sales process regularly with monthly or quarterly updates to the team. The internal communications piece is a powerful retention tool.

In designing a company-wide compensation strategy, ask yourself the following questions:

  • What is the percentage of gross margin budgeted for total people costs? Include base pay, variable compensation, bonus within budget (i.e. not overachieving), health and retirement benefits, related taxes.

  • Compensation plans are requried for three broad groups:

    • What is the total (itemised) budget for the executive/leadership team?

    • What is the total budget for back and middle office (non-sales)?

  • What is the total budget for sales members? Include on target base, variable and bonus payments?

  • How much of the bonus payments can be moved to overachievement? This means it is not a budgeted cost in the base budget.

  • Are the amounts allocated for the three broad groups proportional to contribution? This means under, over or just right.

Are the highest and most valuable contributors being rewarded the best?

Is there an adequate opportunity for overachievement?

Answering these questions will be a great start in positioning the compensation strategy more broadly in the organisation than just case by case and help to avoid surprises; attrition or overspend.

Other points to consider:

Be slow to give away equity. A lot of clients I support are keen to carve out equity for their “perceived“ high performers and critical heads. Once this is done, it is hard to undo. Be certain and take time to understand the impact on other shareholders. Have legal agreements drawn up.

Keep sales compensation agreements simple. Great sales professionals I have worked with reading the annual plan several times, make a few challenges on detail or clarification and then put in place a personal plan to overachieve. Complicated plans cannot be understood and do not motivate top professionals.

Consider bonus criteria for back office staff carefully. In most cases, it should be based on the achievement of the plan and can be a de-facto profit share.

Consider the bonus criteria for leadership team carefully. What is it you want them to focus on and be accountable? E.g. Over emphasis on profit can restrict the focus on revenue generation. Decide what is most important for the organisation. Do this for each business unit leader and not as one size fits all.

Hiring the best talent, motivating them to succeed and retaining them for as long as possible is a real leadership challenge. Company culture is important. A well structured compensation strategy aimed at all members will be a real asset. It will also be a work in progress as you endeavour to find the perfect mix.


How a Pay For Performance Strategy Pays of – Sharon Koss 2008