Pay. Compensation. Salary. Bonus.
This is 6th in a Series | Principles 6, 7 and 8 focus on structures of compensation that maintain a focus on value creation for the organisation. I am not sure these are fully adaptable to Social Enterprises as they exist in their current state, with many likely paying not enough money to any person in the firm. However, I do think even with pay rates less than private sector, it is important to structure the pay in a way that ensures value is created for the organisation.
#6, Reward CEOs and Sr. Execs for Long-Term Returns:
Original text addresses the need to re-structure stock options. I would suggest in a firm without stock options that the way to ensure the CEO is acting to create value for the long term (and not just the 2-3 years they will be in post) is to create a pay structure that analyzes the firms performance against long-term goals. WYYA posts its balanced scorecard on its website. Great start. Take the balanced scorecard and grade the firm’s progress against it, and pay the CEO accordingly. Yes, in some years the firm will make great strides while other years will seem like a trudge. That’s life. But, boards can smooth these payouts by concentrating on building a robust balanced scorecard.
#7, Reward Operating-Unit Leaders for adding superior value:
Original text suggests that stock options are inappropriate because they look at the whole company. Revenue and income targets create budget jockeys who will lowball estimates to make targets and are rarely an indicator of long-term cash flows. Instead, Rappaport suggests the use of metrics such as shareholder value added (SVA). But, this may be overly complicated for small and medium sized firms. I suggest that you adopt a portion of this approach by gathering results for the division into 3-year spans and paying for performance against these targets. To avoid budget jockeying, try linking the 3-yr spans targets to the balanced scorecard for some other measurement not directly related to that year’s budget assumptions.
#8, Reward middle managers and frontline employees for delivering superior performance on the key value drivers that they influence directly:
Simply put, determine the value drivers (low employee turnover, length of time to start new venture, customer happiness, etc.) and pay against them. This is different than the usual pay structure of paying directly for production of widgets or even quality level of the widgets. Look behind the obvious performance indicators to measure against the value driver effects. Rappaport suggests identifying 3-5 of these long-term value indicators and paying against them. This will likely be difficult at first, but focus on explanation of the reasoning with employees and use it as a filter for interviewing candidates. Those who do not understand or are brissled by the prospect of being paid for something outside the hand to mouth paradigm will not be acting to drive value in your firm.
References |
Harvard Business Review
Alfred Rappaport
De-bunking the Terminology
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