Employee compensation is a powerful tool to drive superior performance. It can create a "virtuous cycle," in which pay drives performance, which leads to prosperity for the company, which then has the ability to attract even better people, who in turn spur even higher levels of accomplishment for the organization.

Properly constructed, employee compensation plans are simply a way of dividing income between employees and shareholders in a way that maximizes the return to both. However, pay plans rarely work that efficiently because managers and compensation committees often try to reduce this complicated set of decisions to a formula or a rote process. Unfortunately, within many companies, compensation decision-making has less to do with maximizing revenue and more to do with ensuring equity, consistency and efficiency.

SUCCESSFUL COMPENSATION PRACTICES CHARACTER TRAITS

Organizations that have successful compensation practices share common attributes:

• They emphasize results over process.
• They act small and independent, no matter their actual size or standing.
• They not only tolerate but encourage wide dispersions from the mean.
• They pay top performers at the top of the market.
• Compensation is treated as an investment to be managed, not as a cost to be controlled.
• Pay is disproportionately allocated to those who manage, please and deliver value to customers over those who play a supporting role.
• They provide an equitable sharing of value creation between owners and employees, so high employee pay means everyone is winning.
• Senior management does not delegate decisions to a system, subordinates or the human resources department.
• The connection between pay and results is obvious to everyone.

CHANGING YOUR PARADIGM

So, where does that leave a large, multidimensional and global enterprises where everyone has become comfortable with the current job evaluation system—one that determines salaries, bonuses and long-term grants with a formulaic approach?

It starts with a fundamental mind shift: understanding that pay is the single most important management tool to communicate priorities and drive performance consistent with those objectives. With that shift as your foundation, take these 10 steps to instill your own virtuous cycle of pay, performance and prosperity.

1. Investigate how compensation is currently allocated across your organization. Dividing your population into categories such as management, sales, customer service, operations, technology, finance and other support gives a very interesting perspective on the priorities of the business. If the strategy is to be a customer-focused, technology-driven company, then spending two-thirds of your compensation dollars on management, production and finance should set off alarm bells.

2. Understand your compensation and benefit structure. Examine how much of your compensation is delivered through fixed vehicles (e.g., salary and benefits) versus variable forms (e.g., long- and short-term incentives). This analysis will speak volumes about your ability to change behavior through the management of incentives.

3. Think like a small business by funding locally. Large companies often struggle to show the link between individual contribution and reward because there is so much noise in the system. As a result, they run the risk of losing their truly exceptional performers to smaller companies that can and do make such differentiations.

To overcome these challenges, large companies must think and act small. Keep the distance between the individual and where performance is measured short, and establish clear links between results and pay—for instance with a simple matrix relating incentive funding to a percent of profits. The ability to tell employees, "If we make more money, you make more money," is a very powerful motivator.