I’m working with a $2MM firm right now to build in a performance-based aspect to their compensation program.
Usually, I would follow a process of compensation strategy (guiding principles for how we make comp decisions) > compensation framework (the components that go into comp decisions) > performance framework (the specific definitions of performance). (If you want a full description of the process, you can get it from my book, The Stage 2 Owner’s Manual.)
But with a small firm, we’ll be able to skip the comp framework step. That’s the step where “What does it take for you to stay in the game?” changes to “What is the right amount to pay you?” It looks at things like market pay rates, and what the role of the person is.
If you’re a small Second Stage Company, the most important things to address when you upgrade your compensation program is why you pay people what you do – the overarching principles that are at play, and the specific performance drivers you look at. When you get bigger, or when compensation starts causing you problems, you can fine-tune your pay program based on some more sophisticated thinking about what makes up employee compensation. But that’s a short-cut that, in most cases, is fine to take when you’re smaller.
Stage 2 management focuses on getting approximate answers, not precise ones – and then using judgment to realize when an answer can be more approximate, and when it needs to be more precise.
Have you ever thought about the impact of over-paying, or under-paying, the staff in your Second Stage company?
If you are over-paying, then you are taking resources away from other parts of the business that would give you a higher ROI. Over time, you’ll under-invest in the areas of the business that make your company stronger, and the result is a company that is paying its employees relatively well while weakening the business.
If you are under-paying, the opposite is true. You are “mining” your employees for the value they create, and if they don’t feel rewarded, you will be faced with a triple-whammy – you’ll lose someone who was providing more value to the company than you realized, you’ll have turn-over costs, and you’ll have to spend more than you expected to replace that person.
Compensation is about aligning the rewards that employees get with the value that they create for the business. As your business gets more complex in Stage 2, that alignment gets harder, and more important.
You’ll never pay someone exactly the right amount, but making sure you’re close is important for you, your business, and your employees.
I was reading the blog post Top Compensation Planning Mistakes (And How to Avoid Them) and there were a couple that stood out as particularly important for Second Stage Companies:
Saying one thing and doing another, which the blog says can be avoided by “avoiding secrets…and reducing exceptions.” The particular challenge for Stage 2 is that most leaders who are emerging out of the start-up phase don’t have expertise in compensation, and don’t realize how complicated it gets in Stage 2, and so they hide how they make compensation decisions in a “black box.” This usually works fine for some period and then starts to break down as they add people. In Stage 2, it’s especially important to think through a comp strategy so that you can avoid secrets and reduce exceptions.
Not preparing managers to talk about compensation, which the blog says can be avoided through training and scripting answers to key questions like “How does the organization set salaries?” and “Why did I only get this much money?” The particular challenge is that most Stage 2 managers don’t have expertise or experience dealing with compensation – and in fact what experience they have is with the start-up phase’s “What do you need to stay in the game?” approach. One of the most important aspects of a compensation program for a Stage 2 company is the messages that it communicates about how the company creates value and how performance is measured. If those messages don’t make it to employees – or, worse, if the wrong messages are communicated – much of the power of the compensation program is lost.