Schuster-Zingheim and Associates, Inc.- Pay & Rewards Strategy

"Why do we need to develop a reward strategy, anyway? Let’s just get on with designing the reward programs and tools." Have you heard this before? It’s common thinking behind why many companies are so focused on finding out what other companies do and importing these practices. It’s the foundation of too much "me, too" reward planning.

So, what’s wrong with this? The problem is that copying the practices of others results in mimicking prevailing practice, not necessarily best practice. And certainly seldom best practice for your company. Every company is different. Each has a different way of becoming and remaining successful. IBM’s business strategy is different from that of General Mills. The U.S. Post Office has a different mission and strategy from the Veterans Administration. Not better, just different. A reward strategy lets companies customize their business case for rewards to their business model—that’s why you need a reward strategy.

No company can afford to miss out on the chance to gain advantage from how they reward their people. Companies need their people to understand how they add value to the business. This is a powerful opportunity for communicating business strategy to employees and cascading goals throughout the organization. And what’s one good way to do this? Through rewards—you get what you reward and pay for in terms of performance, skills, and competencies. So it makes sense to use your pay and rewards to communicate your business strategy throughout the company. And we mean your company’s strategy—not the strategy of some other company you admire.

In Pay People Right! we make a strong case for alignment of rewards with business strategy. Take a look at Exhibit 1, "Alignment of Rewards with Business Strategy," from PPR!. The reason for using rewards is to get what the company wants and to give employees what they want—a win-win reward relationship indeed. You start with the business strategy and a commitment at the very top of the organization to "put the company’s money where the strategy is."

Exhibit 1
Alignment of Performance Measurement and
Management with Rewards

Source: Patricia K. Zingheim and Jay R. Schuster, Pay People Right!
Breakthrough Reward Strategies to Create Great Companies,
San Francisco: Jossey-Bass, 2000.

The business strategy, operating plan for executing the business strategy, and the business case for rewards are critical. The business case is essential because employees need to understand why the rewards of the company are what they are, especially when rewards are changing to better communicate an aligned business strategy. So this is the requisite starting place for the communications process.

Extending employees’ line of sight is imperative so employees understand how they add value to the business. And this means pay and rewards for the skills and competencies the organization needs and employees use to produce results. In addition, it means paying for employee goal achievement that ensures effective achievement of company strategic goals, like those in areas of finance, customer, operations, and people and future-focused goals that build the enterprise’s future. These are defined for different companies in different ways. Some believe more than others do that customer care results in high levels of financial performance. Other companies emphasize the future in terms of creative and highly marketable new products and services. So what you emphasize is reflected in your reward solution. It makes practical sense. Strategy becomes goals that lead to rewards.

What does your company need to do to add value? How can people help with specific goals and skill contributions? The strategy determines the needed outcomes, and the tactics of reward design assume the task of tying rewards to the goals. But at the heart of the communications process is defining the goals, how they are measured, and how employees are helped to understand what they must do and why. This must be clear and straightforward.

Here’s an example of measurement gone awry. Some companies have chosen to deploy an asset performance tool categorized as "economic value added" (EVA). This measurement strategy may make great sense to the people at the top of the business, but it has proved to be nearly impossible to cascade to the people below. So although it made measurement sense, it made very little communications sense.

But total rewards can be based on clear financial measures of cost and revenue, operational goals like effectiveness and efficiency, and customer goals such as getting and keeping the customers the company relies upon. Total rewards can also communicate and reward achievement of people goals such as those that retain and attract the most talented contributors and future-oriented goals that generate new products and services for the company’s future.

Strategy next becomes tactics in terms of definition of goals. Then the company can focus on critical priorities of how to measure and reward. How do you select the tools that make achieving the goals and applying the needed capabilities worthwhile? Cascading clearly understood goals and objectives from top to bottom is the way companies become and remain successful. It makes little sense to do an excellent job of selecting and defining goals if nobody understands them or is committed to their achievement. And that’s what rewards driven by strategy provide.

How do you make it all work? Remember that people work for more than pay. Total rewards permit you to customize the reward solution to use the best tool in addressing the specific goal to be rewarded. Look at Exhibit 2, also from Pay People Right!. This total reward model has been adopted by many of the top-performing organizations in the world. It’s unique and effective in that it deals with more than just "pay and benefits," giving you more flexibility in designing reward tools.

Exhibit 2 Total Reward Components
Individual Growth	Compelling Future
Total Pay	Positive Workplace

Source: Patricia K. Zingheim and Jay R. Schuster, Pay People Right!
Breakthrough Reward Strategies to Create Great Companies,
San Francisco: Jossey-Bass, 2000.

These are four powerful alternatives to consider for translating strategy into action:

Individual Growth: Provide people the opportunity to improve and become more valuable. Don’t just provide training. Translate the opportunity to learn into real nuts and bolts improvement. Build the core competency of the enterprise in real terms. Do what is needed to help employees become worth more to the business.

Compelling Future: Give people something to look forward to. Reward top performers by offering them a company that they are proud of, where the future is clear and everyone understands its vision and mission. Rise above merely the "slogan" level—give excellent people the chance to realize that, "Hey, we’ve really got something good going here."

Positive Workplace: Define the workplace in terms people who add value to the business want. People want to work with associates they respect and can grow with. They want to be led by managers they respect. And they want a workplace that is productive, effective, and enjoyable. This is a powerful reward to retain the best people a company needs. And it’s more than just liberal benefits, it’s a place people want to come and add value as well.

Total Pay: Total pay not only includes base pay and benefits but also incentives to reward short- and long-term goal performance as well. And recognition and celebration that supplement other forms of rewards by increasing their power. All of these elements are an important part of the total pay and total reward formula.

So strategy sets the stage for building a powerful business case for reward design. Now we have the tools to connect strategy to measures and skills and then to rewards. And the rewards communicate what is to be done and why and what the win-win is between people and companies.

Take a hard look at what is called your company’s "compensation strategy." We’ll bet it begins and ends with something like, "Attract, motivate, and retain excellent people." It may continue with something about paying "competitively and fairly." We contend that these "strategies" provide zero differential advantage. Every company has these strategies. But it’s clearly time for you to "brand" a reward strategy so the business case for the specific total reward package you provide communicates business goals to the workforce.