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Traits for Best Compensation Systems According to Global Consulting Group

Monday, February 1, 2010

The Society for the Advancement of Consulting® (SAC®) has over 300 members in nine countries, and has monitored the distinguishing factors of the best compensations systems, philosophically and pragmatically.

"This is always a controversial topic," says SAC CEO Alan Weiss, PhD, "so we always have a diversity of opinion. Here are some of our current findings."

"The best compensation system encourages desired behaviors and discourages undesired behaviors," observes Ann Latham, president of the Massachusetts consulting firm Uncommon Clarity. She recommends that companies take a good hard look at the results they are trying to achieve, the factors critical to achieving those results, and the ways the company inadvertently encourages and discourages the wrong things.

"You must reward both the results and the behaviors critical to success even when they fail to produce results." Latham, who helps companies large and small improve their performance, goes on to explain that if you need employees to take more risks, you have to reward risk-taking even when it fails to achieve results. If you want to retain talent, don’t reward the super achiever who drives the rest of your talent out the door. "And don’t forget that your informal reward systems can be just as powerful as the formal systems. Both are capable of discouraging desired behaviors and encouraging undesired behaviors."

Gary W. Patterson, president and CEO of FiscalDoctor® and author of the newly released risk management book Stick Out Your Balance Sheet and Cough, is telling his clients and audiences that the best compensation systems must require participants support an integration of enterprise risk management (ERM) in their normal operations.

Best practices demand ERM be part of everyone’s business; not just the risk manager or whatever function had such responsibility in the past.

Dr. Maynard Brusman is a consulting psychologist and executive coach. He is the president of Working Resources, a talent management and leadership coaching firm in San Francisco, He offers a few insights:

"One of my professional service firm CEO leadership consulting clients indicated that a number of the partners were unhappy about the compensation committee’s decision to limit bonuses for 2009. The firm’s revenues were down 5%. The month of November was especially bad financially creating a sense of pessimism among the partners and a mindset for further cost cutting. The CEO and I discussed some of the following ideas related to improving their compensation system based on best practices at similar size firms.

"Smart organizations are changing the way compensation is handled. Compensating talent for the good of the entire organization, and not just self interest is part of the organization’s culture and values. They reward individual initiative, but especially team performance. The decision-making process to be perceived as fair is based on evidence not influence. Inputs into the process are received from multiple constituent sources. The criteria for accomplishment or goal achievement are well understood. There is an appropriate reward for rainmakers who bring in the business and superstars. It supports the retention of talent who are 'keepers.'"

Wayne McKinnon, president of The McKinnon Group in Ottawa, ON frequently encounters managers at all levels that are too focused on satisfying some check box that their bonus is tied to. The "bonus check box" might potentially eliminate the disconnect between strategic direction and operational priorities, but rarely does this binary approach produce the intended strategic outcomes without additional key performance indicators and guidance.

In addition, Wayne has consistently found that the teams he works with are financially compensated, but since many have a difficult time linking their duties to specific business outcomes, they lack the emotional compensation that keeps them productive and happy. As a result, without assistance understanding where they are in the business process and how they can improve it, they revert to spending their time on overly technical or detailed activities that do not support the corporate direction.

"In our experience of crafting performance-based incentive plans with clients, we find the most effective systems come from plan participants building their own. Once they address the three key elements of increased productivity, enhanced profitability and total fairness, they’re ready to play the game," says John Carroll, president of Unlimited Performance, Inc. in Mount Pleasant, SC. "We observe participants in these plans changing behaviors, often permanently, thereby translating the potential for greater compensation into measurable improvements in productivity."

As a result, Carroll, a growth consultant, sees compensation systems as a useful tool for leaders to demonstrate keen understanding of their people and their business. "When associates can increase the variable portion of their pay by generating improved results, they tend to engage quickly and begin to see the world through owners’ eyes. When that happens, communications improve and the common goal of putting more money into associates’ pockets creates a win-win environment."

Carroll has also seen plenty of ineffective systems. "Until behavior changes positively toward intended results, the compensation system is dead in the water. Unless increased profitability more than covers incentive payments, the system is neither feasible nor sustainable. When participants see an inequitable or unfair system, they tend to fixate on the perceived lack of fairness and productivity actually drops. Think of a three-legged stool; when any one of these elements out of sync with the others, the system topples."

Weiss concludes that compensation practices must reflect equity, merit, desired behaviors, and fiscal responsibility. "That's no small task," he cautions, "and not one best left to human resources. Those are key executive-level decisions."

SAC is an association of solo practitioners in various consulting disciplines with members in six countries.

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