Do Boards Really Care About Compensation Programs?

by David Creelman | Posted | Total Rewards

Do Boards Really Care About Compensation Programs?

Boards spend a great deal of time on executive pay, but what about the rest of the compensation budget? What do boards care about? What should they care about?

The basics bore boards

Since total payroll is such a huge expense you might think boards would be interested in all the details of how you manage compensation. In truth, unless the reward policy is unusual (such as paying very high or very low relative to the market) the board is likely to show little interest. This isn’t a bad thing, board members are not in a good position to tell you how to fine tune rewards.

However, board members are interested in high potentials—and not just as the concept “there is a pool of high potentials” they are interested in the individuals. The board will be interested in how the reward system helps retain these individuals. Board members know reward is only one factor in retention, however they will want to know that they are not losing good people due to a short-sighted or inflexible reward system.

Talking about high potentials is a good way to engage the interest of the board. We can expand on that interest by showing how a compensation rewards program helps us attract and retain people in an equally important but less familiar category: pivotal roles.

The concept of pivotal roles

The notion of pivotal roles was advanced by John Boudreau and Peter Ramstad in Beyond HR. Their question is “Where would an investment in talent have the biggest impact on the execution of strategy?” So rather than give everyone the same amount of training, take those training dollars and invest them in the people where it will have the biggest impact. 

The classic Boudreau example is from Disney which realized that investing in customer service training in the overlooked sweeper jobs would have the biggest impact on the customer experience.

We can sharpen the concept of pivotal jobs by asking which jobs are especially critical to our strategy.  The first thing would be to remind the Board that the answer to this question is not “top management”.  Yes, the top management is important, we know that, it is captured by the traditional job evaluation/ market pricing of the compensation rewards program. 

What HR needs to communicate is that it is alert to the jobs where, due to something special about our business, retaining the best talent is particularly important.

Comparing Walmart to Gucci

Both Walmart and Gucci have retail clerks. These are pretty standard jobs, and would generate pretty standard scores in a job evaluation scheme or salaries on a salary survey. However, the customer doesn’t expect anything special of a Walmart worker, they do expect the look and behaviour of the Gucci worker to match the brand. 

It’s not that the job of a Gucci retail clerk necessarily demands more skills than that of a Walmart worker, in some ways it might be an easier job, the difference is that in Gucci the retail clerks are strategic and it makes sense to pay at the top end of the market if that is what it takes to get the best talent.

A more sophisticated example Boudreau shares is from Boeing. When Boeing made the move to building planes from composite material this new technology was a key differentiator from their main competitor Airbus. A composite material engineer is not a bigger job than the equivalent aluminum engineer - the market pay rate might be the same. However, when the entire strategy of the organization rests on the success of composites it makes sense to have the best composite engineers in the world. The rewards system should recognize this.

So as a board member I want to see that HR has made the link from business strategy to identifying which jobs are pivotal from a strategic viewpoint. This is not an easy or uncontested exercise. The Sales VP will argue strongly that the sales jobs are pivotal, while the head of IT will explain the fate of the organization rests entirely on their team of programmers. While it is true that every job is important, we need to see beyond that truism and recognize which jobs are pivotal and hence need special treatment.

One of the most useful rules of thumb is whether there is an argument that, due to our strategy, we should pay a job differently than our competitors. Should Gucci pay more from a retail clerk than Walmart? Absolutely. Should Boeing pay more for a composite materials engineer than Airbus? Yes.  Should GM pay more for an auto designer than Ford? No. The designer job is really important, but paying the market rate is probably the correct move.

Building confidence in the reward function

If I put myself in the shoes of a board member, obviously the first thing I want to see is a sound reward policy competently implemented. If the basics are not there the solution is easy, fire the head of HR.  What is far more interesting than the basics is how the reward function is tuned in to strategic issues. I want to see if HR knows what the pivotal jobs are and if the compensation rewards program is responding to the need to get and retain the very best talent in these jobs.

Since the normal functioning of the reward system will resist treating pivotal job as special, I will be particularly impressed if the head of rewards shows skill in handling these exceptional cases without undermining the integrity of the overall pay structure.

Let me put it another way. The board won’t be impressed by an administrator who competently runs a generic pay system. They will be impressed by an HR leader who understands that reward is one of the tools we use to implement our strategy, and knows how to target reward where it will make the most difference.

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