Developing a compensation program to effectively attract, retain and motivate an employee population in a cost-effective way is difficult and is made more difficult by the difficulty in predicting the changes to employee needs over time. Most programs have mixed results catering well to some people and failing with others. The weaknesses in these programs rarely stem from the technical aspects of the design despite those aspects often garnering the most attention. Most companies who struggle with compensation effectiveness do so because they focus on the details not the big picture.

Conventional compensation program design seeks to understand the competitive market for talent and offer a package that is just slightly better than your competitors. Defining the right competitor space and doing effective benchmarking often become the focal points for design activities. While these activities have a role in compensation program design, excellence in either is rarely enough to create a competitive advantage. Even with excellent benchmarking of the right competitive population, the following 3 mistakes still hold companies back from achieving maximum impact for the costs spend on employees.

Poor communication of the program

Companies are more likely to over-pay for or under-benefit from their rewards programs due to poor communication of the total value to employees than from offering less than their competition. Companies must proudly sell the rewards program to employees, not just at the time of hire or introduction of a new program, but on an on-going basis. They need to communicate about both financial and non-financial rewards and that communication cannot be limited to delivery by human resources. Business leaders need to actively participate in regular promotion of the rewards program.

Thinking it is all about the money

While financial remuneration is fundamental to any rewards program, at a certain point, additional money has limited incremental retentive or motivational value. Not only do companies often over-estimate the point where the impact of more financial compensation tails off, but many companies fail to address topics like culture and career progression which beyond that inflection point on financial compensation typically become the primary decision drivers for employees.

Targeting the wrong audience

Whether assuming all employees seek the same things and offering rewards that are inflexible or crafting rewards packages that fail to address the interests of their unique employee/candidate population, many companies craft their rewards programs to be academically compelling without ensuring that each element contributes to the specific interests of their target population and serves a specific business purpose.

How to avoid these issues

Companies can avoid these issues by taking a more inwardly focused approach to compensation program design. Rather than letting competitors orient their thinking, they should focus first on their customers. Answering, “Who are the right people to employ to serve our customers in the way that they want to be served?” is key to designing a program that will attract, retain and motivate the people most able to drive business success

Businesses then need to ask the question: “What do these people want? What is important to them and what would it take to make them want to work here?” There is no value in giving people something they do not want even if other people would want it. Understanding the nuances of the relevant group of candidates and employees is the only way to ensure that you appeal to the people you care about.

Next, understand the behaviors that the company seeks to promote and the outcomes that it wants to incentivize. This allows you to match reward types to specific objectives. Rather than accepting a standard template designed either by the industry or historical precedent within the company, challenge the compensation program to only include elements which have a specific purpose and are elements sought by the employees who will receive them.

Said another way, every element in the rewards program should have a direct connectivity to attracting candidates to join, retaining existing employers and/or motivating employees to perform at the top of their potential. If a reward element does not show up on the list of employee wants or cannot be clearly connected to a specific company objective, it should be excluded from the rewards program.

Finally, it is important to build flexibility into the program to cater to the range of employee and candidate needs. Innovative program like Self-Direct Rewards™ can be a powerful tool for achieving high levels of flexibility but even just being aware that priorities can predictably change for employees at different levels in the organization and planning accordingly is a first step in embracing changes in employee needs rather than challenging them. Ultimately, companies with rigid programs may streamline the management of the program but lose out on the total impact enabled by a more flexible program which can cost more in the long-term.

Additional Reading Suggestions

White Paper: Creating Competitive Compensation

White Paper: Self-Directed Rewards

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