In recruiting employees—especially high performers—today’s business market has different “rules” than in the past. People of talent are not just looking for a good income. That’s assumed. They are looking for an opportunity to have an impact on the growth and success of the company they work for—and to have their earnings mirror the wealth multiple they are creating for shareholders. As a result, there are three things the pay offer you make must include for them to feel you “get” the kind of relationship they wish to have with your company.
Key Ingredients
High performers want to be viewed as growth partners in the business. Not in a formal or legal sense (although that may sometimes be the case); rather, in how they and their role are viewed by company owners. Consequently, they consider compensation to be the financial codifier of that partnership—and will look to it for clues about the kind of contribution you expect them to make; and how that contribution will be valued monetarily As a result, here is what they hope you’ll offer.
1. A Clear Pay Philosophy
Most employees know what they are paid, but they don’t know why that’s what they are paid. In other words, they don’t have a clue about the belief system that guides the creation of the compensation package in which they participate. This is why there are so many uncomfortable conversations between employees and employers about everything from salary levels to the amount of bonus that is paid out. When business leaders can’t articulate a coherent philosophy, these conversations are reduced to arguments over which market pay study is most credible.
Top talent won’t abide this lack of clarity. They want to know what your pay philosophy is. This means you must be able to explain how you define value creation in your business—and the circumstances under which you think it should be shared. Beyond this, premier performers want to understand your philosophy about how salaries and incentives should be balanced. When it comes to incentives, they want to know what you believe about how short and long-term performance should be rewarded–and which you consider the most important. And they want to know what guides your decisions about what form those rewards will take (stock, profit sharing, performance units, phantom equity, etc.).
2. A Value-Sharing Methodology
The next critical thing top talent is looking for is whether you have a means of sharing value with those who help create it. Here, they are looking at two elements: 1) plans that reward annual performance (helping the company maintain its profit and revenue engine), and; 2) plans that reward sustained performance (helping business value grow). Today’s top performers feel they should have a stake in the wealth multiple they help generate. And that “stake” needs a mechanism that values (measures) and then pays (fairly) for that contribution. They are not impressed by periodic, discretionary payouts. They want to know the formula that will drive their ability to participate in the value they are helping create.
The metrics guiding the value-sharing plans that reflect this kind of financial partnership should be clear and simple. In general, annual value-sharing should be tied to profits (dollar or percentage increases) and long-term should be tied to business growth. As a result, the trend is to base short-term incentive plans on a company-wide profit target, so everyone’s reward is linked to how the collective does, as opposed to a focus on team or individual performance. (The latter are usually used as modifiers and not primary payout drivers.) Most long-term plans in private companies are some form of phantom stock. These plans allow participants to participate in the company growth they help drive without shareholder value being diluted. This gives the effect of owning stock without actual shares being exchanged.
3. Uncapped Earnings
In today’s talent market, people of significant experience and ability do not want a limitation on their earnings. And they recognize that capping their earnings is unnecessary if the right value-sharing philosophy is in place. Let me explain.
When companies have a clear value creation definition, they have set standards of performance that protect shareholders’ capital investment. In other words, they ensure no value is shared until owners have received an appropriate return on their capital each year through the profits that are generated. It essentially means they are assessing a capital “charge” against profits to reflect the opportunity cost associated with that capital being tied up in the business. Amounts generated beyond this threshold are considered “productivity profit, or profits attributable to the contribution of employees. Value sharing should only occur out of productivity profit—and only when it is meeting certain thresholds. However, once it meets those pre-determined targets, the value sharing that is being done is essentially financing itself. It is being paid out of “surplus” value that has been created by the very people who are participating in the performance reward. As a result, it is not really “costing” the company anything.
Because insightful employees understand this concept, they see no reason why their earnings should be capped. As a result, if your pay offer is laced with limitations, top performers will be inclined to search for a different opportunity that is grounded in this principle.
So, there you have it. High performing talent can’t be “purchased” by simply paying a high salary or offering super cool perks. If the three elements discussed here are not present, you will not win over the people you are trying to attract.
