Should you hire a Compensation consultant?

Okay, first things first. I suppose it might seem odd and even a bit self-serving for someone who is a principal in a compensation design firm to offer advice about engaging a pay consultant. However, given the hundreds of companies that have engaged VisionLink over the past 20 years, the reality is I have much “real life” experience with those who were ready for a pay consultant when they hired us and those who were not. So, in that context, I suppose I might be considered an expert on the subject. As a result, I’ve decided to offer the benefit of my experience to those who are struggling with compensation issues and therefore might be considering outside assistance. I’ll leave it to you to decide whether these insights are helpful.

I plan to approach this topic from two perspectives. First, I’ll address the symptoms that would suggest it is time for you to consult with a compensation expert to help you navigate next steps in building an effective pay strategy. Second, I’ll cover indicators that suggest you probably need to get some other things taken care of before you engage a pay consultant.

When it is the right time

1. You Have no Compensation “Gameplan.” Business leaders often need someone to help them construct a more coherent, complete and compelling strategy for their company’s compensation. This is common in growing companies that have built pay programs in a kind of patchwork fashion over a number of years. They wake up one day and realize there is no continuity in their rewards approach. As a result, they need assistance in evaluating where they stand currently (what’s working and what isn’t) and how to create a gameplan for where they need to go next. They need help in defining a sound pay philosophy, envisioning what rewards programs will best reflect that philosophy and initiating a process that will result in an enduring compensation strategy going forward. They need to replace the chaos with order.

2. You Have No Compensation “Structure.” Some companies have had success in creating specific pay plans that are effective but there is no overarching structure for managing them. They need a Total Compensation Structure to help them examine and monitor their pay allocation as a comprehensive but coordinated unit instead of as a series of disparate plans and benefits. Most organizations need a framework and system that allows them to look at everything from salary grades to incentive plans and benefits through one centralized construct. This enables them to see their total compensation financial commitment in one place and how it is spread through various programs and tiers within the organization. This facilitates ongoing decision making and planning regarding pay issues.

3. You Need a Market Pay Assessment. Building sound salary grades is a combination of art and science. Companies typically rely either on too much on market data to form the guaranteed pay part of their rewards structure or not enough. Most organizations need help figuring out how much and what kind of data they should obtain, but more importantly how to evaluate it once they have it. This is a critical step towards building salary bands that make sense for their businesses. It involves combining data analysis with an “internal equity assessment” to ensure guaranteed pay levels are compatible with the company’s compensation philosophy while remaining competitive with “the market.”

4. You Need Better Incentive Plan Metrics. Most companies have a hard time determining what criteria to set for the achievement of the annual incentive they provide. Many are frustrated because their plan is largely discretionary and has become a kind of entitlement. Others have built a plan that has too many metrics. Therefore, employees are confused and feel payouts are unachievable. Finding the right type and number of metrics is critical to a successful plan. Most organizations need help with this.

5. You Need Help Finding the Right Long-Term Incentive Plan. Many private companies do not have any type of long-term value-sharing arrangement. Often, this is because they don’t know how to determine which plan is right for their company–restricted stock, stock options, phantom equity, SARs, performance units, profit pool, deferred compensation, etc. They need someone that can help them navigate a decision process that guides them to the right conclusion about the most effective value-sharing approach for their organization. They then need assistance in constructing a plan design that is strategically sound, financially viable and statutorily compliant—while also providing a meaningful and compelling benefit to plan participants.

6. You Need Help Managing Your Plans. Once plans are set in motion, much needs to be done to ensure their success. There is a need for ongoing administrative, financial, communication and statutory supervision. The plans need to be monitored and tested to ensure they are working together to create “line of sight.” A comprehensive pay strategy needs oversight, reporting and a promotional strategy to keep it alive in the minds and hearts of participants. Many organizations ignore this need and one or more of their plans fail as a result.

7. You Don’t Know How to Measure Your ROI on Compensation. In today’s business environment, every dollar invested by a company should be scrutinized for it financial impact. Compensation is typically the largest deployment of capital and profits a company consistently makes, yet it is rarely measured the way other business investments are. Decisions about how compensation dollars are being allocated need to be justified. Incentives, in particular, should be “self-financing” (paid out of productivity profit) and most organizations need help determining how to do that effectively.

There are certainly more reasons that could be listed for engaging a pay consultant, but most of them would probably fall in one or more of those categories. Now let’s turn our attention to when it probably isn’t the right time to engage an outside firm to help you with compensation issues.

When you are probably not ready

1. You Consider Pay a Cost not an Investment. Organizational leaders who view compensation solely through the prism of expense have a hard time opening their minds to the strategic role rewards should play. Compensation professionals are there to help you not only with how much you should pay, but how you should compensate your people. It’s not unlike the discussion you would have with an advisor regarding your investment portfolio. The focus should be on what investments (pay programs) should be included in your portfolio and what weight (level of allocation) each should be given. If you are simply trying to find the lowest amount you can “get away with” in paying your people, a pay design firm will not be useful to you. This is not because compensation consultants are looking for ways to spend more of your profits. Rather, it’s because they look at pay development strategically.

2. You Don’t Have a Growth Plan or Strategy. Incentives in particular are tied to business growth. If you don’t have a clear vision for how your business is going to grow—and how profits will be generated—it will be difficult to build a pay strategy that’s meaningful. Become clear about your growth objectives and their feasibility before engaging a compensation consultant.

3. You Don’t Have a Decision-Making Process. Organizations that don’t have systems for working through projects and making ongoing decisions end up throwing money away when they hire a pay consultant (or any other outside advisor). If you hire a firm to help you, the compensation design process becomes a partnership between the consultant and your company’s leaders. The best consultants know the right questions to ask (and they are myriad) and when they need to be addressed in the process. If you aren’t organizationally prepared to have the right people engage in the system the consultant uses for producing your plans, or you’re unclear about the outcome you’re looking for, it’s probably not the right time to engage outside advisors.

4. You Have your Mind Set on What You Need. Good consulting firms have seen what works and what doesn’t. If you aren’t open to the direction they are equipped to give you, because you assume you already know what compensation solution you need, then you’ll experience conflict and frustration. You will likely also resent whatever you end up paying for the help. For example, we will often get a call from someone who says they want help setting up a specific type of program (such as a phantom stock plan)–and they want to know what we’ll charge to help them construct it. This is akin to calling a doctor and asking what he would charge to perform gall bladder surgery because you’ve decided that’s what you need. In either case (doctor or comp consultant), any professional firm worth its salt doesn’t see itself creating much value for an organization that thinks it already knows what it needs. If you have self-diagnosed, you probably should do the rest on your own as well.

The reality is that most organizations could benefit from the help of a compensation consultant. Given the enormous investment made in pay every year by most growing companies, it only makes sense to also invest in advice that can help maximize the return on that investment. However, business leaders must be open to the guidance a pay consultant is prepared to offer if the service is going to have any real value to them.

Hopefully the factors summarized here will help you determine whether or not the timing is right for you to engage such help.