“When we buy a product, we essentially ‘hire’ something to get a job done. If it does the job well, when we are confronted with the same job, we hire that same product again. And if the product does a crummy job, we ‘fire’ it and look around for something else we might hire to solve the problem. (Clayton Christensen, Theory of Jobs to be Done, Harvard Business School, Working Knowledge, Interview with Dina Gerdeman, October 3, 2016)”
The job of compensation is an important thing to define in any economy.
I have long thought that Christensen’s theory is not just relevant to the products a company develops and markets. It’s a concept that should be applied to all the processes and systems a business uses—especially compensation. This theory is particularly important during the present crisis. If you want apply Christensen’s concept, you can start by answering these two questions:
1. What “job” does your compensation plan need to do for your company right now?
2. What pay strategy is best suited to do that “job?”
An Outcome-Based Endeavor
In both bad economies and good, your approach to compensation should start by identifying the outcomes your company needs fulfilled—in clear terms. Presumably, your priorities currently are different than they were in January. This is because you have likely redefined your targets for 2020. You may even be in the throes of reimagining what your value proposition is going to look like once the current crisis is over.
If you do not take the time to define the results you need to prioritize right now, you run the risk of taking a reactive approach to your pay strategy. You might assume, for example, that you should freeze or eliminate any short-term incentive plans. But a narrow focus on cost could lead you to make decisions that encourage behaviors that are at odds with what you really need. If you approach compensation as an outcome-based endeavor, your focus will be on the impact a given pay offering might have on the achievement of the result(s) you need. And you won’t eliminate any plan until you have determined that.
Potential “Jobs” for Compensation
The “job,” then, of compensation in your company will be hard to determine if you haven’t defined clear outcomes. One way to move in that direction is by answering these questions: What kind of results should be rewarded, right now? What kind of pay plan is most suited to reward that kind of performance? What kind of impact will that type of plan have your cash flow? What about on your P&L? Are there ways to reward those results but lessen the impact on either or both of those things?
Here are examples of outcomes you should want your approach to compensation to help you achieve in the current environment:
• Create a greater focus on value creation.
• Lessen your fixed pay commitments.
• Tie employee earnings to profits.
• Reinforce priorities for employee roles.
• Accelerate and reward innovation.
• Engage employees as growth partners.
• Create widespread cost consciousness.
• Develop a unified financial vision for surviving now and then thriving when the economy gets better.
This kind of exercise forces you to think about compensation as something more than just a large expense that needs to be contained—particularly when cash flow is tight. Instead, it is an investment that needs to manage strategically to ensure it is helping you achieve priority outcomes now and in the future.
Here is one potential way this approach can help you address the urgency of cutting costs while still rewarding the performance you need. Let’s assume you announced profit or revenue targets at the beginning of the year. At the same time, your employees were told they would be eligible for incentive plan payouts if the company hit those targets. Everyone was excited—and felt confident the goals were achievable. Then, the entire economy was shut down. Now what?
Your instincts (and your CFO) say you need to cancel the incentive plan. Certainly, you reason, your employees will understand under the circumstances. But if you are thinking in terms of the “job” you need compensation to do right now, you may consider these options as an alternative:
Instead of simply canceling the existing plan, you can transition to a different type of plan. You can turn your incentive plan into a discretionary bonus. If you were to do this, you would set new targets (based on the new reality) and then communicate the changes to your employees: “I can’t promise you the bonus plan we introduced at the beginning of the year, but I do still plan to share value with you if we achieve sufficient profit. So, if we hit these targets [the new results that were just decided], I will set aside “x” percent in a discretionary fund. Payouts from that profit pool will be based on this formula…” The result? Employees still have an incentive to perform but there is not cash flow impact if the profit target is not hit. And if it is achieved, you’ve anticipated how much you can share—and payouts are made from value that’s been created. In a sense, it’s “self-financing.”
Another option gets you to a similar outcome. In this approach, you still recalibrate your targets for the year. But instead of setting up a discretionary bonus, you freeze your existing incentive plan. You then tell participating employees that while you are not able to make bonus payments this year, if the company goals are achieved, you will make an “extra” contribution to their long-term value-sharing plan (you determine what amount works). For example, if you offer a phantom stock plan, perhaps you contribute one and a half to two times the number of shares participants would have received this year.
Under either approach, your compensation plan is doing “the job” it needs to do for your company, right now. And you got there by clearly defining the outcomes you needed your rewards plan to produce.
A pay strategy built to address a bad economy should lower costs but still reward performance. And if you clearly define “the job” of compensation for your company, both can occur at the same time.