Keep Your Compensation Strategy on Track

Compensation Planning Insights Part 3

In earlier Compensation Planning Insights posts, I discussed the importance of articulating your company’s business strategy and aligning your compensation approach with strategy.

In this post, I’ll cover two common pitfalls that can knock your compensation approach and business strategy out of alignment and cause your company to fall short of its goals.

At McDermott Associates, we encourage clients to periodically review the linkage between their company’s business strategy and compensation approach, to ensure that the two remain aligned. This also helps you evaluate the effectiveness of your chosen compensation approach.

For example, if your company is now closer to meeting its strategic objectives than it was at the beginning of the strategic planning process, your business strategy and compensation approaches are most likely aligned and working synergistically. On the other hand, if your company has not moved forward as quickly as expected, you’ll want to look for two common compensation pitfalls.

First, look for the “Moving Target Syndrome”. This syndrome may be difficult to detect because everything may appear to be in sync, with processes in place for planning and goal setting. However, a closer look may reveal that managers frequently change goals, targets, and objectives throughout the performance period, causing employees to change direction constantly. Companies that undergo frequent reorganizations are particularly at risk for the Moving Target Syndrome.

The syndrome also manifests itself in other ways. For instance, managers may change performance target just as employees are about to achieve them, often with the rationale that the targets were set too low or were not realistic. Or, managers lower targets if the original targets will not be reached. However it plays out, the Moving Target Syndrome can be devastating to a company’s efforts because employees become confused and frustrated without clear and steadfast performance objectives to guide them.

Second, beware of accelerated payments. Some companies will accelerate payments for long term performance before that performance is realized. For example, if an incentive plan has three  to five year time periods for goals, a company will make incremental payments to reward management for projected future performance. Unfortunately, past performance doesn’t guarantee future performance will be at the same level. The company can get burned if performance drops and payouts against that performance have been made. Accelerated payments also reward and reinforce short term thinking among managers.