You know that you need to make some changes to your organization’s compensation plan. One of the following comp problems is keeping you up at night:
- Your current compensation program isn’t working. Perhaps, it’s resulted in some unintended consequences. For example, an incentive plan that emphasizes top line revenue is generating lots of sales but it also encourages steep discounting that leads to low profitability.
- You’re in hyper-growth mode and your previous comp plan has gotten stale. You need to update your structure and create new guidelines to ensure that your organization can grow in a sustainable way.
- Pay equity issues has become a byproduct of your organization’s fast growth. You want to make sure that your pay practices are compliant and fair to all employees.
- Your organization is losing the talent war; employee turnover is high, and offer acceptance rate is low. You think that your compensation and benefits program is the culprit.
- You don’t have a formal compensation plan at all. You’re getting lots of questions from employees about how their pay is determined, and it has become untenable to carry on without a data-driven compensation plan in place.
At this point, you have a good idea of what your compensation strategy should be and you’re excited to start working on a new comp plan. But before you do any work, you’ll want to see that your executives are on board with your vision.
Too many times, we see well-intentioned HR and compensation professionals who will have already completed weeks or months of work on their new comp plan before notifying any C-level executive. They’ve conducted a market study, build out a new structure with updated ranges / salary bands, and created new comp guidelines –without having a single conversation with their executives (CEO, CFO) about the need to change comp. Not surprisingly, these executives were taken by surprise, and insisted that the HR practitioner go back to the drawing board.
In this article, we’ll outline the steps you can take to get 100 percent buy-in for changing your compensation plan (or to create a new one). We’ll also show you some research-backed tactics used by the world’s most successful professionals to sell their ideas.
Step 1: Get the Framing Right
Executives need to see how your initiative fits into the big picture. Explain how changing your compensation plan supports a strategic goal, such as increasing your organization’s ability to attract talent.
You’ll want to make the problem as vivid as possible in your executives’ minds. What’s at stake if you don’t change your compensation plan (or create one) very soon?
For example, is your organization losing top talent to competitors and it’s costing you dearly in terms of delays in product launches, loss of specialized knowledge and recruitment costs?
Do you need to attract quality candidates in specific roles that are highly competitive in your talent market?
Are you going on a hiring spree and thus need to put a better structure in place to ensure you can be grow sustainably as you hire the next 100, 500 or 1,000 employees?
Getting compensation wrong can hurt your company’s bottom line. Here are some ways this can happen:
- Underpaying people. Offering a salary that is below the market rate to a prospective employee can be (and often is) the reason the prospect declines your offer. This drives up recruiting costs. Declined offers turn into a multitude of other costs — projects you can’t start, overburdened incumbent employees, turnover from frustrated recruiters who don’t enjoy working for an organization that expects top talent for pennies. A SHRM study found that the cost of replacing an employee can be 6 to 9 months’ of their salary on average.
- Overpaying people. Overpaying employees is costly to your business, and it could be demotivating for performance. If a new hire is already paid near the top of the range for his role, by next year, he’ll be hearing that there is no room for financial advancement absent a promotion. This can be a harsh pill for the employee to swallow. Additionally, overpaying some employees means that you’ll have less budget for raising wages or to increase incentive pay.
- Pay inequities. If some employees are paid less than their peers for the same work, they will feel upset and may look for other jobs. PayScale’s 2017 Compensation Best Practices Report reveals that compensation is the number one reason people voluntarily say goodbye to their employer. When an organization is in hyper-growth mode, pay compression can easily occur — because your internal compensation structure has fallen out of alignment with the external market.
To frame the issue properly, you’ll also want to consult with other stakeholders and build a coalition of supporters.
Chances are, there are leaders outside of HR who care about compensation as much as you do. For example, the Engineering department has the highest number of open job reqs and the hardest time attracting qualified candidates. The VP of Engineering has a vested interest in updating the org’s compensation plan and can help you influence target executives. Or let’s say that your organization has recently set a target around workforce diversity in your organization. You can frame evaluating pay equity as a critical piece of reaching this goal.
To ensure that your executives see the value of changing comp (and the urgency of the matter), take the time to quantify the costs as well as the projected benefits. Calculate the amount your organization would save if you were able to reduce turnover by a certain percentage, hire people faster and reduce the time your team has to spend on repetitive tasks such as conducting ad-hoc compensation reviews. For more resources on how to calculate employee turnover, check out this article.
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Step 2: Understand the risks and your organization’s tolerance for change
Making a significant change to one’s compensation plan will raise concerns from employees and managers. Every organization has a certain level of tolerance for change. Your executives won’t be comfortable with the change until they understand all the potential consequences associated with your plan and see that other key stakeholders are on-board.
Could your proposed change have unintended consequences? Are there groups of employees who could be negatively impacted?
For example, let’s say that one of your C-suite goals for the year is to increase revenue by 20 percent — a stretch goal for the organization. You want to make some changes to the performance metrics and the commission structure in the sales organization. Will the sales organization perceive this to be a dramatic change or a minor one? You’ll want to bring your proposal to sales leaders and gauge their reaction to the draft plan.
Be prepared to encounter active resistance. The key to dealing with active detractors is to understand their reasons for resisting the change.
When you pitch your plan to executives, it’s important to not only sell the benefits, but also to lay out the potential drawbacks.
Wharton Professor Adam Grant’s research has shown that when you’re selling an idea to those in a position of power, you may want to utilize “powerless communication” (versus forceful communication) to increase the chances of acceptance for your idea.
Powerless communication involves expressing vulnerability — talking tentatively, expressing doubt, admitting weaknesses and deferring to others’ opinions. He found that people prefer to work with those who use powerless communication, because it sends a message that they care about our interests, values our input and respect our preferences.
Step 3: Gather best practices
Chances are, others have done what you are seeking to do. Can you ask others in your space about how they’ve dealt with changes? Here are good questions to ask:
- Can I talk to other organizations who have implemented a similar change? PayScale customers can take advantage of our online community Comptopia to get perspectives and insights on their comp and HR challenges from their industry peers.
- Are there people within my organization who can share their experience or can point me to others who have best practices?
- Are there surveys or other written resources that will highlight best practices?
- What are the lessons learned from others who implemented similar projects?
Once you’ve done the work of framing the issue, understanding the risks or drawbacks to your plan, and gathered best practices from others, you’re ready to communicate your proposal. Here are some communication tactics to keep in mind:
- Tailor Your Pitch
You should know your audience’s goals, priorities and values, so that you can use this insight to shape your message. Use the vocabulary of your target audience.
- Know the Organizational Norms
Every organization has its own norms or ways of doing things. You’ll want to adhere to them in most cases. What kind of data do your leaders like to use to make decisions? How do they prefer to receive information? Is it generally best to use formal or informal approaches when you are pitching an idea? Think through the answers to these questions to ensure that when you speak, your audience will listen.
- Get the Timing Right
People need time to get comfortable with change. If you are proposing a significant comp plan change, you’ll want to bring it up with stakeholders and executives well in advance. When a deadline is far away and decision-makers are still in exploration mode, open-ended questions can be more effective than proposing a specific solution.
- Manage Your Emotions
When you communicate, you want to be perceived as a change agent, not a complainer. Further, recent research by Wharton’s Adam Grant shows that people who keep their emotions in check — or at least control what they display to others — feel more comfortable raising issues and receive higher performance evaluations.
Tell Us What You Think
Have you successfully sold your senior team on a new compensation plan? We want to hear from you. Share your tips in the comments.
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