While leadership style, climate, and growth opportunities are important parts of retention strategies, one of the first steps to keeping valuable people from leaving a company is to pay at or above market rates.
Executive compensation plans tied to value creation are currently one of the most attractive and sought-after compensation options. Most companies continue to link these incentives to the organization's annual profits.
These compensation systems have the objective of:
- Link compensation to performance, productivity, and quality.
- Reduce compensation costs.
- Improve the level of participation and identification.
- Increase teamwork and the certainty of participating in a common enterprise.
But it's essential to ask ourselves: Who is the non-traditional compensation plan aimed at? This issue is crucial, as it affects motivation, team spirit, and the sense of fairness of the compensation system. Human resources specialists must define participation and coverage with a sufficiently broad margin to facilitate teamwork, but limited only to those individuals who will have a clear impact on results. They must also determine the amount of incentives and the frequency with which they will be delivered. Clear parameters must be established to avoid confusion or different interpretations.
These plans are a key element in employee loyalty, which is so necessary in today's environment, dominated by globalization and market dynamism, where people's skills and abilities constitute a company's most important asset. Ultimately, the objective of incentive and profit-sharing systems is to improve performance. It is important, however, to determine which aspects of performance are to be improved.
Incentives need to strike a balance between short-term results and long-term goals. At the same time, the incentive must match the executives' needs. Depending on family circumstances and factors such as age, some executives may prefer all incentives to be cash, while others may prefer them to include more non-salary compensation. Thus, other forms of incentives exist, including those that allow executives to design their own compensation package. The common element in most executive compensation packages is their relationship to performance in the organization. When these systems do not link compensation to achievement, they cease to be incentive plans.
Many companies have opted to link executive incentives to the profits the organization generates for its shareholders, since one of the biggest problems facing large corporations lies in the separation of the company from its shareholders' control, which remains in the hands of managers, whose interests do not always coincide. Therefore, in some cases, the option to acquire shares in the organization is offered, which is equivalent to the right to buy shares at a certain price.
Managing an incentive system can be complex. As with any control system, parameters must be established, along with objectives and ways to measure them. Issues to be resolved include:
- How information about results will be obtained,
- Who should carry out the final calculation of results,
- How the payment will be made and
- Who will be responsible for periodically checking that the planned objectives are in line with those actually achieved?
Although individual compensation may increase, the organization's overall compensation costs may decrease, thanks to increased productivity levels. One of the most significant objectives of financial incentives is to reward improved performance on a regular and periodic basis. In this way, the organization benefits because these rewards are awarded in direct relation to productivity, rather than through the indirect method of calculating the number of hours worked. If the system motivates the executive to increase their productivity, the costs of administering the system practically offset themselves.
