Employers Get Innovative with Compensation

​Compensation innovation is within every organization's reach. But what form that innovation takes will depend on a variety of factors.

Some companies have made headlines by allowing employees to allocate their pay package as they see fit. Among recent examples:

• Netflix Inc. permits employees to receive their compensation by choosing among cash and stock options.
• Shopify Inc., in addition to letting employees choose how much of their pay to take in cash and equity, enables workers to direct the equity portion of their pay between stock options and restricted stock units.

"Allowing employee choice in how to receive compensation is a minority practice but gaining significant interest," said Tauseef Rahman, a partner with consulting firm Mercer in San Francisco. However, such innovations can be difficult to design and administer. For one thing, employers need to carefully consider how they will communicate the risks and benefits of this approach to employees and develop technology capable of capturing employee decisions for administrative purposes.

Then, he said, "they must carefully review employee pay allocations in order to identify and manage any pay equity issues that occur as a result of an employee's chosen pay mix."

Innovation Driven by Circumstance

In some cases, employers will be limited by their own circumstances in how much and what kind of compensation innovation they can pursue.

"Many organizations don't have the capability to expand long-term incentives to provide more equity to more employees," said Linda VanDeventer, vice president with consulting firm Segal in New York.

Other organizations, by virtue of their structure, budget or other reasons, may be unable to make major changes to pay programs.

In these cases, organizations can focus innovation on improving existing compensation programs. "You don't have to go all in on flexibility to innovate," said Catherine Hartmann, North America rewards practice leader at consultancy WTW in Los Angeles.

By segmenting employee populations, an employer could develop new bonuses tied to core company objectives, such as the research, development and implementation of ideas. In some cases, this might call for the expansion of the segment of the workforce eligible for long-term incentives or equity rewards, perhaps with some leeway to choose a mix of cash and equity.

"There can also be meaningful rewards in the $2,000 to $5,000 range available to recognize operational innovation, with managers encouraged to use those rewards when appropriate," Hartmann said.

In other cases, an employer might allow top performers to present their ideas for company growth and innovation, with winners eligible for significant equity grants or cash awards, she explained. These awards could be career-oriented, such as the opportunity to attend a TED Talk or to have several sessions with an external career coach.

Innovating with Employees in Mind

It's important to keep the basics in mind when making any change to compensation. This means looking at the organization's compensation philosophy to make sure it is still aligned with business and organizational objectives as well as the employee value proposition.

"Depending on the level of change, it is important to balance that compensation philosophy with what employees want," VanDeventer said.

This is a good time to evaluate how well employees understand and value current compensation programs.

"A lot of compensation programs don't get high votes from the customers of those programs—employees," said Tom McMullen, senior client partner for total rewards with Korn Ferry in Chicago. "Organizations are getting low marks on employee understanding of how pay programs work. So, if you think about innovation, it starts there."

When information about and awareness of compensation programs, particularly incentives, is lacking, focus on the communication effort.

"If employees don't understand how the compensation package works today or they are confused about basics like how pay ranges and performance measures work" or how different levels of performance impact incentive payouts and merit increases, this is the time to make sure these concepts are clearly explained, VanDeventer said.

For example, she noted that one company developed quarterly cash bonuses that rewarded employees for completing projects on time and under budget. The rewards had a clear cause and effect between results and payouts. Consequently, she explained, incentives were well-received and helped the company reinforce high levels of performance using metrics that mattered to company success. With more energy and clear parameters and rewards for getting things done on time, the program had a clear tie to business results and meaningful payouts to participating employees.

Innovating by Demand

External factors can also drive compensation innovation. As pay transparency laws become more widespread, for example, employers may find themselves having to lay out their compensation programs to greater scrutiny. This may not always be to the employer's benefit and, if not handled well, could lead to unhappy employees.

In this case, compensation innovation could focus on helping managers work through uncomfortable conversations about pay.

For instance, if an employee who has been in a job for three years is making $150,000 per year and sees a similar job posted by a competitor with a salary range of $130,000 to $250,000, that could lead to some dissatisfaction on the employee's part.

In this situation, "organizations have to ask themselves whether a manager will be able to adequately answer questions about why the employee's pay is at the lower end of that salary range," McMullen said. "If managers do not understand the root causes of the situation well enough to answer these types of questions, there could be some churn in the organization."

In the end, compensation innovations must lead to successful pay programs that provide what employees and job candidates want. They must also focus on those elements of total rewards that will help retain employees and keep them engaged in their work over the long term, Rahman said.

He urged employers to think holistically about the total rewards package rather than focusing on changing specific parts of it. "Tinkering with one aspect of the [employee rewards] ecosystem and expecting it to work is unlikely to be successful," he said.

Joanne Sammer is a New Jersey-based business and financial writer.