It’s Too Easy to Blame Compensation for Every Business Problem


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Expert Perspective from Grahall’s OmniMedia Editorial Board

Jeffrey Phillips raises some interesting issues in his August 5, 2010 blog “How Compensation Models Work Against Innovation” asking  “… why innovation seems to be so beneficial on its face and yet so difficult to accomplish.”  He goes on to claim that “We exchange our labor, our thoughts and insights and our management skills for a paycheck.”  And he blames “… very small but very powerful disincentive[s] to innovate, buried in how we compensate our teams…”

Wow, that is pretty harsh and flawed thinking.  We believe there are many more reasons that individuals work and work hard than just for a paycheck, although obviously it is a compelling incentive.  Barriers to innovation won’t be leveled by simply changing compensation programs.  The issues obstructing innovation run much deeper than that.

In many large, mature and successful companies, business strategy is no longer one of “playing to win” but rather playing not to lose. There is a perception that the incremental amount achieved from innovation outweighs the risk of “getting it wrong.”  In most business and people strategies, failure isn’t rewarded, and there is no question that to innovate, a company, its management and its employees must accept a certain level of “failure.”  Companies don’t want to risk their sustained profits, and neither management nor employees want to risk their jobs on an unproven idea.  Reaping the profits from an established idea is a comfortable place to be. All the hard work is done and companies, their management and their employees can essentially “coast.”

Second, large companies are often not very nimble.  The pace of change is fast, and capturing opportunities requires a quick response. Bureaucracy can stifle the advancement of ideas. Building a better mousetrap requires that the mousetrap you have now is essentially self-sustaining.  If that mousetrap requires continued investment to meet customer needs, it is often difficult to find the resources for innovation.   

Third, large companies lack an overarching  “people strategy” to harmonize and align the various components of HR – organization design, rewards, talent management, performance evaluation, etc.   When it comes to these components of people strategy, the whole is truly more than the sum if the parts. Significant improvements in the effectiveness of each component can be made when they are aligned with all others.

Fourth, people strategies are often not aligned with business strategies and do not effectively drive business results.  

Last but certainly not least, is the compensation system.  Too often, companies design a single compensation structure.  This “peanut butter” approach is simple, easy to explain and might even be perceived as “fair,” but unfortunately it won’t sustain business results or drive innovation.  Top performing people should be placed in critical jobs (as defined by the business strategy) and these people in these jobs should reap the lion’s share of rewards (assuming they are effective). 

Failure to innovate can’t be cured by changes to compensation alone.  In fact, changing compensation structure to encourage innovation might not be in the company’s best interest. Changes to compensation should not be initiated without a deep and penetrating review of a company’s business strategy, external environment, key stakeholder concerns and people strategy. 

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