03 Jan What is Conscious Compensation®?
Conscious Compensation® helps companies move from the traditional, capitalist approach to compensation towards practices that are more socially responsible. It has been developed in response to expectations from employees, investors, and stakeholders for companies to move towards corporate responsibility. For decades, traditional capitalist compensation has been characterized by the following:
- Base wage or salary
- Merit-based salary increases
- Annual incentives
- Primarily financial metrics
- Stock-based compensation focused on executives
- Graded annual vesting
- Increasing cost to employees for benefits
- Primarily self-funded retirement; 401(k) with match
- Executive supplemental benefits and perks
- Top-down performance review
Yet, many of these characteristics are at odds with the emerging demand for a more socially and politically correct approach to compensation, which encompasses:
- CEO pay caps at a multiple of the lowest-paid worker
- Living wage levels
- Employer payment of all benefits costs
- Employer-funded pension
- Employee profit-sharing
- All-employee equity participation
- Employee ownership
- Length of service/seniority as basis for pay increases
To bridge the gap, Conscious Compensation® invites companies to improve their pay practices without sacrificing profits and without overreacting to perceived societal trends and short-term political hiccups. For instance, it encourages periodic distributions instead of annual incentives, because even though annual financial statements are required for businesses, compensation doesn’t have to operate within the same time frame. It could also encompass 360-degree performance reviews instead of reviews that are exclusively top-down, the same benefits and perks for all employees, stock-based compensation for all employees, and stakeholder-driven metrics, among other design elements.
The following 12 ideas act as the foundation for Conscious Compensation®:
- Based on multi-stakeholder value creation
- Scalable and sustainable across organization growth cycles
- Easy to understand for all stakeholders
- Not a transaction-dependent or exit-dependent
- A balance between organization need and worker preferences
- Not driven by accounting’s calendar-based cycles
- Equitable, but not always equal
- Affordable but generous
- Team-based by individualized
- Transparent but confidential
- Efficient to administer
- Linked to information, education, and empowerment processes
While these 12 ideas are the factors on which a robust and conscious compensation plan can be developed, the overarching principles can be summed up into three key points:
If the organization is providing societal value, it has to continue to operate to exist to provide that value. This holds true even if the company is acquired or any other significant changes take shape; it must still deliver benefits to society.
Employees deliver the value to the business, even as developments in machine learning, robotics, and artificial intelligence are made. To drive this point home, consider asking yourself: If no employees showed up to work, could the company still function? This is viewed by some as being in direct conflict with the emphasis on shareholder value while other companies believe that by putting employees first, increases in shareholder value naturally follows.
A company must perform well financially, especially in a global market. Yet, performance is broadly-defined and does not just refer to total shareholder return. The myth that “as long as the share price is good, everyone is happy” should be confronted. It will become increasingly important that companies also perform well socially and environmentally.
Forward-thinking companies must be ready to adjust their compensation plans to reflect these new demands for attention to socio-political and environmental concerns. It will likely take years for these changes to be fully realized, but gearing up for change is what will set your company up for success in the new multi-stakeholder business landscape.
HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and allocation of merit, bonus and equity awards to drive manager and employee engagement.