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…So this morning I read a great piece from Jacque Vilet over at Compensation Cafe highlighting the way compensation plans must evolve based on the life stage of the company. Vilet focused on how an organization’s pay mix (i.e. salary/bonus/equity) and market competitiveness changes based on if they’re in a start-up, growth, maturity, or decline phase, explaining the causal reasons behind each stage and the steps a prudent compensation professional takes to adjust their structures accordingly. It’s a great piece, and you can read it here.

With that said, this piece got me thinking about what compensation structure might make sense for a business based on its life cycle. As a quick overview, there are four predominantly used comp structures in the U.S:

* Traditional: Range spreads from 20%-40% and midpoints of 5%-10%
* Market Pricing: Range spreads of 30%-80% and midpoints of 5%-15%
* Broadbanding: Range spreads of 80%-200% with undefined midpoints
* Step Structure: Range spreads of 20%-40%, midpoints of 5%-10% w/ steps

…If you want to learn more about the prevalence of each structure by industry this (2012) piece from World at Work is a good starting point. But this evening I want to talk about the utility behind using one comp structure or another based on life cycle. Again, Vilet defines each of the below life cycles 1. If you’re curious to learn more about this topic you can do so on Wikipedia here. Wiki adds a 5th-life cycle stage called ‘renewal’, which is essentially what every organization that avoids decline (and eventually death) must do at various points in its existence.in her piece here 1 quite well, so I will use them below (italics):

1. Start-Up Life Cycle Stage: In this stage companies build capital and start developing their products or services. Much attention is focused on product demand and markets. Each person wears many hats and there is a strong team orientation.

What Comp Structure Might Be Most Appropriate: Market Pricing.

Why it Might Be Best: I’ll note here for the record that market pricing is not so much a compensation structure as it is a compensation philosophy. With that said, the rationale for utilizing a market pricing approach while in start-up mode is that early on in an organization’s life cycle pay needs to be able to flex to accommodate the rapidly changing priorities of the business. It also allows the organization to flex its comp to attract and retain critical employees necessary to the businesses growth without worrying too much about internal equity (or focusing on training for a compensation plan that will almost certainly change multiple times over as the business continues to change).

2. Growth Life Cycle Stage: Companies experience explosive growth and begin building their support structure — including employees — as business opportunities are outpacing resources. Company revenues grow rapidly. It is common to hire over-qualified outsiders for management positions — specifically to take the company forward. Founders may decide to go public due to the need for more funds to take advantage of all the available growth opportunities.

What Comp Structure Might Be Most Appropriate: Broadbanding or Market Pricing.

Why it Might Be Best: As the organization grows and continues to experience significant changes to operations, the company needs to have enough flexibility to react to the market, while at the same time allowing talent to make regular lateral moves as needed without having to take a step back from a pay grade/job band standpoint. Additionally, the organization may be purchasing other businesses and need the flexibility to fit their comp structures into their own.

3. Maturity Life Cycle Stage: A large amount of assets has been accrued and companies are well established in the market. They’re cash cows and have a large market share. They may gradually experience slower growth if products stagnate. In order to avoid decline, they may decide to diversify by acquiring other companies and/or creating new product lines.

What Comp Structure Might Be Most Appropriate: Traditional Grades or a Step Structure.

Why it Might Be Best: As operations begin to stabilize and growth slows, things like internal equity, defining internal career paths, and having a structure that makes sense across all business units starts to become more important. As downsides, having narrower, more clearly defined ranges limits an organization’s ability to attract outside talent based on pay (and provide additional remuneration opportunities for senior individual contributors at the top of their ranges), but the narrow ranges limit disruptive pay issues and free managers and the HR function up from having to constantly market price jobs so that they might focus on other things.

4. Decline Life Cycle Stage: If efforts to re-charge the business fail, companies will decline or go out of business entirely. Company sales, profit, product demand and hiring dramatically slow. They can no longer afford to invest in the business. Unprofitable business units are terminated. A key focus is on cutting costs.

What Comp Structure Might Be Most Appropriate: Traditional Grades or a Step Structure.

Why it Might Be Best: At this point growth has slowed and any operational change is regressive as opposed to progressive. The organization is in a conservation mode, and also unlikely to be either a market leader in pay, able to target top talent, or be concerned about any of the other things (e.g. growth through acquisition, enabling internal mobility etc.) that made market pricing and broadbanding strategies attractive earlier in their life cycle.

…Here’s the thing, though. As with most things comp related… it really depends. I’ve seen mature, large cap organizations utilize broadbanding… and I’ve also seen start-ups utilize step structures. This is because the market, industry and growth strategy a business pursues are often times likely to play just as large a role in what comp structure it selects as its life cycle stage. HR/Comp Pros: Determining what makes the most sense for your business comes down to having a collaborative discussion with business leaders to understand how the talent strategy and business strategy work together.

/rant

As always, please share your thoughts in the comments section below.

Best,

Rory

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