At Stewart & Smith Advisory, we often tell our clients that their payroll is not just their largest expense, it is their most significant strategic lever. Yet, many SMB CEOs and owners treat compensation as a compliance task or a necessary evil, often piecing together raises and bonuses reactively when a star performer threatens to leave.
To move from a reactive payroll mindset to a proactive compensation strategy, we look to the framework laid out by Verne Harnish and Sebastian Ross in Scaling Up Compensation.
By applying these 5 Design Principles, you can turn your salary bill into a talent magnet that drives the exact behaviours your company needs to reach the next level.
1. Be Different (Align with Strategy)
The #1 mistake business owners make is copying a competitor’s pay structure. If your strategy is to be a high-touch, premium engineering firm, but you copy the compensation of a high-volume, commodity firm, you will attract the wrong people.
- The Principle: Your pay system should be as unique as your brand. It should signal to the market exactly who you are.
- CEO Insight: If your brand promise is no surprises, always on time, your compensation should reward reliability and project completion, not just billable hours.
2. Fairness, Not Sameness
In professional services, the difference between an A-Player and a C-Player isn’t 10%; it’s often 3x to 15x in terms of output and client impact.
- The Principle: A fair system recognizes these massive differences in impact. Treating everyone exactly the same (the “sameness trap”) is actually unfair to your top performers.
- The Implementation: Build broad pay bands that allow for significant overlap. A high-performing maker (individual contributor) should be able to earn more than a mediocre manager.
3. Easy on the Carrots (Individual Incentives)
Verne Harnish famously warns that individual bonuses can backfire. When you reward an individual for a specific metric, they will often hit that metric at the expense of the team or the client.
- The Principle: Financial incentives shape behaviour through selection (attracting people who value that reward), not by magically motivating effort.
- The Rule: Individual incentives only work for repetitive, independent tasks. For collaborative professional services, use them sparingly. Instead, focus on group gain-sharing.
4. Gamify Gains (The Power of Play)
Rather than a mysterious end-of-year bonus decided by the owner in a dark room, Scaling Up suggests “gamification”.
- The Principle: Use shorter-term, group-based rewards tied to a critical number.
- The S&S Spin: If your company’s goal is to reduce WIP (Work in Progress), create a 90-day “WIP War” where the entire team wins a group experience (or a gain-share pool) if the target is met. This builds a culture of collective responsibility.
5. Share the Wealth (Owner Mindset)
Finally, to get employees to think like owners, they must eventually allow them to benefit like owners.
- The Principle: Profit-sharing and equity aren’t just about the money; they are about informational transparency. They signal that we are all in this boat together.
- The Strategy: High-growth companies share a portion of the profit above a threshold” with the team. This ensures that when the business wins, the people who fuelled that win feel it in their bank accounts immediately.
The Stewart & Smith Takeaway
Compensation is a “hygiene factor” – if you get it wrong, it’s all people talk about. But if you get it right, it disappears into the background, allowing your team to focus on what matters: delivery and growth.
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