“The reward of a thing well done is having done it.”

So said the American essayist, poet, and philosopher Ralph Waldo Emerson.

It’s hard to imagine that many entrepreneurs, business owners, or employees would agree. Few of us would accept that “doing a thing well” is enough reward to justify our contribution. After all, reward – whether financial or otherwise – is the primary motivation for anyone contributing to a business.

How, then, should entrepreneurs approach the complex subject of reward and remuneration? How should they design an incentive program that works for their employees, and their business?

We spoke to Carl Sjöström to find out.

As the founder of Viti Solutions, and a member of Ispahani Advisory, Carl provides advisory services for reward, corporate governance and business strategy across Europe and beyond.

He does this with over 25 years of experience dealing with executive reward, at businesses such as Ericsson, Hay Group, and Deloitte.

 

1. What questions should entrepreneurs ask of their reward and remuneration program?

The first question entrepreneurs or business owners tend to ask is: what incentives will motivate our management team, and the wider business?

But I encourage them to ask a different question: do we need incentives at all? After all, not everyone is motivated in the same way.

Rewards are simply another tool a business can use to further its performance. Not every business should use incentives in the same way.

In family businesses, incentives often reflect the founder’s own values, used as a way to embed those same values with the wider family and younger generation. (How successful such an attempt is can make for an interesting dynamic.)

If used strategically, reward can signal to a business what matters most — whether that’s aggressively chasing sales, being cost conscious or helping to build a more harmonious culture.

There are few quicker ways to communicate to someone than through the wallet — an incentive does not need to be large to send the right message.

 

2. How should entrepreneurs approach designing an incentive program?

I start with the idea of the remuneration philosophy.

Now, that might sound like a group of Ancient Greeks discussing pay checks, but in reality it’s crucial to designing an impactful incentive program.

First: why does your business pay people? A simple question, but an important reminder: an entrepreneur may work for free (for years), but employees won’t.

In fact, even an entrepreneur won’t work without some form of reward — like a sense of achievement, or the social capital that comes with running one’s own business.

Second: how do you make sure everyone understands the logic behind your approach? I usually avoid the word “fair”, because everyone will have a different interpretation of what is truly fair. Instead, I advocate for transparency. I advocate for founders to clearly articulate why they have chosen their approach, so that everyone understands future decisions around remuneration.

 

3. What are the common mistakes entrepreneurs should avoid when it comes to reward?

The mistake I find most depressing is founders designing their program around what the rest of the market does.

Of course, learning about other approaches can be a useful education. But in reality, I have often observed that a company pays for a survey of its competitors, and then bases its own approach on the number that survey shared.

I think this approach is a mistake for two reasons.

One, because it suggests a lack of competitive imagination: you wouldn’t directly copy a competitor’s approach in any other aspect (like marketing), so why would you copy their approach to reward and remuneration?

And two: because you may end up with an approach that is inconsistent with everything else in your company. For example: if you are a family business, you shouldn’t base your approach on a private equity competitor, you are unlikely to have the same goals.

 

4. Are there any other mistakes?

The other mistake I see is entrepreneurs and owners not considering the potential consequences of their incentive program.

It is wonderful, of course, if your $10 million business turns into a $1 billion one — but what will that mean for your CEO’s remuneration package? If your CEO is now entitled to a $100 million reward, can your growing business afford such a big outlay in cash?

So whatever the formula of an incentive plan, it’s important to think through all the scenarios.

And the final mistake I see, particularly with family businesses, is to forget that incentives can be based on a number of performance measures.

There is the performance of the business, of course, but also factors like philanthropy, environmental impact, or how well an individual is helping to achieve the family’s wider ambitions.

 

5. How should owners manage different – and potential competing – family interests?

Take the example of the CFO who is also a member of the family. How much should they get paid?

Perhaps, some family members might think, they don’t need payment – after all, they already have a share of the family wealth.

But fundamentally, I would recommend that a family separates the reward one gets as a business owner, and the reward one gets as a business contributor.

In other words, the reward you get from your capital, and that you get from your role – whether that is an executive, non-executive, or employee.

In my experience, the more transparency you can have in these conversations, the better members will understand the logic behind your decisions.

How do bonuses work? How are salaries set? Why does the CEO get so much more than the CFO? If these questions are clearly answered, a shared understanding will develop across the family.

 

6. What about entrepreneurs and owners operating in emerging markets? How should they think about reward and remuneration?

Different cultures pay in very different ways. What would be seen as entirely standard in one place may be seen as deeply strange in another.

So it goes back to the idea of the reward philosophy. As you define this, it’s important to take into account the different cultures it will need to operate in.

In some markets, an employee may leave your company for a better-paid job — but return to you later on, if you’re able to increase their salary. In others, you may have an employee for decades and never once discuss salary.

So, it’s important to define what’s right for your family and your business – and then understand how that changes as you expand internationally.

 

7. What about managing the interests of other parties, like advisors or employees?

This is an important question to ask, particularly for family businesses: how much should you reward people from outside the family? And can the family afford such a reward?

Let’s say a new CEO is brought into the business. You might have significant hopes for their performance – for which, of course, they will want to be paid a significant. reward. But what does “significant” look like for your business, and what can you afford?

Such is the balancing act of reward and remuneration. In scenarios such as this, transparency is essential: if the CEO is clear from the start what their reward will be in the event of significant business growth, it’s more likely all sides will be satisfied.

 

8. Is it possible to offer no reward or incentive at all?

The biggest number when talking about reward, I always say, is zero.

It’s big because it’s controversial. Now, some people may be willing to accept this, if they feel they are rewarded in some other way. Let’s say a family has a small fund or bank that needs to be managed — a family member may be willing to do this “for free”, if they feel the opportunity is exciting, or educational, or whatever it may be.

Of course, it’s likely they’ll view this opportunity more as a “hobby” than a full-time role. But it’s important that these other rewards are set out clearly from the beginning.

Because ultimately, like beauty, reward is in the eye of the beholder. That’s why I believe transparency and clear communication are so important when talking about reward.

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