Scenario Planning: Reward Design in an Uncertain World

Compensation planning - like life in general - got a lot tougher this past year or so.  And as we move into what has traditionally been the pay budgeting and planning months, many of us are wrestling with where (the heck) to take our reward plans amidst today's economic uncertainty.

Perhaps we can borrow a technique from the business planner's toolkit.

Scenario planning, pioneered by the military in the 1950's and long used by some of the world's largest corporations, involves identifying a small number of "scenarios", predictions or possible paths the future might take, and defining how to potentially respond or adapt to each of them.  It should come as no surprise that recent times have brought a new surge in popularity for this particular planning approach.

An article in this week's Knowledge@Wharton, Eyes Wide Open: Embracing Uncertainty Through Scenario Planning, talks about this resurgence and covers some of the challenges involved in doing scenario planning effectively.

From the article:

Trying to gain a better understanding of the trends shaping the competitive environment has always been critical for managers. In the 1970s, scenario thinking first became relatively popular as a structured way to look ahead -- to understand new growth areas, anticipate risks, spot opportunities and build a long-term vision. Perhaps most notably, Royal Dutch Shell used the approach to look more broadly at the trends and developments that could impact the price of oil and develop stories that could challenge management perceptions. Since then, however, companies of all sizes and in many industries have picked up the practice, particularly at times of crisis or dramatic change.

George S. Day, a professor of marketing at Wharton and co-director of the Mack Center, also has witnessed the recent rise in scenario thinking firsthand. "What has changed to make scenario planning so timely? Obviously uncertainty is way up. This is the main driver, because when conditions are stable it's easier to live with momentum and the projections we normally use," he points out. "The challenge is that when things are very uncertain we need to think differently, because what we project based on current momentum may be the least likely outcome. We need to start thinking about the unthinkable scenarios -- and what's new today is people are finally figuring out how to do it well, in an environment with a huge amount of uncertainty."

My point? Simply this question: Are there elements of scenario planning that we - as a profession - should be embracing as we try to position our reward plans to support success in a future that is difficult to predict? 

Let's face it.  The days of simply plugging a new budget number into our compensation program and rolling it forward with a few tweaks are behind us.  Looking forward, we may need a dramatically different process that considers our reward structure against the possibilities the future may throw at us ... and asks questions like:

• What are the boundaries of possibility for our organization in the coming year ... and beyond?

• What might the possible scenarios mean for how we manage and reward our employees?

• What direction should/would we move our reward plans to respond to these realities?

• What, if anything, do we do today to ensure we would be appropriately positioned to make these moves, if circumstances demand them?

I'm betting that there are some forward-thinking practitioners out there who've already incorporated questions like these into their compensation planning efforts.  The rest of us ... time to learn up and get on board.

Ann Bares is the Editor of Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School, enjoys reading in her spare time and is waiting for her daughter to return China this summer.  Follow her on Twitter at @annbares.

Image: Creative Commons Photo "It's about rules and strategy" by pshutterbug

Comments

[Paul Hebert]

Probably the single biggest "scenario" to plan for is having a plan for change. No matter how well you do the scenario planning - the reality never looks the same. Too often we lock ourselves into the "most likely scenario" - then BAM - black swan time.

Who would have thunk property values would go down by 50%? They never did before. Strategic planning (and scenario planning) need to be predicated on changes in the environment - not changes in time like we have done in the past.

Great post Ann - as usual.

[Ann Bares]

Paul:

Agreed - across the board. To really add value, scenario planning needs to push outside the box, which is never easy to make happen in our time-pressed, discussion-weary world. And yet, I still think we would better position ourselves (comp planning wise) if we could take at least a few steps down that gangplank...

Just getting into Black Swan, by the way ... way behind you and all the other "forward thinkers"...

[working girl]

Think indirect compensation, like openly expressed appreciation, growth opportunities and autographed pictures of the CEO.

[Becky Regan]

Ann,

My cousin who worked as a Division Manager at Caterpillar told a story about how they used scenario planning there. Back in the '80's, Cat's CEO embarked upon a long, drawn out battle with the UAW to break the union. They envisioned 3 different scenarios and drew up a detailed plan based on the possible outcomes. Once the situation played out, then they were able to act faster to implement their plan.

Must have worked as they're in business still and GM is not....

I think this is a great idea to consider using, based upon where the management team thinks the organization may be over the next 18 months. As Paul said, you can't anticipate every scenario, but perhaps you can select a few of the most likely to occur and build plans around them.

BYW, I'm going to have to research "black swan"...

Thanks for a strategically oriented post that's very timely for salary planning purposes!

Becky

[E James (Jim) Brennan]

Everyone should always have a GTH (Go To Hell) plan for when Murphy thwarts your every carefully prepared option.

In the World At Work Community Benefits blog, I responded thus to a blogger asking how to Plan for the Unknown benefits situation in 2010:

How can you be expected to plan for it? Do you have a superior crystal ball or a special tap into the Congressional negotiating rooms?

Like the rest of us, you may be required to make a B.A.D. (Best Available Data) decision. You go with what you actually know and can project into the future based on your most carefully laid extrapolation from current and forecasted information. Standard decision-analysis process suggests that you should budget as though nothing will change, with preventive/contingent steps. No matter what the outcome, you will be covered. At worst, if wrong, you will have excess money put aside to be re-allocated.

[Paul Hebert]

Along with the BAD decision scenario - there is always the SWAG - some wild a## guess. Always a favorite!

[Ann Bares]

Ha! Gonna add these to my list of favorite acronyms.

These days, you probably have as much luck with SWAG as anything else!

And, as you point out Jim, never a bad idea to keep that worst case scenario top of mind.

[E James (Jim) Brennan]

always thought SWAG stood for "Scientific Wild Axxed Guess" but it fits, either way

[Margaret O'Hanlon]

Ann, thanks for this nudge. Well put and immensely important, I agree.

I think that it would be a great use of time if every strategic compensation team took a break to tackle your four questions.

At this point in business history, discussing these issues means more than blue skying it. It means learning so you can consider new alternatives.

Dig out the business models, learn what the execs are projecting (not announcing, but discussing behind closed doors). Try to figure out what your competitors will be doing. Check out the concepts that the big consulting firms are kicking around.

This time, there is definite change in the winds. Better you should have a couple of different (sketchy) travel plans than none at all!

[Wally Bock]

Congratulations! This post was selected as one of the five best independent business blog posts of the week in my Three Star Leadership Midweek Review of the Business Blogs.

http://blog.threestarleadership.com/2009/07/29/72909-midweek-look-at-the-independent-business-blogs.aspx

Wally Bock

[Jon Ingham]

Ann, I've just come across your post through the HR carnival - sorry I missed it earlier.

I agree - scenario planning is a great and substantially underutilised tool. But in my experience (reasonably limited), it makes sense to do it across the HR portfolio rather than simply for reward, as obviously you want all these different functions to be aligned. Just a thought.

And more relevant thoughts at http://strategic-hcm.blogspot.com/2009/02/hr-scenario-planning.html

and http://strategic-hcm.blogspot.com/2009/02/scenarios-for-hr-future-in-global-reset.html

The later post formed the basis of the model which I briefly described in our webinar with Globoforce.

Best, Jon.

[Ann Bares]

Jon:

Thanks for the comments. I completely agree that it is best to utilize senario planning across the entire HR function rather than limiting it to reward planning.

I have been preparing a follow-up post on scenario planning, and I would love to include links to your posts on the topic - both to further illustrate the technique and to make your important point about alignment across HR.