Family Dollar: Aligning Pay with Strategy

When the entrepreneurial CEO retired and new leaders looked for fresh talent, they realized they needed a comprehensive structured pay strategy

A fast-paced, family-run business grew by leaps and bounds—achieving spectacular success without much of a compensation philosophy beyond: "We'll pay what it takes to hire talented people." But when the entrepreneurial CEO retired and new leaders looked for fresh talent, they realized they needed a comprehensive structured pay strategy.

Until recently, Family Dollar, a fast-growing and profitable 6,200-store, FORTUNE 500 retail chain had a limited internal pay structure as well as limited central control oversight for its compensation practices. Founder Leon Levine had surrounded himself with people he knew well, and he let them reward their people as they saw fit. Many employees, including lower-level workers, got stock options (and many employees were well aware that their pay was beyond what the market would bear).

With Hay Group's help, Family Dollar redesigned its total compensation structure to accomplish its objectives while limiting overall compensation costs to a slight rise in the first year. Family Dollar makes better use of its compensation budget than it did before Hay Group helped build structure into the jobs. And today, Family Dollar managers have rewards that are tied to performance measures.

Setting guidelines and reaping the benefits

When Levine passed the torch to his son, Howard Levine decided it was time to bring in some fresh perspectives from outside of Family Dollar—experienced senior executives from other big retailers. Senior Vice President of Human Resources Kathi Child was among them. When she arrived, there were limited job descriptions, no salary structures, and few rules. Different divisions had different philosophies about pay—and they didn't communicate. "It was a very entrepreneurial company," she said. There was no denying that Family Dollar was profitable, but it was growing, and it needed to revamp its pay programs.

For the new management team, a successful pay alignment would accomplish some big goals:

  • A sense of internal fairness and consistency across divisions
  • More effective use of available funds for compensation
  • A stronger pay-for-performance culture
  • The ability to move talented individuals within and across divisions

In addition to the organization's growth, new accounting regulations prompted Family Dollar to seek structure, discipline, and a reward strategy that would attract candidates, appeal to employees, and compete in the market. Though no one questioned the old guard's generosity or its loyalty to employees at every level, the new guard did question what the pay practices accomplished. For example, did stock options actually motivate lower-level employees to perform better? Family Dollar needed a rewards plan that made sense, and turned to Hay Group. "We had a high comfort level with their consulting expertise, tools, and databases," said Child. "Hay Group's compensation database is the best one in retail, and we knew they had a lot of experience in the retail sector."

Rewarding performance, not tenure

Hay Group consultants began by looking at several of Family Dollar's pay practices, such as giving some employees stock options that didn't change their behavior or improve their performance. Based on Hay Group recommendations, Family Dollar realigned salaries and bonuses to match up better with desired market practices. "Getting away from stock options was difficult" said Family Dollar General Counsel Janet Kelley. "Long-term employees valued options, but they didn't have the impact we would have liked." Family Dollar also initiated another Hay Group recommendation: changing their long-term incentive compensation strategy from one based solely on stock options to a combination of performance-based restricted stock and options.

Hay Group helped build more structure into the jobs at Family Dollar—benchmarking, designing job families, and assigning pay levels that went beyond simple titles. And performance standards were written into every job description. Now, "we can talk about jobs and their accountabilities like never before," said Child. "We can focus on what we need to do for a particular job given the market and internal equity."