Too often, when you ask a compensation professional about the competitive strategy for their organization's base pay program, the response you get is something along the lines of "we follow a lead/lag strategy."
#Fail. And I'll tell you why.
First a little background. For those who don't eat, drink and breathe compensation daily, lead/lag is one (perhaps the most common) of three choices for competitively positioning a salary structure.
In a lead approach, the data underlying your salary structure is aged to a point ahead of its effective date, typically a full year out, so that the structure effectively leads the market for the entire year.
In a lag approach, the data underlying your salary structure is aged to the date it is effective, so it will effectively lag the market for the year.
In a lead/lag approach, the data underlying your salary structure is aged to a date halfway through the plan year, so that the structure effectively leads the market for the first 6 months and lags it for the second 6.
I'm not saying you shouldn't be thoughtful and purposeful in setting your structure relative to the market timing-wise. Of course you should. I am saying - however - that we sometimes focus too much energy and attention on this question, and not enough on more important ones.
The question of leading or lagging structures, to a great extent, is a remnant of a different era. The decision about where, along the annual time continuum, to position your salary structure came into prominence back in the 1970's and early 1980's when salary movement and increase budgets were clipping along at 9% to 10% a year. In those circumstances, the impact of choosing between a lead, lead/lag or lead strategy was significant. Today, with salary movement relatively stagnant in the face of 2.5% to 3% salary increase budgets, this is a much less meaningful distinction. And in an age when "competing for and retaining critical talent" in the face of "low to no salary increase budgets" have been noted as our most critical reward issues (according to the results of a new WorldatWork poll as of this morning) and the bar is being raised for smart data and analytics, this is not strategic thinking.
Instead of debating whether to lead, lead/lag or lag, we ought to be examing and answering questions like:
- Should the competitive pay target (e.g., "market median") on which your salary structure(s) is/are built be the same for all employee groups or should you be pursuing a more aggressive market position (e.g., "75th percentile" or higher) for groups whose skills are considered more critical to the success of the business? What would this look like and which salary management tools would support it?
- Do you have a sufficient grasp of the labor pool for your most critical talent and how it may differ from that for other employees? Do your benchmarking efforts need to be more differentiated, targeting different industries, organization types/sizes and geographies (perhaps even different survey resources) for different employee groups?
- If your organization is in an aggressive growth or expansion mode, are you or will you be facing the need to obtain talent in a manner out of step with today's labor market and competitive positioning choices, but is necessary to fill gaps that are critical to the next leap forward? Can your program and structure design be adjusted to accomodate this or must these be treated as exceptions?
Harvard Business School professor Michael Porter, considered by many to be the father of the modern field of strategy, famously said that strategy is about being different. It is about choices and trade-offs. Have you thought deeply (strategically!) about the choices and trade-offs that must be made with your available compensation spend - or are you still trapped in yesterday's lead/lag paradigm?
Ann Bares is the Founder and Editor of the Compensation Café, Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting to a range of client organizations. Ann serves as President Elect of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and is a member of the Advisory Board of the Compensation & Benefits Review, the leading journal for those who design, implement, evaluate and communicate total rewards. She earned her M.B.A. at Northwestern University’s Kellogg School, is a foodie and bookhound in her spare time (just finishing Dave Eggers "The Circle"). Follow her on Twitter at @annbares.
Creative Commons image by ekkiPics