Compensation Cafe

Numbers That Lie

Hard numbers can turn out to be really soft and squishy upon closer examination.  Perhaps that is why predictive foresight is rarely fully accurate, even when based on the Best Available Data.  (Note the nifty acronym, proving that even an optimal decision is still doomed to be a BAD decision.)

Reliance on data¹ does increase the certainty people feel when making their mistakes.  Numbers are therefore fondly embraced by most compensation people, because numeric data seem to confirm the accuracy of measurements.  But those very numbers can cause us to stumble because they promise a degree of precision that can be quite misleading, if not downright false. 

Last year, the initial Apple effect greatly skewed exec comp survey results (see The Apple Effect note at the bottom here).  Some frowned at the $376,000,000 in stock options granted to the new Apple CEO Tim Cook (which temporarily ballooned in value to over $600 million shortly thereafter) but little attention was given to his subsequent 99% pay cut this year… perhaps because it’s all RELATIVE.  Funny, how a relative increase gets headline attention but a relative decrease is ignored.  Surveys that did not make allowances for massive swings in isolated observations like that would leave their followers spinning in confusion.

Maybe it all depends on whether you want to find what is normal (the median), discover the most popular (the mode) or simply compute the average.  Those arcane terms are really important in compensation work, because each has a different precise meaning. 

When Bill Gates enters a Starbucks, the average customer in the shop becomes a millionaire.   Averages are directly impacted by outliers, while medians are the middle figure no matter how high the high or how low the low observation.  Conventional society tends to favor AVERAGES even though they are more problematic in statistical terms.  There are all sorts of fancy tricks statisticians use to manipulate the figures they process into “hard numbers.”  They include winsorizing, trimming, hot decking (where a missing value is replaced by a similar but different observation) and others .  Excuse me, but some of those gimmicks strike me as flat-out falsehoods; yet they are enshrined in statistical lore and thus may be applied without your knowing.

Likewise, anyone who finesses you with a claim that pay falls in a bell-shaped curve is yanking your chain (or pulling your thumb) in a big way. Wages are never symmetrical nor do salaries have a normal distribution.  That means some of the standard statistical techniques just don’t fit the world of total rewards where the observations are living, breathing human beings.  Whenever the science of number-crunching is invoked, the art of judgment must be added to assure its proper application.

These are just a few of the common compensation conundrums of lying numbers.  What are your favorites?

¹Mark Twain - There is something fascinating about science. One gets such wholesale returns of conjecture out of such a trifling investment of fact. 

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), and will express his opinion on almost anything.

Creative Commons image "Bell Curve" by hardeep singh

Compensation and Education: A Broken Link?

Has the tie between education and compensation been broken?  Or is a new conflict emerging due to the inability of our educational system to close the talent deficit?  Any break in the chain linking teaching institutions and the KSAs that earn pay is troubling.

While we face a shortage of viable candidates for the critical STEM jobs vital for economic recovery, we have an excess supply of people burdened with immense debt incurred pursuing educations which do not produce suitable employment.  Obviously, college curriculum developers and placement officers are not doing a very good job.  Universities produce graduates in disciplines with no job openings.  Part of the blame rests on the flat economy, because no one can help even the most qualified candidate find employment that doesn’t exist.  The jobs available today are increasingly less middle-class and more of the low-wage type, too, and that further reduces the pool of opportunities for those with university degrees.  Arguments that more education MIGHT change that dilemma rest on the doubtful presumption that students will choose the tougher academic fields where strong skills are badly needed but qualified applicants are in short supply.  Don’t bet on it.

Workforce participation by college grads has been steadily declining, despite the fact they seem to have lower unemployment rates even if they can’t find work in their career field .  Part of that paradox exists because they are frequently willing to take any job despite being “overqualified,” probably because of the immense pressure of student loans that cannot be discharged under new bankruptcy rules.

Student debt is the next U.S. financial crisis, because it already exceeds credit card debt.   An advertorial for an auto equity loan scheme offering temporary cash flow to the typical under/unemployed grad illustrates how bad the situation has become.  Determined people who invest in higher education still have a hard time finding steady income from a suitable job in their field.

In a planned society, this misallocation might not happen because it would not be permitted.  In an openly competitive economic system, you would think that “free market forces” would operate to efficiently match supply with demand.  But this has not happened.  Or maybe it is happening, because pressure is increasing to lower barriers against importing foreigners with the skills our home-grown educational system seems incompetent to produce.  Even professional societies (IEEE) propose immigration reform for STEM talent.

Meanwhile, industry seems to be turning away from an academia seemingly unable to close the skill gaps (talent deficit) in the real world. Everyone agrees that higher education does pay off, over time, despite initial employment issues and similar problems when unemployed; but mismatches between abilities and jobs persist.

The alternatives for solutions are shrinking due to a confluence of forces.  There are fewer people sufficiently educated for the diminishing supply of skilled jobs required for modern employment.  “American workers are overeducated and underskilled,” according to one report.  Large numbers of degreed workers remain underemployed.  At the same time, there are more people literally being encouraged to disappear from the job market and become dependent on new forms of “the dole”  funded by taxes on increasingly stressed and underemployed workers.

How can this mess be fixed?  As the unprecedented number of embedded research links demonstrate, these are deep and serious problems.  What are the most promising possible options to solve them?

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), and will express his opinion on almost anything.

Creative Commons Photo "060713 Tangle" by Dan4th

Further Federal Furors

When the Federal Government brags about cutting spending, check your pockets.  What is given from one hand tends to be taken by the other.  Let's take time to re-examine existing proposals that could increase the employer cost of doing business. 

There has been no further action by the Department of Labor on the status of RIN 1235-AA04 as of today.  The regulatory tweak to require all employer exempt determinations to be documented and communicated to the subjects and the record retained for examination is still held under the “long term action” category.  Any change on this would be signaled by a notice in the Federal Register. A Notice of Proposed Rule Making (NPRM) then triggers a 60 to 90 day comment period before DOL reacts.

There is action on RIN 1235-AA05, dealing with domestics employed as companions, as reported in the December publication of the Agenda.  That NPRM was in a prior Federal Register.  Comments were collected; then the comment period was extended a year ago so with an effective deadline for comments now shown as 4/00/13.  It seems to focus more or less on retaining exemptions for personal friends but denying it for employees of home-care services. 

A number of other separate initiatives on worker misclassification are also being pursued. One deals with whether contractors are really employees.  Keep a close eye on that one, because someone in D.C. is thinking long term. 

A Worker Classification Survey has been commissioned, probably to generate buzz about the evils of status quo employer practices.  Challenges to contractor status have major implications due to the impending implementation of the healthcare reform act with its requirements and penalties dealing with the health benefits companies provide to employees.  Some companies have simply declared workers to be contractors and thus washed their hands of responsibility for their overtime and health care. Continued attempts by companies to carve out overtime-eligible non-exempts or workers with potentially high benefit costs from employee status by hiding them under contractor status could be blocked. Closing the contractor escape route assures that employers will continue to pay for health care and exposes them to substantial fines and severe penalties as well.  Keeping medical benefit costs as an employer duty rather than a government obligation may be essential to assure the actuarial survival of PPACA.

In addition, OFCCP’s recent abandonment of their prior guidance communications adds more confusion to employers struggling to decipher discrimination rules. 

Despite the regular impressions of chaos in Washington DC, nothing happens there without a reason.

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), and will express his opinion on almost anything.

Creative Commons image "U.S. Capital" by cliff1066

The Best of the Compensation Café 2012 – A Holiday Gift from Us to You

Each year the crew at the Comp Café writes about 200 articles on all things compensation. Many of them are actually pretty darned good. In this spirit, each Café writer has selected a favorite post of 2012. Some were read widely and shared throughout the industry, others are hidden gems you may have missed when they were first posted. Here’s your chance to have a little thought-provoking, cheeky, holiday reading while you wait for reindeer hooves upon your roof. These are some of the best from the best compensation writing team in the business (or one of the best) (maybe around the median?) (nah, we’ll go with the “BEST”). Enjoy and get inspired for a 2013.

Ann Bares: Rewards & Gamification: New Frontier or Next Big Fad?

Used to be that the notion of playing games at work meant sneaking in a hand of Solitaire during a slow moment.  Now gaming is drawing attention as a way to connect people to reward programs and focus them on goal achievement.  Is this the new frontier of engagement or just the next fad?

Jim Brennan: The Compensation Cookbook

Bowing to the unceasing demands of compensation people for a one-stop source of all the secrets of the trade, E. James (Jim) Brennan dedicated his April 1 article to breaking news about the forthcoming Compensation Cookbook from the renowned author H.R. Screwtape.  The Compensation Cookbook is expected to be the last word on 21^st Century state of the art in the field of total rewards.  Readers are encouraged to place their advance orders as soon as possible.

Chuck Csizmar: Balancing Comp 101 with the Workplace

The contribution you can make to your organization is in blending technical knowledge (the how-to) with seasoning and experience to understand what will work for your organization, considering culture and management bias.  Technical knowledge will give you the same answer every time, but knowing how to use that knowledge like a craftsman’s tool to aid in achieving business objectives – that's the key to success as a Compensation professional.

Derek Irvine: You Can Never Give Too Much Recognition

One question I’m often asked is, “Can’t you recognize too much or too often? Doesn’t that water down the effect and impact of recognition?” My answer is nearly always to ask another question, “Have you ever received too much recognition?” The answer is invariably, “No.” Find out why in this post (including why the new Wreck-It Ralph animated movie is on my must-see list).

Margaret O’Hanlon: Your Comp Program Speaks for Itself. Are You Comfortable with That?

It’s tough to be candid with yourself about pay-for-performance practices. This article starts with vignettes from a few companies that don’t realize that they are stumbling. When managers don’t identify high performers accurately (because they prefer to reward their favorites), they don’t realize they’re throwing cold water on productivity and creativity. Most companies can’t afford to stumble these days. Q1 is a great time to both make resolutions and actually start work on them. Here are issues that you can, and should, address in your own backyard to sharpen the focus on results at the same time that you manage the numbers.

Laura Schroeder: Moneyball

Companies tend to overvalue top talent and undervalue everyone else. Assembling a team based on the ‘best’ people you can get for your money isn’t a winning strategy unless money is no object, and even then it’s questionable. This post discusses how the right B team can kick the A team’s butt and how that fact can impact hiring, rewards and performance.

Stephanie Thomas: The Compensation Function is Evolving

This was the Cafe's first infographic – proof that we are evolving right along with the profession. Creating visually stimulating translations of data can be challenging, but the results speak for themselves. It’s great to see that most comp pros (at least those included in the survey) are on the right track. - they recognize the importance of communication and consistency, and are moving toward refinement and specificity. I think this can only improve the compensation function.

Jacque Vilet: Out With Metrics ---- In With Analytics!  

I feel strongly that when compensation decisions are made, Compensation professionals need to use analytics that look toward the future rather than metrics that focus on the past.  The use of analytics will allow Compensation to more closely align a total rewards strategy with the company’s business strategy --- and that’s Compensation’s most important responsibility.

Dan Walter: Is it Time to Change the Equity Compensation Paradigm?

I love equity compensation, but am not currently enamored with how it is being used. This is the starting point for a discussion on how to best evolve equity compensation. The instruments, vesting schedules and stated goals for most of these plans have changed very little over the past 20 years. While people are naturally resistant to change, we are also supremely adaptable. What can we do to restore the purpose and luster to these programs?

Note: to see more from any of the Compensation Cafe writers simply copy and paste their name into the search field on the left. We bet you will find some additional articles that will make your “best” list for 2012.

All the best,

The Compensation Café

(And a special "thank you" from the Editor to Dan, who took time out of a busy year-end schedule to coordinate and compile this gift to our readers.)

Don't Pay for Mistakes

Every employer likes to think they pay people to Do The Right Thing.  It is NOT smart to pay according to the theoretical value of potential mistakes.  (Note that many job evaluation approaches are designed to do exactly this.)

Don’t pay for errors.  Don’t even consider paying for what someone possibly COULD do wrong.  Instead, pay for proper performance.  People in a position where mistakes have serious consequences are correctly compensated for the value of their positive (not negative) expected outcome results.  An airline pilot is not paid for failing to crash but is paid to safely and efficiently transport valuable human cargo.  The night guard is not paid for declining to open the doors to thieves but is rewarded for appropriately following your security protocols. 

The whole concept of paying for the potential value of errors is wrong-headed and confusing.  That logic would argue that operating room nurses should be paid almost as much as the surgeons they assist, because they could do as much (if not more) harm to the patient. 

The selection decision process includes considerations about the potential hypothetical chance for error.  Anticipated competence is established upon employment.   Employees are selected, assigned and paid due to assurances they can satisfy the higher demands of proper performance for their specialized roles.  Once someone has passed your entry screening protocols and completed any required additional training, you expect proper work performance thereafter. 

Next, their job should be designed to minimize or totally eliminate the negative effect of deficient performance.  Most organizations are clever enough to recognize their vulnerabilities.  They erect protective buffers to prevent problems and install reactive options as contingent responses to quench sparks before they erupt into fires.  Management control systems are installed to detect results outside acceptable parameters early enough that timely interventions can assure that deficiencies are corrected before failure levels are reached. 

Most individual contributors are not permitted to hold positions where they are granted the freedom and power to wreak unrestrained havoc upon the entire enterprise.  It is not wise to pay someone more because you failed to properly screen them, refused to place essential quality assurance controls on their work or declined to install feedback alarm systems.  That course of action enables recklessness and invites disaster. 

It is preferred to reward workers in line with the effect of their actual positive contributions rather than give weight to their possible potential hypothetical negative blunders.  Maybe this is why compensation professionals have such a hard time getting high pay for themselves.

 E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), and will express his opinion on almost anything.

Image courtesy of checkonsafety.com

Employee Size Doesn’t Count

Someone asked recently if there was a list of employers by headcount.  I suspect the question arose for the usual reason:  the CEO was curious whether it might suggest some justification for an argument about pay.  The consensus answer from the members of the global total rewards association was negative; but the reasons why are more interesting than the simple answer. 

There is no one authoritative source that ranks organizations by employee count because (essentially) no one cares what others are doing.  Headcounts don’t tell you much.

Number of full-time employees is a terribly misleading size metric in this age of automation, technological innovation, subcontracting, outsourcing, contingent workers and temporary employees. The number of people on your payroll constantly changes and is frequently deliberately flexed for maximum responsiveness to current needs.  No study has ever shown any association of headcount to business success, although sheer size does imply a certain base mass and probable inertia.  Not that many nimble dinosaurs out there.

Employee population is less statistically predictive of compensation than operating budget or sales revenue.  One could argue that the number of people on your payroll does affect your organization style and has some impact on office services and HR functions like labor relations; but those dimensions don’t have much influence on executive compensation.  Firms can have the same revenues, similar expenses and identical profit margins with widely varying headcounts due to differences in work design and business methods.  Those executives who can generate the same operating results with a much smaller payroll may have a better argument for higher pay than those who require many subordinates for the same outcomes.  Likewise, when more people are doing a task, the value of each individual job-holder may drop. 

Number of employees is infrequently surveyed and indifferently reported because no one is willing to underwrite the costs of a really accurate count.  When you do an internet search under "employers ranked by employee population", you get popularity contest lists, incomplete lists of firms sorted by sales revenue  or global headcount estimates.  FTE counts are rarely a matter of external interest except to companies trying to sell something based on headcount (frequently outsourcing or subcontracting services). 

Another reason that headcounts are rarely externally compared is that large employers have already spent many years re-engineering their workplaces for maximum efficiencies.  Economic pressures have also justified downsizing and the replacement of people with systems and technology.  Chaotic supply & demand market situations stimulated the creation and implementation of nimble just-in-time manpower planning systems that can better cope with uncertainty, too.  All these responses were internally driven without reference to (or dependence on) what other employers were doing.  Enterprises that want to survive in this new turbulent world can’t afford to look to others to decide what is best for them.  That is particularly true when the most popular path taken turns out to be a mistake leading to a dead end.  Those who find a new and better path may reach the destination sooner than those who are forced to reverse direction, take a detour or finally find their way only to arrive last at the end of the line.

It may be interesting to know how many employees other have, but it doesn’t really affect you, except as a factoid of dubious relevance.

 E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), and will express his opinion on almost anything.

Creative Commons image "Crowd" by James Cridland

It's the Little Things

I was all set to post a completely different article this morning until I got off the phone with the manager of the hotel where I am currently staying. I am staying at a beautiful resort. It is on the ocean and, in fact, my room has a view of the Pacific. The food has been wonderful. The staff has been friendly and helpful. But, I am very tired, a bit annoyed and overall my experience did not meet the promise of the vision created by the instantly visible “big” picture offered by the location.

Let’s trade in the hotel for company. We can switch the room for a department. The food is like my pay. And the staff is like HR and Compensation. So what could possibly be wrong? I am at a great company, in a fantastic department, my pay is wonderful and HR and Comp have been friendly and helpful. How could I be less than happy? Let’s talk about the little things.

When I went to brush my teeth last night the sink didn’t drain. It took almost 5 minutes for it to empty. When I went to sleep the room was a bit warm. I set a cooler temperature on the cool remote and went to bed. A few hours later, in the middle of the night I awoke to an even warmer room. I reluctantly called for assistance after being unable to determine the problem. The person who came to my room was also unable to correct the problem. I chose to stay in the room rather than go through the difficult process of changing to a distant new room.

A couple of hours and catnaps later I had to start working. I went to order breakfast and realized the room had no menu for the multiple onsite restaurants. I opened the Guest Service binder and the very nice metal insignia fell off and onto the glass desktop. I picked up the desk phone to call the front desk and it didn’t work. When I spoke to the front desk (from the functional bedside phone) I explained my issues and they expressed their apologies. They also offered a discount.

Things happen, but understanding that fact does not completely remove their impact.

Imagine the remote as your participant website. The air conditioning is the commute or parking access for your location. The maintenance person is the HR business partner who does not have the tool to answer the urgent question. The metal insignia, the termination provision in your LTI and the desk phone is the customer service line at one of your third party providers. And what about the sink? Heck, let’s just say your sink was clogged this morning. (Even I can run out of metaphors!)

By this point, you may have forgotten how great the company and its people are. You might not remember that pay was great. This is the challenge of the little things. Even though not a single one, or the combined total, of the minor issues I have experienced in the past 24 hours would stop me from staying at this fantastic venue again, they have colored my experience enough that I will without truly experiencing what this place had to offer. When you think about your compensation plans make sure you take care of the little things. When they become problems in a swarm you can lose nearly all of the amazing impact your company and effort should have brought.

Lastly, when the little things fail, don’t spend time reminding people of the good things.  Just fix the little things and move forward knowing that the big stuff will usually speak for itself in the long run.

P.S. Did I mention how good the complimentary coffee and fresh-baked croissant are?

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”,  “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay

The Carnival of HR: The Big Tent of Total Rewards

The Compensation Cafe is pleased to present this special edition of the Carnival of HR, which we have dubbed the Big Tent of Total Rewards.

Why Big Tent?

in volunteering to host this special Carnival, we hoped to introduce our colleagues and readers to the ideas and perspectives of other HR bloggers.  The unique value of the blogosphere is that you get a fresh, immediate, unfiltered (and yes, sometimes irreverent) take on the reward issues of the day.  The posts we have to share with you today present a wonderful complement to our everyday Cafe content.  While we typically focus on core compensation issues, the writers featured here today (most of whom are not compensation specialists) bring essential points to our attention and remind us of the many important questions that surround reward design.  These broader aspects remind us that Total Rewards, done right, is a Big Tent -- and that it touches, and is touched by, a wide range of practices and considerations in the bigger organizational system.  For this, and for those who share a sampling of their thoughts and ideas with us today, we are grateful.

Cue the Carnival.

Rewards and the Job.  Suzanne Lucas, aka Evil HR Lady, spins a cautionary tale in Are You Biased Against Dirty Jobs?, warning about the risks of devaluing jobs that may not be considered high impact, but provide essential infrastructure.  On a related note, Chris Young of the Human Capital Strategy Blog reminds us that The Best Employee Reward is the Job Itself.

Rewards and the Free Agency Reset.  Fistful of Talent's Andy Porter throws out a radical idea for regularly testing the market value of employee skills in Why Your Company Should Adopt a Free Agency Period.

Rewards and the Law.  Wage and hour law compliance is challenging - and critical - these days, and it is often the seemingly little things that trip us up.  HR Compliance Guy Mike Haberman, who blogs at HR Observations, sounds a warning note in his post A Very Expensive Lesson in Not Following the Rules.

Rewards and Immediacy. Ben Eubanks of Upstart HR shares some wonderful lessons about reward timing drawn from his wife's classroom experience in Rewards and Incentives for Nine Year Olds.  Take that, Alfie Kohn!

Rewards and the Importance of Acknowledgement.  Jason Womack illustrates the power of acknowledging peoples' contributions, even in small and simple ways, in his post Building Acknowledgement into Your Day.

Rewards, When Acknowledgement is Not Enough.  Acknowledgement and recognition are great, but sometimes it is also important to share the spoils of success with those who helped create them, says Tom Delaney of Brownie Points in his post The Shelf Life of "Thank You" and "Great Job".

Rewards and the Unexpected.  Icicles forming in the Arizona desert?  You almost have to wonder, as WorldatWork's Ryan Johnson's muses in his post Here's Something You Don't Often Hear from Business Leaders: "We're Overpaid".

Rewards, Intrinsically Speaking. Alex Raymond of Kapta Systems examines the drivers of engagement for today's workforce and highlights the important role that intrinsic and psychological rewards play in his post How to Increase Employee Engagement with Rewards.

A Reward within a Reward? In an insightful post about 401(k) plans, The 401(k) Match is Returning, But is it Effective? WorldatWork's Lenny Sanicola examines the role of the employer match in driving plan participation and savings levels.

Rewards ... or Not? John Hunter of the Curious Cat Management Improvement Blog challenges conventional reward practices in Motivation, Rewards, Performance Appraisal and Your Career, a post highlighting his responses to an interview with Dan Pink.

(When) Rewards Are Not Enough.  In his post Sometimes the Answer is No, Paul Hebert of Incentive Intelligence reminds us that are simply some problems - and some people - that no reward effort can fix.

The Greatest (Reward) of Them All.  Wrapping up the Carnival line-up, Wally Bock of the Three Star Leadership blog chides us not to overlook the "power tool" of employee rewards in his post The Most Potent Reward.

In closing, special thanks go out to all the bloggers who shared their posts with us, and to the Cafe's own Carnival team of Margaret, Chuck and Jim (without whom, this particular Big Tent would have never have been raised).  The regular Carnival of HR schedule continues with the next edition going up in sunny Florida on September 26, courtesy of Heather Vogel, at the HR Whisperer.   Submissions are due in to to heather at twovogels dot com by Monday, September 24th!

What is "Fair Pay"?

It is frequently said (by me, if no one else) that the phrase "fair pay" generally means "I want more money."  Therefore, it is a very popular slogan raised by people whenever they wish to press management for higher pay. 

Let’s explore the volatile topic, because it comes up so often and it can be difficult to handle.

Simply claiming that “my pay is unfair” places management on the defensive.  No reason for the accusation is really required, but there are numerous standard popular arguments.

An aggressive posture adopted by a valued worker creates pressure on the supervisor to either immediately accept or reject the contention of unfair pay.

Giving in is the easy solution for well-funded departments.  Granting more money pleases the employee, wins favor for the supervisor, eases future recruiting and often even increases the size of next year’s payroll budget allocation.  Griping costs the individual nothing and can produce great benefits, because many managers have little understanding of their own pay systems and therefore find it easier to give the complainer a raise rather than look stupid by being unable to explain a program they don't understand themselves.  Executives typically are unwilling to lose face by exposing their ignorance. 

Tough-minded managers may offer valid reasons why the pay is proper; but the listening employee just hears excuses.  A debate can ensue that is difficult to resolve because (unfortunately) there is no hard and fast rule that defines “fair pay.”

Legal precedents addressing "fair pay" in the United States are the Fair Labor Standards Act of 1938, the Equal Pay Act of 1963, the Civil Rights Act of 1964, and the Lily Ledbetter Fair Pay Act of 2009, to mention a few. The Fair Pay Act and the Paycheck Fairness Act  are different proposals that have never passed; they would have provided equivalent legal protections on pay in the U.S. as are found in Canada.  In the meantime, American federal agencies are attempting to implement a variety of protective pay enhancements administratively, as seen in programs from the EEOC, the DOL and the WHD.

The conventional mantra for "fair pay" in the U.S. is that pay is determined by competitive open market forces reflecting the skill, effort, responsibility and working conditions of the position.  Of course, there are no universally accepted standards for any of those job evaluation category measures, and pay classification is left up to the (nondiscriminatory) choices of each employer.  Since each enterprise is different in some way, it is logical and proper that each employer will have its own unique value system for paying workers "fairly" according to its particular standards.

Here are some potentially helpful links to writings on the subject:  This summarizes the academic studies on the topic.  Eliott Jaques has done most of the best original research, documented in his 1961-1964 books.  This offers the best arguments an employee can muster and present in support of "fair pay."  This addresses Comparable Worth, one approach to determine “fair pay.”  Here are arguments for gender pay equity.  This discusses “unfair pay” for one occupational group.  This treats perceptions of equity.  This shows how pay might not be the real issue in dispute.  Here are proofs that all rewards don’t jingle.

Practical experience (and other research) tells us that:
1.    employees are more sensitive to internal equity relationships than to external market competitive realities;
2.    when people feel that they are being paid fairly, they are frequently being overpaid compared to objective measures of the external competitive marketplace; and
3.    when workers cease to complain about unfair pay, they are generally extremely overpaid and reluctant to call management's attention to the fact.

The topic is so constantly popular that any internet search under the phrase "fair pay” will produce many hits.  There probably will never be a full and universally acceptable answer to the question, but the total rewards tradecraft continually deals with the subject of pay equity and new observations are always emerging.

What are your thoughts and experiences?

 E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.) and will express his opinion on almost anything.

Creative Commons image "Balance Scale" by winifredxoxo

Does Paper Trump Performance?

What do you do when an employee informs you that they have just achieved an academic milestone:  a college degree, an advanced degree, or even a certification from a professional association?  After offering congratulations, do you take them to lunch, perhaps tell them to take the next day off, or do you do more?

Do you provide a specific reward for that accomplishment?  Perhaps a salary increase, or a promotion?

Many employees seem to expect that when they receive academic or professional credentials - something that comes with a piece of paper suitable for framing - they should receive an increase in pay, a bump in title, if not an outright promotion.  “I'm more valuable to you now,” they seem to imply.

However, if you don’t need another MBA graduate, or a senior engineer, legal counsel or whatever, should you pay extra to have one?  Should you increase your labor costs to gain something that you don't need?

Some managers feel compelled to react with salary / title increases; they want to acknowledge the employee’s personal achievement and avoid the risk of de-motivating good people.  They especially don’t want to lose someone who is ambitious and career-oriented.  Such a loss might be perceived as a mark against their own management capabilities. 

But is raising the cost structure a good business decision, or a feel-good, I-want-you-to-like-me emotional knee-jerk reaction?  Do these managers have the right answer to the “why more money?” question?

If you already pay for educating your employees – through some form of tuition reimbursement - should you be expected to follow up with even more expense once the company-paid courses run through to completion?  Chances are you don’t require employees to remain with you for a defined period afterward, right?  So, technically they could use your money to prepare themselves to work somewhere else.  Where is the fairness in that?

Pricing a piece of paper

Have you asked yourself, what’s the market value of an employee with a higher education or certification level?   Compensation surveys don’t differentiate on the basis of whether employees have a particular degree or other credentials.  In some cases educational requirements are mandated before one can assume certain roles (Engineer, Attorney, Nurse, etc.).  At the end of the day what the market highlights is the common pay rate for experience, for knowing the job and being competent at performing it.

Does the market say a premium should be paid?  No.

Perhaps a promotion then?   But job grades are not typically influenced by formal education levels either, and no credible job evaluation system scores on that basis – only equivalencies.  Job evaluators recognize that, while what the employee knows how to do (job knowledge) is critical, how that knowledge was attained is less important.  The professional seasoning of life experiences does count, trumping the piece of paper.  Book learning is not an evaluation factor.

If ultimately the newly certified or graduated employee returns to the same job function, their day job, then what does the company receive for granting extra money?  If the job role remains the same, where’s the ROI to balance an increase to fixed costs?

What you need vs. what you have

If you use any sort of position control process, you should know how many heads for each job the organization needs to fulfill its mission.  When you create more heads than you need, your costs will increase but likely not your effectiveness.  So why would you pay for an extra MBA, senior engineer or legal counsel – when you don’t need them?

You can acknowledge an employee’s personal achievement without increasing your fixed costs and possibly creating disruptive internal equity concerns among other employees.  Remember that fair and balanced treatment is a perceived state-of-play, and the employees are always watching.

So offer your congratulations, take the newly minted certificate holder out to lunch, and give them a day off.  Tell them that they’re now eligible for advancement when a higher position comes available – but have a care before raising your fixed labor costs without a corresponding increase in ROI.

They may be more valuable to you – but that is for tomorrow.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a brood of cats.

Creative Commons image "The Diploma" courtesy of Josh Parrish