Are You Getting What You're Paying For?

Amid all of the talk about motivation and incentives in the past few months, including some excellent posts on these subjects recently here and here at the Cafe, as HR and compensation influencers, we need pay attention to what we're paying for, why we are paying it (are we getting what we think we're paying for?), and in communicating this information throughout our organizations.

In their classic book "Pay People Right," Zingheim and Schuster argue that base pay should be compensation for ongoing value, not for results. Each person brings to work their unique set of education/training, skills, experiences and talents, and base pay is to compensate for use the of skills and abilities that employees bring to work every day.

Zingheim and Schuster go on to say that variable pay (typically in the form of short-term cash incentives) should be used as pay for results. Using their model, we can use base pay to pay for what I call the employee's "toolkit" (all those skills, abilities, etc.), while reserving variable pay for the actual results achieved via a combination of the employee's abilities and efforts.

Although employee efforts are a key component of achieving desired outcomes, efforts do not always equal results, and so we should separate them from each other in terms of pay and rewards.

Efforts are critical though, especially those "discretionary efforts" that we as HR and rewards professionals seek out, and thus, while we probably shouldn't pay for them per se, we certainly can recognize, applaud and occasionally even celebrate these "above and beyond" efforts.

In the book "17 Rules for Successful Companies Use to Attract and Keep Top Talent" author David Russo states ("Rule #6") "applaud effort; reward contribution" and I couldn't agree more.  Efforts are critical, and worthy of recognition and applause, but not of pay per se.

If we pay for effort alone, in the absence of tangible results, we run the risk of rewards confusion (especially for those who actually achieve intended results) and possibly of mis-placed rewards expectations and/or feelings of entitlement ("I busted my butt on that project...").

Of course, we need to be clear and transparent about what we pay for and why; what base pay is for, and what variable pay/incentives reward. If we don't do that, many of our pay related programmatic efforts will be waisted, because people will not understand what they are paid for and how they can improve their own personal rewards system.

Doug Sayed is principal at Applied HR Strategies, a Seattle area compensation consultancy and author of the StrategicPay Series Base Pay Toolkit, a hands-on, "do-it-yourself" (DIY) guide to developing a strategic market-based compensation program, complete with dozens of pre-built tools and templates, ready for use.

Comments

[Laura Schroeder]

Well said. Base pay is like a retainer and if it's too low people shop around. And if it's not too low, variable pay reminds people not to take their base pay for granted. Variable pay also provides a sense of risk, which can be highly motivating. The two combined can drive great results.

[Paul Hebert]

Base pay is the cost of having the rights to leverage the talent - consider it a licensing fee.

Pay for Performance - that's the cost of applying the talent in a specific way toward a specific goal.

[Darcy Dees]

Excellent post, Doug. This really concisely sums up many of the arguments raging about pay. Well done.

[Henry]

Amazing summary. Right on point!

[Doug Sayed]

Thnk you for your comments everyone!