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02/16/2010

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Great post, Chuck. I was most struck by your comment that "Managers are commonly ill-equipped to understand the dynamics of their compensation costs, never mind monitor and control them." This is at the heart of a challenge that I have faced repeatedly in working with organizations to overhaul and improve their compensation practices. Not only do managers generally lack these abilities, but I would suggest that there is no reasonable expectation or need for the majority of managers to develop them.

I believe it is a mistake to push responsibility for compensation decision-making too far down in the organization. You accurately described the potential results of poor or subjective decisions in terms of uncontrolled payroll costs, and this is certainly true. However, there are potentially other prices to be paid, in the form of perceived or real inequity in reward practices and inconsistent linkage of compensation and performance among different employees. Such inequity and inconsistency can negatively impact morale, trust, engagement, and turnover, resulting in higher recruiting, onboarding, and related costs and, therefore, even greater degradation of the ROI on compensation.

I am currently working with an organization whose practice has been to provide individual managers with merit and bonus pools to be allocated as they see fit. Beyond establishing the size of each manager's pool (in a problematic fashion, but I digress), senior management and the human resources function exercise virtually no control over how and on what basis increases and bonuses are distributed. With my efforts to refine the organizations compensation practices and pay-for-performance orientation, the free reign currently provided to managers is becoming a thing of the past. Mangers will instead be focused with managing, supporting, and evaluating performance, with the linkage to compensation -- and thus the resultant costs -- managed centrally. Among the effects will be greater equity and consistency across the employee population. Rather than resisting the change and perceiving it as a reduction of their power, managers in this particular organization actually welcome the change and feel that it will relieve them of burdensome responsibility and often unpopular decisions and will free them to focus on optimal performance of their staff and their units.

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