Moving Away from Job Based Pay

Most companies today use a job based approach to compensate employees, derived from a combination of market analysis, job level and skills.  There’s a lot to be said for job based pay, which is fairly straightforward to administer and help protect companies from fair pay lawsuits. 

The flip side is that job based pay is expensive, since salaries typically represent a fair whack of total operating costs.  It’s also inefficient, because companies pay for people instead of business results. 

Clearly, it is people who drive business results, but from a purely financial point of view job based pay is like buying the bathwater with the baby.  And the recent economic recession has forced companies to examine alternatives.

I am a strong believer that people matter to business and that high performing knowledge workers are not interchangeable, unless processes are so standardized that diversity and inspiration are no longer possible.  But the economic reality is that although we need certain types of work to get done by skilled people, it may not make business sense to pay a premium for exclusive rights to those people.  Or to pay for skills and experience that aren’t tied to any business outcome.

The end of 2009 saw a notable rise in contingent labor.  In 2010, despite some promising hints of economic recovery, employers remain cautious about hiring new employees and this will very likely continue as companies get used to a new employment model with seemingly lower overhead.  The labor market is evolving, whether we like it or not.  Our challenge over the next few years is to figure out how to pay for business value rather than ‘jobs’ and do so in a way that doesn’t sacrifice workforce engagement.

Paying for business outcomes is a well-understood concept when it comes to sales incentives.  Successful sales people tend to be highly engaged individuals and few people question the high commissions earned by top salespeople because everyone can see the value they add to the bottom line.

Why can't we apply a similar rewards model to other areas of the business?  Well, for one thing, the business applications companies use to manage talent still lag when it comes to assessing the impact of work on the bottom line.  Moreover, some types of work lend themselves to this more easily than others.  For example, a person who develops training materials might be compensated a certain percentage based on units of training sold but it might not make sense to reward, say, a nurse based on revenue generated.

And let’s face it, in fields where intellectual capital is a competitive advantage, high performing companies have it pretty good, paying fixed base salaries with the odd discretionary bonus while pocketing the rest.  Why should they move to a more results-based pay system? 

Because the times they are a-changin’.  Time Magazine predicts that by 2019 40% of the workforce will rent out their skills.  Business applications are getting better at measuring how much various kinds of work contribute to the bottom line.  Meanwhile, ideas of ‘teams’ and ‘collaboration’ are also being turned on their heads as new technologies are introduced that don’t require people to sit together in order to work together. 

Basically, companies and workers alike are going to have less security and more choices.  It's already starting.  For example, in response to growing demand, Web sites and temp agencies have sprung up all over the place to help companies rent talent instead of buying it, generally for a fixed hourly or project rate. 

So far this trend hasn’t really impacted compensation professionals because contractors are viewed as expenses rather than overhead.  However, once the proportion of contingent workers in the workforce reaches a critical mass businesses and companies will be forced to look at new rewards models to keep contingent workers engaged.

Why?  Because running a business with 40% of your workforce contracted from a local temp agency that also serves your competition... see where I'm going with this?

Renting talent may be the wave of the future but temporary workers will have even less incentive than employees to feel passionate about your company's success...unless, of course, there’s something in it for them. 

New model, same principles.

Picture courtesy of Ames True Temper.

Laura Schroeder is the Product Manager for Compensation Solutions at Workday, headquartered in Pleasanton, CA.  She has more than twelve years of experience designing, developing, implementing and evangelizing Human Capital Management (HCM) solutions in the US, Asia and Europe.   Her articles and interviews on HCM topics have been published in national and European trade journals.  She currently lives in Munich, Germany and enjoys reading, writing and spending time with friends and family.

Comments

[Ian MacRae]

"...and that high performing knowledge workers are not interchangeable, unless processes are so standardized that diversity and inspiration are no longer possible."

In our increasingly service-based western economies, the majority of jobs are standardized and diversity of output is managed by systems and procedures. Think of call centre reps (service not sales) or the people monitoring the computers that process banking or insurance transactions. They have no control on the amount of work they process as they are reactive in nature. The "job" they do defines the value their work provides to the organization. Their work is essential because we want our calls answered by someone who can provide answers and we want our bank cards to work each time we swipe them.

Firms in such service industries have to rely on an ongoing employment relationship in order to be comfortable that enough will show up for work that services will be delivered each day. Hence the use of non-cash components of total rewards - vacation, medical benefits, recognition. None of the latter are typically used on contingent employees; they get cash only. The tradeoff for the uncertainty of their employment is usually a premium cash level, but an amount typically still less than the value of a permanent employee's total reward package.

I wonder if the publishers of Time will be comfortable if 40% of their printing, distribution and web employees are contingent in 2019? Will the uncertainty of their ability to publish thousands of copies of their weekly publication push them to ensure their job-based pay is attractive enough that they will have a sufficient permanent workforce to enable them to reliably deliver their business product?

Throwing our job-based pay really is throwing out the baby's bathwater. The baby will get cold and blue and not produce much of value.

[Ted Weyn]

Laura,

We couldn't agree more with this statement:

Why? Because running a business with 40% of your workforce contracted from a local temp agency that also serves your competition...

Not only from the staffing agency but with the use of payrolled independent contractors.

We have a large client in Canada and this is the main reason they don't payroll their independent contractors through a staffing agency. Those staffing agencies take the referred talent that was referred to them by the client and when the assignment ends, they place that contractor back out in the market. Often at that client's competitor because they market their rich industry experience. If staffing companies are telling you that they are not using payrolling as long term recruitment strategy, then think again.

If companies have large groups of independent contractors and are thinking of outsourcing them to a staffing company. Think twice... The risk is greater than the reward.

For some real world examples of this and other risks, please check out the PSC Blog at: www.blog.paymentservicescorp.com

[Laura Schroeder]

Thank you Ian and Ted for adding rich detail to this discussion. You've both underlined the inherent risks of relying too heavily on contingent labor, especially in areas that touch on 'core' business. Great food for thought!

[Derek Irvine, Globoforce]

Laura, we may not be there yet with a results-based compensation system, but we are with after-the-fact recognition and reward. These strategic efforts can fairly and positively recognize those in any organization (from the sales person, to the call-center, to the nurse) for delivering desired business results within the context of company values. While it may not be easy, possible or even desirable to compensate a nurse for bottom line business results, we would most certainly want to recognize and reward a nurse for work or performance that saved a patient's life, eased their recovery or simply reflected well on the medical center and its reputation.

[Laura Schroeder]

Derek thank you for your insightful comment. I agree it's in everyone's best interests to recognize and reward a job well done and especially like the idea of rewarding for work that reflects well on an organization.