If Compensation Could Talk Would it Say, 'Go Away'?

My Café colleague Chuck Csizmar wrote a post recently called Insiders v. Outsiders about the standard practice of paying outsiders more.  One reason for this is that when companies hire an external candidate they have to outbid the current employer.

Part of me is in agreement with the practice of paying external hires more because in any hiring situation the company is trying to pay as little as possible and still get the goods.  The current employee loses because there isn’t another bidder.  That’s life.

The other thing to consider is that when you promote someone internally they still have to learn the new job.  We can debate whether that's really more challenging than learning the ropes at a new company but the fact of the matter is that they aren’t yet ‘marketable’ in the new role.  Once they do the job for a while their market value will appreciate but no one else will pay them that much now.  So why should you?

So, on the one hand, I don’t believe in paying people more than they’re worth.  On the other hand, six months to a year after you promote someone internally, they’ve become more valuable in the eyes of the market.  This means two things: 1) They are now a target for recruiters; and 2) You’re underpaying them.  And they probably know it and resent it.  Wouldn’t you?

Which means that now that you’ve trained them - and most of their colleagues who thought they should have gotten the promotion have finally stopped grumbling - you have a new problem.  You’ve created a flight risk.

What to do?  There’s the annual salary review, of course, but that frequently mocked 3% won’t cut it unless you stiff everyone else.  The annual salary review may include a separate budget for promotions and/or cost of living adjustments but few companies budget for market adjustments.  Typically, people get a modest salary increase together with a promotion and that’s supposed to be the end of the story.

What about an off-cycle salary adjustment?  Unfortunately, while the annual salary review is standard practice and usually only needs to be approved by someone C-level and all the department heads, off-cycle salary adjustments need to be approved by some higher authority like the Pope. 

Now, some companies allow department heads to hold back a certain portion of their annual budget for mid-cycle adjustments but that only gets you so far.  The real issue is that few if any companies have a policy for reviewing salary 6-12 months after a promotion with an eye to market adjustment.  And that’s what’s needed here: a regular review of skills and market value, followed up by salary adjustments where appropriate. 

Companies should promote internally because career opportunities inspire people to work harder.  However, although it makes no sense to pay someone more than they’re worth, it also makes no sense to underpay someone once they have the skills to go elsewhere for more money.  It’s like saying, ‘Go away.’

Another Café colleague Derek Irvine recently wrote about replacing the annual merit review with more frequent, performance-based recognition and rewards.  I would add that your compensation practices should be as dynamic as your workforce.  An annual salary review still has its place but shouldn’t be allowed to bog things down the rest of the year.

You don’t rely on massive annual processes in other parts of your business. For example, I’m guessing you don’t produce all your widgets in one day or pay all your suppliers once a year because it would be eccentric and inefficient. 

So why reward people that way?

Picture (slightly modified) courtesy of womensglib.com.

Laura Schroeder is a Compensation Strategist at Workday, headquartered in Pleasanton, CA.  She has nearly fifteen years of experience designing, developing, implementing and evangelizing global Human Capital Management (HCM) solutions and holds a certificate in Strategic Human Resources Practices from Cornell University.  Her articles and interviews on HCM topics have been published in the US, Europe and Asia.  She lives in Munich, Germany and enjoys cooking, reading, writing, kick boxing and spending time with friends and family. If you want to read more from Laura, check out her talent management blog Working Girl or follow her on Twitter @WorkGal.

Comments

[Sanej Nair]

One of the biggest issues in comp, expressed lucidly. Excellent article.

[E. James (Jim) Brennan]

Good thoughts. Will make two points:

1. Almost every second-class internal candidate considered "not ready" for promotion turns out just fine when circumstances conspire to "force" management to throw them into the higher job. Those not so lucky to be given the "temporary assignment" where they prove their actual competence for the promotion end up becoming the outsiders recruited into your rival enterprises over their devalued internal talent. Few are seen as prophets in their own land. "What could THEY know? They work here. And we've seen them make a mistake at least once."

2. Agree on the silliness of making performance management a once a year ceremorial flurry of focused activity. Just like sales and product/service development, it should only be done at one focal time point annually, right? Not! If the management and development of people is important, it should be done constantly and continually. The budget funding should follow the human capital needs rather than restrict your potential to fit your pre-determined spending plan.

[Dana]

I could not agree more with the above article. Once an internal promote myself, I stayed in my new management position for a year and a half without so much as an official review. I continued to take on more responsibilities and eventually became much more valuable than my salary indicated. I was recruited by a new company with an offer of 5k more than I was making, plus bonus. When I gave my notice, my director offered me a promotion and 11k, but I still went with the other job. A lack of recognition, being under appreciated, and a huge amount of resentment definitely go a long way.

[Laura Schroeder]

Jim: Yes, there's a lot of myopia out there when it comes to one's own employees. What's up with that?

Dana: That's a perfect illustration. Good for you sticking to your guns!

[Laura Schroeder]

Thank you, Sanej. I'm glad it struck a chord.