Compensation Archery: Aim for the Middle and Adjust as Required?

Archery is an interesting sport. Great archers hit the center of the target nearly every shot. For those of you who have never shot a bow and arrow, you might be surprised that to hit the target you have to aim somewhere else. Sometimes you must adjust for the wind. Other times you must adjust for altitude. Even on the calmest days at sea level you need to aim higher than the target, just to account for gravity.

A key aspect of archery is that you perform in solitary manner.  You stand still, focused only on yourself and the target. Silence is the rule and distractions are things like your heartbeat and the need to breathe. Your entire focus is on the center of the target. It draws your eye and arrow.

Compensation is just like this. Except instead of solitary, calm, silence while you shoot, you have other companies aiming arrows at you and your target. Changes to the market are constant, noisy distractions. To make matter worse, we often put our bull’s-eye away from the center of the target. It seems we actively work to make a difficult task even harder.

The 75^th percentile has become almost mythical. Targeting pay to the upper quartile shows you are leading your industry and attracts high-level staff. It proves your management is better than your peers. These are facts. We know these are facts because consultants have said it for years and it seems like “everyone is doing it.” Perhaps, just maybe, we have this equation wrong. Should more companies be aiming for the middle and adjusting as warranted?

Aiming somewhere other than the middle of a target makes the task of hitting the target more difficult. It also leaves far less room for error and adjustment. More problems crop up if everyone starts aiming for the same off-center section of the target. First, there may not be enough room for everyone’s arrows. Second, the new smaller area becomes the standard. Eventually targets will be moved so that the center is located where people are aiming. Once again, archers will aim for the 75^th percentile and the target will be moved to accommodate them. In the end, the target is so far away from its initial location that poorly shot arrows end up hitting spectators and causing real liability insurance issues.

You can see how in my totally not exaggerated example that this can lead to some dangerous results. But seriously, making the 75^th percentile your stated goal can, and has, lead to unwanted consequences. We tend to forget that if we have already limited our peer group to 20 companies very similar to ourselves, we have already defined our target away from the real center. We tend to forget that basic math requires the 75^th percentile to go up for every year a majority of companies are above the 50^th percentile.

In other words, if even a few peers follow your lead and target the 75^th percentile an equal number would need to aim for the 25^th percentile just to keep things centered. We know that won’t happen*, which means our target will continue to move until we are no longer spending our compensation dollars safely. It’s time we reevaluate the mythical 75^th percentile and determine if evidence shows that has served a purpose or if it has just been a distraction that has made us miss our real target of effective compensation.

*I don’t know about you, but I haven’t seen too many compensation philosophy statements that read: “In an attempt to stay a poor performer in our peer group, we aim to pay our staff in the bottom quartile whenever possible.”

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” 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

Comments

[Jacque Vilet]

I love it Dan! The ole "compensation creep". Pretty soon we are the lead payer in the market. Could we come up with a new dance ---The Compensation Creep? Something tells me the CFO will refuse to learn it.

[E. James (Jim) Brennan]

Oh, yes. The "ratchet effect" has been around nearly forever, statistically measured in the 1974 CompReview article "What are Average and Above Average Salaries." The movement towards ever-higher norms has been steady for decades as survey data correlations have risen and standard deviations dropped due to everyone similarly paying "above average." After all, declaring an employee "average" is an insult. ;-)

That said, most employers today are forced to take great care to protect their key talent who are critical for survival and whose talents always remain scarce. Keeping an informed eye on the market is essential, to recognize where they stand and how you can justify what you need to do for the vital few. The next struggle is how to reallocate the mimimal funds available to hold and engage them. Typically, to give a big raise to one who truly needs it, a bunch of others must get nothing. Who belongs in each category is highly controversial.

We fire at a moving target, but its speed of movement has changed dramatically in the last few years. Ready, aim, fire, score, adjust... and repeat.

[Jacque Vilet]

Well . . . Dan and Jim ---- I wasn't going to mention it . . . but the "chasing the 75th percentile" comment made me think of executive comp and Crystal's remark that no BOD ever wanted to match their CEO at the 25th percentile --- thus the racheting effect.

Jim --- how about ready, fire, aim?

[Dan Walter]

I think the flip side to this conversation is that SOME CEOs actually belong far above the 75th percentile. It's how we get there that seems to be the problem.

[E. James (Jim) Brennan]

Jacque: "fire, fire, fire" was the mantra I was supplanting. Getting ready and aiming is tough enough. Most folks forget to score and adjust accordingly for their next evolution. Too many innocent bystanders already damaged by that time, to bother, you see.

[John Nichols]

How sensible. Most of our sutdies are amongst self selecting peer groups be they oil or banks. Don't think we would advocate more than a central tendency at basic, fixed cash, total fixed including the value of benefits BUT with an opportunity to hit the 75th percentile including incentive programmes.

[Dan Walter]

Thanks everyone for your comments. This article has garnered a surprisingly large number of comments in LinkedIn groups that are not solely dedicated to compensation professionals.

While the 75th percentile ratcheting issue has existed for a long time, and seems to be a common-sense issue, it remains a current problem.

In one of the other discussion boards (dedicated to corporate compliance) I brought up a flippant idea that perhaps we should just do away with all pay disclosure, since it has seemingly just lead to continued growth in pay levels. The idea had more initial support that I would have guessed.

You opinions?

[E. James (Jim) Brennan]

Not that surprising, depending on who wants to keep pay secret.

Hard to guess if that opposition to pay transparency comes from disgruntled NEOs unhappy about new disclosure requirements and SaysOnPay or from employers wanting to hide their "competitive" pay practices from their ...well, ...from their COMPETITORs. That latter is the reality in much of the world outside North America where there is so little discretion on compensation left to employers after government edicts and union contracts that they literally hoard the tiny residual still under their direct control in hopes of retaining some "competitive" edge.

A certain element also opposed the Paycheck Fairness Act that failed yesterday, because it would have required more disclosure of potential smoking guns re pay discrimination against protected classes. As the Brits say, where you stand depends on where you sit.

[E. James (Jim) Brennan]

This topic came up again in a UK article http://www.telegraph.co.uk/finance/jobs/9307599/In-the-corporate-pay-row-remuneration-consultants-are-the-arms-dealers.html. But none of that should be news to anyone here.