There are Only Two Pay Philosophies

We, the compensation professionals of planet earth, work hard to define the whys and hows of our pay programs. We build out details on our objectives for pay levels, definitions of peers, pay mix and plan details. We define the purpose of each pay element and its alignment to the company, shareholders, individuals and in some cases, the world itself. We put all of this together into words, rules, charts and slides and call it our compensation philosophy. I have been, for as long I have worked in this profession, a huge advocate of great compensation philosophies.

Like many of you, I work hard to provide the correct analysis. I do my research and learn everything I can about what has worked in the past and what has failed. I model scenarios and educate stakeholders. I talk to employees and boards alike. I attend conferences, listen to webinars, read academic papers and network with other professionals. I even do my best to give back through the creation of articles, books, presentations and resources. I answer questions on the topic and work hard to find new ways to have people understand the importance of a great compensation philosophy.

I know that the final product should define what a company should pay for and how that pay will be used in practice. I know it ought to clearly define where the company pays relative to its market. It is no secret that it will explain the reasons for, and balance of, guaranteed and at-risk pay. And, of course, it must be clear in short-term and long-term objectives. I know this and much more. And, so do you.

This is why the next section of this article will be so frustrating.

For many (perhaps most) companies, it is far easier to explain pay philosophy than the barrage of ideas and words above. For these companies, there are only two possible compensation philosophies.

1.     “We pay as little as possible without directly and negatively impacting the success of the company.”

2.     “We pay as much as possible without directly and negatively impacting the success of the company.”

These companies may or may not be truly concerned with pay mix, market placement, pay alignment and the rest of that rigmarole (yes, it’s a real word…I looked it up.) They know that any data they get will be used to expressly support their “world-view” on compensation.

I am certain that many of these companies do not have a compensation expert on staff. I am also certain that some of them do. I have a question for those almost certainly frustrated compensation professionals who work at a company with the policy to simply pay as little as possible. How can I and the rest of your colleagues in this industry, help you get the support you need to create a more effective approach to pay? Or do you believe, as some have pointed out in the past, anyone who pays a dollar more than they absolutely have to simply doesn't understand economics.

Dan Walter is the President and CEO of Performensation a firm committed to aligning pay with company strategy and culture. Become a better business leader. “Everything You Do in COMPENSATION IS COMMUNICATION” was written by Comp Café writers, Dan Walter, Ann Bares and Margaret O’Hanlon. It lays out a practical approach to communications (with helpful worksheets for each step). Dan has also co-authored of several other books you may find useful including “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives.” Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.

Comments

[E. James (Jim) Brennan]

How top management (or the owners) define "what they have to pay" makes all the difference. Both the nature and the amount of the spend are involved, too. Some use cash alone while others seek a balance in their total reward package and corresponding employee value proposition.

Since people are not cans of peas, behavioral economics rather than purely financial formulae should be applied. And I have seen many enterprises that (frequently successfully) charted a middle course between being Scrooge or Santa. But most do tend to swing towards one extreme or the other.

[Tony Bergmann-Porter]

Dan, I'm not trying to be obtuse, but ceteris paribus, what is the economic difference between #1 and #2 for any given organization?

It's implicit in your argument that there is a range between these two points; if so, the only way I can come up with one is to ascribe it to the inherent noisiness of compensation data. Is that your view also?

[E. James (Jim) Brennan]

While this may be Dan's to answer, Tony, I would guess it is impossible to quantify in any meaningful absolute or relative terms.

The cost difference between the least and the most requires some standards for comparison. Dan's conditions ("as possible without...", etc.) add more variables. The results also get confused by side effects: CheapCo might be highly automated or technically leveraged to counterbalance its lower investment in HR while FatPayInc might have a quasi-monopolistic hold over its market that permits a guaranteed profit.

All else being equal, industry would probably have the biggest effect on the min-max range spreads. For example, health care requires more uniformly costly human KSAs while construction might permit equipment to substitute for a lot of hard workers.

[Dan Walter]

Jim and Tony,

Great responses and questions. My initial idea behind this post was simply this. First "Compensation" in the article includes everything in "total rewards" but that term just didn't flow well.

Many companies pay just enough to keep people from leaving the company or from performing soo poorly that the company is unable to succeed. These are the companies who say (behind closed doors): “We pay as little as possible without directly and negatively impacting the success of the company.”

Some companies do whatever they can to take care of their employees. They may as much as possible . They have old-style pension plans in place with no intention to kill them off. They provide great environments and all sorts of goodies that make the job more than a job. They are the kind of companies where a hedge fund manager might walk in and point out 100 way to immediately save money (with little regard for the impact to the company.) These companies tightrope between paying well and paying so much that they can't always afford it. They are the companies where the CEO and other officers may voluntarily ask to be paid below market to ensure there is budget for the rest of the staff. They are rare birds, and they do not care about the nuances of creating and managing a balanced philosophy. They also tend to be successful trend setters (but that is something for another article altogether).

Then there are the companies who try and find the middle ground. The single digit percentage of companies that actively participate in compensation surveys. The companies that send their compensation professionals (and actually have such people on staff) to conferences and other learning and networking events. The companies that bring in outside assistance with the intent of listening to them, rather than simply looking for an agreement that things are already fine. These are the readers of the Compensation Cafe and other industry blogs.

The concepts of "as little as possible" and "as much as possible" are both relative. They are dependent on the facts and circumstances of each company.

The issue is mindset. If a company has the mindset to pay as little as possible it is unlikely to provide incentive programs that incent much at all. The company that pays at the top risks creating and entitlement mentality where more is always required even when enough has already been given

[E. James (Jim) Brennan]

Well summarized. Another article, in effect!

[Ainley An]

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