Walking Up a Descending Escalator & Other Crazy Pay Policies

After many years in the compensation profession, I remain completely befuddled at the idiotic policies still blindly followed as “best practices” when they are merely popular mistakes continually repeated by a majority.  The most commonly followed methods may be statistical modes reflecting standard norms, but the frequency of an error does not transform a bad choice into a sensible good idea.  Many of the worst offenses in history have been prevalent and pervasive.  Slavery, human sacrifice, child labor, racial bias, female underpayment… all have been enshrined in past tradition.  Some of those awful “best practices” continue today.

This particular grudge deals with the illogical and mathematically impossible system of pay progression that seems to be almost universally embraced.  Whenever a grade program is encountered, the practices that appear so logical at the moment begin to stink when viewed over a time cycle of years in which incumbents are actually paid by a fundamentally flawed method.  What looks good in one year fails abysmally over many years.

The problem is not new.  Range penetration over time is a matter of net increases. For example:  if you increase your grade midpoints 3% every year while the average employee gets a 4% pay increase, the average worker's Compa-Ratio will only improve one percent per year.  Picture walking up a descending escalator.  Bottom line:  anyone hired at an 80% C/R level will wait twenty (20) years before such tiny incremental relative 1% per year gains accumulate enough to close the residual gap between entry rate and the ever-upwards moving central Market Reference Point (MRP). 

Twenty years to reach the officially targeted normal competitive rate?  That's just crazy wrong.  If your grade range midpoints are realistic, a normal good performer will languish, earning far below the current typical competitive wage or salary for an unreasonable length of time.  Meanwhile, their cumulative experience will qualify them for the same job at nearly any other enterprise who is looking at the market.  Smart recruiters are willing to pay an experienced veteran a more updated “competitive” entry rate that probably is much higher than the incumbent’s present income.  The same solid worker valued by a rival organization at probably very close to the MRP is viewed as worth no more than 90% of that magical midpoint by their employer Dumb Company.  Most outside rival enterprises would be willing to pay much more for the same talent while the hard-working victim's current happy employer is content to deny them the rate they clearly deserve.  Look at the math.  An 80% C/R start denies you any hope of fair treatment.  Sticking faithfully with Dumb Company after ten years of productive service means you lose forever, doomed to objective underpayment for another decade.  Adding insult to injury, the hapless loyal workers get their noses rubbed in the stench, being continually reminded that they are not yet “up to snuff” and are still undeserving of the official MRP.  Goofy. 

Standard remedies are few and seldom applied.  New hires and promotees might trod on the heels of the disadvantaged solid veterans, but few compression issues arise while external competitive markets continue to languish.  Employers are reluctant to freeze salary structures in order to accelerate range progression trajectories, nor are they eager to invest large sums in abnormally large payroll adjustments when relative increase rates remain so modest.  Simply finding that their most alert good people are jumping ship or turning off is insufficient justification for doubling or tripling the average increase percentage.  Top decision-makers don’t seem to realize that something must be done to remedy the problems. 

Only when the damages created by dysfunctional pay progression systems do serious harm to the bottom line does anything happen.  Usually a series of isolated workarounds, fake promotions, selective special adjustments and other short-range fixes are tried, until the entire grade-range system convulses in the usual death throes.  This may be why most organizations undergo regular cycles where the pay system is torn apart, completely revised and redone.  Grades are renumbered and jobs reclassified (involving both some art and some science), wasting time and money.  Then the cycle repeats.

There MUST be a better way.  What are your thoughts?

E. James (Jim) Brennan was Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. After over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), serves on the Advisory Board of the Compensation and Benefits Review and will express his opinion on almost anything.

Creative Commons image "Escalator 3" by Eric Pesik

Comments

[Trevor Norcross]

Any potential solution would have to fit the company specific issues and culture. Some of this issue is why I moved away from grade and band structures over a decade ago. Individually market pricing a job structure avoids moving all ranges x% when some don't need to.

Other potential solutions;
- If you are using the typical market range spread (+-20% from midpoint) modify to -10% for your minimum. This will give you a better starting point and actual market data typically has a tighter range below the midpoint anyway.
- Differentiate pay increases based on performance and position in range.
- Allocate a portion of Merit funding based on need (department position in range vs performance)
- Create the ability to recommend out-of-cycle increases mid year for individuals below the mid-point with high performance.

Just my thoughts. I have yet to see a "perfect" solution.

[E. James (Jim) Brennan]

Those are all good valid options, Trevor.

Your 90% CR hiring rate would work well for most jobs requiring ~8-year nominal increases to reach the MRP. High-side outliers may extend farther than the artificially symmetrical (rather useless, IMHO) range ceilings allow, of course. Few positions really demand more than a handful of years incumbency to quality for the central market-competitive rate. Proper range penetration becomes a terrible issue when individual progression trajectory plans are based on false assumptions.

Strongly endorse non-uniform departmental merit increase funding... or at least funding based on unit market ratio. See http://blog.worldatwork.org/2015/06/calibration-triple-crown-component-of.html.

Keep the ideas coming!

[Scott B]

This is one of the reasons why job hopping is so prevalent. The most common answer to the question "how do I get a big increase in pay?" has become "by changing employers". The slow increase in compensation over time for incumbent employees, increased employee mobility and decreased loyalty on both sides of the table leads inevitably to more turnover. Many companies try to offset this by doing other things to help make people want to stay, such as a great benefits plan or on-site gyms and other perks that their employees value. That helps, but it does not address the long, slow march to the midpoint for most employees that has become institutionalized through how pay structures are typically set up.

I don’t think there is a perfect across-the-board solution to slow wage growth for the masses. Increasing the frequency and size of pay adjustments beyond the growth rate of ranges is expensive and not everyone performs well enough to merit accelerated salary growth. Most of them also do not perform badly enough to merit being made available to the employment community at large. It also can be difficult to justify offering a newly-promoted employee facing a new challenge a pay level that should be commensurate with demonstrated competency in the role, or one where the MRP can be attained in just one or two cycles. Getting rid of ranges and grades altogether invites chaos and potentially lawsuits.

Really, I can only offer the old standard ideas of making sure that top performers get larger increases that help keep their salaries at or even ahead of market coupled with trying to make your company a great place to work. Pay the non-superstar-but-still-valuable masses a competitive enough wage the business can support. Some people you’d rather not see go will still leave (and others you’d rather leave will stay). For the good people that still leave, take pride in the fact that you have given them the opportunity to grow and develop and therefore made that great offer possible. They have also helped the organization along the way. You have improved their lives, and they will think well of your company for it.

[E. James (Jim) Brennan]

Thanks for a thoughtful response, Scott. Your observations are on target, too.

Maybe the problem is that most grade range systems were formulated in the ancient prehistoric days of double-digit inflation, aggressive hiring practices and generous net pay increases that let new people progress from starting rates to midpoint in a few years. Those days are long gone, but the habit of annual structure updates despite feeble pressure on hiring rates and MRPs, paired with miserly payroll budgets (except for NEOs), is a recipe for disaster.

Imagine what will happen when the economy recovers!

[Tony Bergmann-Porter]

Pay people equally, transparently, at your desired position to market; be rigorous and absolutely ruthless in performance appraisal; and reward your stars through mechanisms other than base pay.

[E. James (Jim) Brennan]

Tony voices another revolutionary concept. ;-) Sounds a bit like the military, where "up or out" is the rule for officers competing for the increasingly fewer open slots above their current rank. Works in a highly structured bureaucracy where there is a broad central band for acceptable performance but no room for outliers. Would discomfit those who believe in seniority-based programs where worker output value is assumed to depend on length of time spent in the same job, however.

[David D]

We created a grade step system that had these attributes:
1.We recognized multiple, distinct job families and for each job family, we created a unique structure.
2.We attached p50 of survey data to the maximum of the range.
3.Then, created steps from entry (hiring rate) up to the maximum. The number of steps for each job family varied based on the length of time it took to become fully proficient in their job.
4.Employees would progress through the range based on their ongoing value to the organization.
5.When they reached maximum of the range, the employee was eligible for annual awards.
6.Structures were updated annually.

[E. James (Jim) Brennan]

Very logical and sensible approach, David.

Suspect that the step #2 range maximum was a compromise semi-subjective guesstimate arbitrary limit based on what the organization was prepared to pay... but what else is a max for? Here you use the market median as the Control Point, to avoid compounding. The maturity curve approach presumes that only workers whose value appreciates over time are retained, of course.