Compensation Cafe

All The Money In The World

Editor's Note: Today's post comes to us courtesy of guest contributor Chris Dobyns.

All the money in the world. An exciting and evocative phrase. Turns out that amount (of money) is something that is actually quantifiable and, depending on what you consider to be either physical money or assets easily converted into money, estimates range from 5 trillion to around 80 trillion dollars.  Yes, exciting indeed.

Although by no means the sort of problem we’ve ever experienced at work,– as something of a “thought experiment” last week, we speculated on what would we pay our employees if we ever found ourselves in the enviable position of having at our disposal, all the money in the world?  We like to force ourselves to think big occasionally.  Plus, it’s fun to dream.

Some Context and Constraints (Even for Thought Experiments)

In our discussion, we assumed we were a privately held, small to mid-size organization, staffed with mostly average-performing employees, that had achieved complete market dominance with some product or service in the recent past. And that product or service was in high demand; we were virtually the world’s only supplier, and it was assumed that our market dominance would last for the foreseeable future.

With a substantial amount of cash on our balance sheet, and without making this scenario so detailed as to suck all the fun out of a whimsical, yet intriguing premise, we stopped there – except to speculate what would we pay people if, literally, money were no object?

First Maintain Relative Pay Equity

In an apparent conscious or sub-conscious effort to avoid the pay equity unhappiness that unfolded in the now famous salary-leveling experiment at Gravity Payments, our group was pretty firm on the issue of maintaining the relative salary level differentials that existed between employees performing different levels of work – based on either hierarchy or performance.

Leave Your Bias(es) At Home

Despite being just a hypothetical discussion, a surprising level of emotion began to creep into the conversation, when the talk turned to the “how high is up” portion of the thought experiment.  Many in the group went back to their professional roots, and tried to make the salary level multiplier puzzle more tractable, by speculating on attracting a higher caliber of employee (or retaining the current level of employee), on the assumption of higher salary levels in the future.  The assumption that the current level of employee was satisfactory to maintain the status quo compelled us to abandon aspiring to “aim higher”, but it was obvious that embracing this strategy bothered people – a lot.

When the discussion turned to the question of settling on a multiplier of 2x’s, 3x’s or even 4x’s current salary levels, there were no good bases to anchor what level of pay was sufficient.  Strangely, when the traditional touch points around pay, and the purposes that pay addresses for people were made irrelevant, the group began to get ambivalent about what was the right answer. 

Interestingly, after some amount of further debate, the group gravitated to the idea that a salary multiplier equivalent to roughly double the level of current salaries, should be about enough.  This was with the understanding that employees would still have all the regular opportunities for advancement and career growth – although this did not explain how we would ever be able to pry any employee loose from this seemingly salary Shangri-la, except perhaps by carrying them out feet first.

Is That Altruism I See?   

After the salary question was resolved, and the experiment seemingly concluded – the group turned to trying to identify other benefits opportunities.  Those ideas started out local (“how about an employee swimming pool or even better . . . how about two swimming pools”).  After that, I was surprised when the focus of the discussion shifted to include much more altruistic ideas – that only indirectly benefited our hypothetical organization.  Suggestions ranged from re-paving the public road out front of the building to contributing funds to the local school system to enhance future education outcomes. 

This was a fun experiment, because apparently when you have “all the money in the world”, you can afford to be altruistic in the decisions you make – because all the choices are yours.  However, unless your company’s name is synonymous with a fruit that helps “keep the doctor away”, you probably won’t ever be faced with this problem.  Regardless, it’s fun to dream.

Everyone probably has a different perspective.  What’s yours?

Chris Dobyns, CCP, CBP, is Manager of the Office of Human Resource Strategies for one of the largest U.S. intelligence agencies. The Office of Human Resource Strategies is responsible for compensation and incentives, occupational structure, recognition and rewards, HR policy, and human capital program evaluation and assessment for his Agency. Chris has worked in the area of compensation for more than 30 years, and has been employed in various compensation-related positions by a number of large, private sector companies including, Sears, Roebuck, Arizona Public Service and Westinghouse Savannah River Company.

"Money of the Different” image, courtesy of Vlad Ivantcovand fotolia images.

How Is Compensation Like Dating?

"Wanna grab lunch sometime?"

When we're hiring, we offer far more allure than a one-time, get-to-know-you over lunch. Our immediate goal is to court talent that we are attracted to as if we want to go steady with them. In addition to trying to impress them with all we have to offer, we're on our best behavior, listening closely to prospective hires and doing our best to understand their needs.

Out of this phase of our relationship comes a job offer. It typically includes a salary we believe will persuade the prospective hire to go steady. And once we start going steady, our goal -- in HR-speak -- is to build Engagement.

While our type of Engagement doesn't involve a diamond, it does represent a relationship that needs as much daily attention as those with our families and friends. But when, after a bit, our employee/date brings up compensation, it quickly becomes clear that the courtship is over.

We tell our employee that s/he should be happy with the total (reward) package we've given them. At the same time, we tell ourselves that we are a great find and the employee should realize it. The employee couldn't get the same benefits or as great a work experience with anyone else.

Then our employee/date says, "But I really want to feel better about our relationship. Show me that you've heard me by giving me more of what matters the most to me -- cash compensation." Suddenly, we are speechless.

This back and forth has gone on for decades, while consultants keep showing us research findings that make it hard to tell whether we and our employees are actually in a full-fledged relationship or on the brink of breaking up. Recent findings are more blunt. Engagement seems to be getting harder to come by, especially when we hook up with younger employees who are new to our game and rebelling against dating rituals.

When the data shows that we keep doing the same thing -- and getting away with it -- there's no need to change. But if you're paying attention to the last few years of U.S. news, odds are we may not be able to get away with our same old compensation habits much longer.

It seems time for some real self-examination and closer attention to our employees' compensation concerns as part of our ongoing relationship. Or have benefits become the new compensation, as I read somewhere recently? If so, we should come clean.

Are you acting like everything you do in compensation is communication? If you wonder why it matters, earn a career boosting ROI by investing in the popular Ebook, Everything You Do (in Compensation) Is Communication @ https://gumroad.com/l/everythingiscommunication. Margaret O'Hanlon, CCP collaborated with Ann Bares and Dan Walter to create this DIY guide to compensation leadership. Margaret is founder and Principal of re:Think Consulting. She brings deep expertise in compensation, communications and leadership to topics like the CEO Pay Ratio and performance management discussions at the Café. Before founding re:Think Consulting, Margaret was a Principal at Willis Towers Watson.

To Make an Investment Work, Keep it Top of Mind

I’m often fascinated by how quickly certain aspects of our work experiences can fade into the background. It only seems to get worse the busier we get, the faster our organizations change, and as more demands are placed on top of already limited resources. It can take a lot to keep something top of mind.

This is part of the reason why the current trends in performance appraisal have been so interesting: transforming the process from one that is mostly forgotten outside of a couple of times during the year into an ongoing conversation about performance. A similar transformation is needed in the way that companies communicate (and keep top of mind) the value and investments that they make in their employees.

For the sake of argument, I suspect that salary, incentives, and benefits are not top of mind for the typical employee on a frequent basis. Much like traditional performance appraisals, there are certain times of the year when these aspects are at the fore (e.g., open enrollment and the pay discussions within the performance review period). But there are also large portions of the year when these issues rarely rise to the top.

There are exceptions to this argument to be sure: hourly or freelance workers, for example, or those whose total rewards packages are fundamentally lacking. But for most people, the majority of cognitive energy is probably taken up by the work that is immediately in front of them. As a result, employees can easily overlook the investments that a company makes and may even assume there are better opportunities elsewhere.

These dynamics tie into the idea of engagement at a basic level, in that individuals cannot be motivated or engaged by something they are not actively thinking about. It also speaks to the reciprocity when an employee feels that the company values the contributions that are made and is motivated to strengthen those contributions as a result.

The challenge for companies is to find ways to reinforce the investments they are making in their employees, in a way that is much more frequent, to achieve the benefits from this type of increased engagement.

One such approach within the scope of a total rewards portfolio is through social recognition. Social recognition can provide a daily reminder of the value that companies find in the work their employees do. It provides ongoing communication of the investments that a company makes in their employees, through messages of gratitude and appreciation from both managers and peers.

Because recognition is driven by the values-based behaviors that contribute to business success, it can keep pace with the daily life of employees and the way in which the organization is changing and reacting to strategic priorities. In pure value, investments in recognition (typically around 1-2% of payroll) may also go further  and wider than investments in other incentives or salary increases. Complementing the total rewards package, recognition is one investment that a company can make that will remain top of mind.

How else does your company communicate the value it places in employees?

As Globoforce’s Vice President of Client Strategy and Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. He is the co-author of "The Power of Thanks" and his articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

Relax At Your Peril

You’ve seen the company’s search ads and heard the pitch from your recruiters; you offer competitive wages.  You figure that that’s got to be a strong hook for attracting talent.

No.

Your pay structures are regularly updated based on competitive market trends, so the reward opportunities you offer employees are aligned with your retention and motivation strategies.

Smoke and mirrors.

Companies routinely advertise “we offer competitive wages” and candidates in return expect this of potential employers.  But what happens when your goal of offering competitive pay is finally achieved?  Are employees grateful?  Can companies rest in their efforts to attract, motivate and retain?

Not so much.

The Missing Pieces

What doesn’t happen when you offer competitive pay is that your recruitment problems don't magically disappear, your employees won’t be satisfied and your compensation programs have achieved little more than being average.  Isn’t that a “C” grade in school?  Is that how you want to position your compensation strategy? 

As far as aspirations go, it's only middle-of-the-road.

If your company does pay “the going rate,” that still means that roughly 50% of the companies out there are paying more than you.  That’s what average gets you, with half doing more and half doing less. You won't see that fact pointed out in recruiting campaigns.

No one quits for less money – so what you’ll hear through the grapevine is how so-and-so left and is now making more somewhere else.  And as it's human nature to hear only what supports your own notion  –  your employees won’t pay attention to the broader rewards package, just the points that confirm their opinion that your company isn’t paying enough.

The only way to avoid this scenario is to become the premier payer in your market or industry – and can you afford that cost?

It's also important to differentiate between having grades, salary ranges and midpoints that provide competitive rate “opportunity” and actually paying employees at those rates.  Some describe this as whether the company is “walking the talk.”  I recall a client quite boastful that their salary ranges were continually adjusted to mirror market rates, but was later embarrassed to discover that their actual pay practices fell well below midpoints.  The company said one thing by their pay structure, but did another by the way they implemented that structure.

For their own part, employees relate to the pay they receive, not the midpoint of a salary range or other such declared “opportunity.”  For them the company’s competitiveness can be more illusion than fact; especially if they’re experienced and long service.

Bad Practices Can Evolve

Typically it's not an organization's strategy to avoid paying at competitive levels, but more likely a series of practices that have evolved over time.

• Some candidates will accept a below value hire rate and managers tend to view this as a cost savings. Though it is more like putting a skeleton into the closet and hoping it doesn’t jump out at you down the road.  One day these employees will change their minds.

• Once you’ve started down the slippery slope of paying some employees below market rates the practice is soon compounded by internal equity. Managers will resist paying similarly qualified new people more than existing employees.

• Reward systems have a hard time keeping up with the increased marketability of employees. A minimally qualified employee hired at the minimum rate will gain knowledge and experience (thus marketability) faster than the company’s annual merit system can recognize.

What’s the answer?  Management won’t agree to be the premier payer in your area, so consider instilling more flexibility into your pay practices.  Consider targeting key jobs (highly skilled, difficult to replace, mission critical, etc.) and make sure those jobholders are well paid.

And don't forget to pay attention to your customer-facing employees.  For many a customer those folks are your company.

Other positions you have deemed less skilled and more easily replaceable could continue with your “competitive opportunity” strategy.  This approach is akin to ring-fencing key talent, protecting them against poaching while recognizing and rewarding those with the most potential impact on your business.

Bottom line?  Be careful when you claim how your company provides competitive wages.  You may not be correct, but if you are – big deal.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a clowder of cats.

Free Digital Photos image, "ber-antem," by Dimaz Fukhruddiny

UPDATE ISS Equity Plan Scorecard EPSC 2.0

Have you ever played a card game with 5-year olds? Before you start, they explain the game in vague details and provide a list of rules that are customized to their needs. Then you begin playing, doing your best to remember the rules and keep the game moving and fun for everyone. STOP!

The game is no longer fun. The 5-year has just realized that one of their rules is not beneficial to them. Because they are a kid and generally pretty darned cute, you allow the change of how the rules apply to them without comment (yet you must continue following their original rules). It doesn't take long for more rules to be changed and for a ball or car to be added to the mix (you must still follow the original rules). Then comes the part where you must do a short dance to get your next card. And, yes, you are still losing.

In October of 2014, I wrote about the new Equity Plan Scorecard (EPSC) from ISS. As a reminder, ISS, or Institutional Shareholder Services, provides guidance to investors regarding how they should vote during public company proxy season. ISS is not a 5-year old child. They are not really that cute (no offense intended). But, they seem to have a similar policy regarding the rules of the game.

I mentioned that the EPSC was both better and worse than the prior formulaic and didactic method of providing voting guidance on executive compensation. I stated that there was more wiggle room to do what was right for your company. I also said that the EPSC would leave many saying, “I think this will work, but it will depend on how some people I don't know (and who don't really know us) interpret and evaluate the information we put in our filings. What is the best way to balance cost, plan features and grant practices for your company and investors? I have no idea right now."

Unfortunately, I was right and the results were even less predictable than my cynical assumption. Frank Glassner, of the executive compensation consulting firm Veritas, just wrote an article about a company who followed ALL of the rules and still received a negative recommendation from ISS. Like a kid playing a game, ISS has decided that their “rules” are actually a flexible set of guidelines. Like playing a game with a 5-year old, this can leave even the best-intentioned professionals frustrated about what to do next.

In my 2014 post, I mentioned that we really couldn't complain in the future if we weren’t willing to comment as the new rule was being crafted. As expected, very few commented. Now we are stuck once again playing a game with rules that are only known to the originator. Let this be a lesson to all of us.

What we do is not a game. The rules that determine how we do our jobs cannot be subject to the whims of those who have decided that the rules do not work in their favor. Most of us do our best to perform to the standards set for us, but when the finish line moves during the race, we have every right to be annoyed (unless we were unwilling to participate before the rules were complete).

Have you found that compensation rules have recently changed for your company? Provide details in the comments section.

This is the ninth installment of my seemingly never-ending “Stock Options on the Precipice” series (other articles: 1, 2, 3, 4, 5, 6, 7, 8.)

Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and has been deeply involved in equity compensation for a long, long time. Dan has written several inustry respurces including the recent Performance-Based Equity Compensation. He has co-authored “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives” and a few other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.

Cafe Classic: The One Equity Compensation Trend to Rule Them All

Editor's Note: On this Classic Friday, we interrupt our regular programming and Dan Walter's ongoing "Stock Options on the Precipice" series (installment 8 here) to bring us this Classic post on the ruler of all equity trends, first published in May of 2013 ... but with an update on how the trend has continued.

Performance equity has taken a long journey. Initially, its use was inhibited by accounting rules that made it far more advantageous to grant equity with time-based vesting. Those rules went away at the start of an incredibly volatile decade for the stock market. The path to this trend has been an adventure requiring a fellowship of disparate groups and events. Stock options lost their luster after the end of Equity Compensation’s Golden Decade™. Dodd-Frank joined the fray after the financial mess of 2008-2009. Even time-based restricted units slowed in growth as companies worked to rebound. Finally, the incredible recovery of the stock market over the past several years has all led to a major shift in how companies, investors, the media and politicians view equity compensation.

As I went through 2013 Equity Trends Report from Equilar, I found several interesting morsels of information. The report discusses some of the trends in stock options, restricted stock and performance-based equity. At more than 30 pages, I would be able to little more than summarize it here. But, there was one section where I called and requested more data.

The report shows most data in time-ranges from 2007 through 2012, the one exception was the chart on performance shares granted to the S&P 1500. This chart shows only 2010 through 2012. As you may know, Say on Pay became a reality in the US in 2010. Assuming that Say on Pay had a direct impact on plan design, I asked for the data empirically showing the change in performance equity use from 2008 through 2012.

While the data speaks for itself regarding the impact of Dodd-Frank and Say on Pay, I believe the story is far from over. Performance-based equity is entering the troublesome “tween” stage. Most of the companies with these plans believe they are almost ready to be left alone for a while, but many investors are just starting to see newly developing issues. At the recent WorldatWork conference, there were sessions trumpeting the success of Total Shareholder Return (TSR) as a metric for equity compensation. At the same time, there were sessions that explained that TSR was clearly flawed and did not reward performance consistently. I predict we will continue to see rapid evolution in the use of internal financial and operational metrics. We will even see growth in metrics more qualitatively measured, like customer service scores. (Update: Note that Equilar has since reported that the number of S&P 1500 companies granting performance shares has grown, since the original publication of this post and the chart above, to 68.9% in 2013 and 69.5% in 2014.)

Like so many in the throes of adolescences, the full potential and fate of long-term performance awards is not yet known. What data does show is that this is the one equity compensation trend that currently rules them all.

Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and has been deeply involved in equity compensation for a long, long time. Dan has written several industry respurces including the recent Performance-Based Equity Compensation. He has co-authored “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives” and a few other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.

Prejudice Perpetuated by Prior Pay Pattern

Legislative initiatives to ban questions about past salary during the employment application screening process keep popping up. I've been deluged recently with interview requests from writers seeking pungent quotes for articles on the topic, so it must be time for us to step back into that fray where others are already tussling.

Here are some salient summary points we should kick around before the politicians determine our practices for us.

For Management: Why ask for prior pay history in the recruiting process? For the most effective/efficient screening, of course, to weed out "the obviously unqualified" candidates. Strong prejudice emerges against anyone paid outside the income band acceptable to the hiring manager.

Recruiters suspect that those who earned much less than the expected amount have not risen to an adequate level of proficiency to earn the minimum of this open position's value. At least, that is the quick assumption. Since recruiters are usually under time pressures and expense limits, deluged with piles of applications while totally unqualified to make deep examinations of applicant credentials, they instinctively press the “easy” button. They presume facts not in evidence. Candidates who earned much more than the employer's normal offer rate are expected to become dissatisfied if hired within the appropriate job pay range, whether overqualified or not. Plus, they create pressure to make hiring offers above the normal entry rate, closer to the central position value, thus potentially creating pay compression with senior peers and inviting other invidious internal equity comparisons when word gets out. Lazy logic argues: why ask for trouble you can easily avoid?

For Applicants, a prohibition against demanding salary history would level the competitive playing field. Unfortunately, their equity would come at the cost of inconvenience to those who process the applications. Recruiters and hiring managers would have to work harder, sifting through more candidates to focus on potential deliverables from the performers, rather than seize upon proxy elements like their prior pay level that have no real relationship to their value to this hiring organization. The only thing that would be worse for recruiters would be a requirement to exclude race, gender and age in resumes submitted for screening protocols short of personal interviews.

Society could benefit by the enhanced opportunities for nondiscriminatory hiring and pay equity that would open up if irrelevant factors were prohibited from scrutiny by prospective employers. Then "diamonds in the rough" would be discovered at an unprecedented pace. Job seekers who would have been passed over could rise through the screening process as their knowledge, skills and abilities justify.  For the first time, candidates would be permitted to compete on their merits alone, without regard for the size of their prior paychecks. Compensation professionals could supply more flexibility in job pay classification and entry rates, too, as employers learn the true full range of talent qualified for their work. Hiring offers will become more variable and creative, rather than rigid. It would mean more work but better results for employment reps whose hiring managers who could improve their talent acquisitions.

Historical pay discrimination is perpetuated when past pay sets future pay. Systemic discrimination will continue forever until the apparently neutral practices that have disparate negative impact on protected classes are ended. If applicants were not required to reveal prior salaries, they would be less likely to be unfairly eliminated as candidates.

Prospective employers currently demand past income history from job-seekers while frequently withholding any details about the relevant pay range they offer. Why waste their time and yours? Don't ask what they used to make.  Just tell them the entry rate. Applicants could then freely decide whether to pursue the opportunity or not.

If human resource professionals can't come up with a valid reason for keeping prior pay as a sorting tool, it should be banned as inappropriately prejudicial ... and probably will be.

E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience, specializing in job evaluation, market pricing and pay budget distribution. After corporate HR jobs in chemical and pharmaceutical manufacturing, he consulted to virtually every industry throughout North America before becoming Senior Associate of pay survey software publisher ERI until returning to consulting in 2015. A prolific writer (author of the Performance Management Workbook) and speaker, Jim gave expert witness testimony in many reasonable executive compensation cases both for and against the Internal Revenue Service and also serves on the Advisory Board of the Compensation and Benefits Review.

"Imbalanced Justice" image courtesy of Chris Dobyns

Nonprofits: It's Time to Improve Your Total Rewards ROI

Why would I choose to work for the Red Cross if I have credentials and can build a career at General Electric or Wells Fargo?

If you interview Red Cross employees, you'd probably hear a lot of different answers to that question, but it would be easy to put your finger on at least one common theme. Most nonprofit employees feel a strong draw to the Mission of their employer, and they put making a difference in the community at the top of their wish list (instead of stock options).

I guess that's why so many nonprofits that I work with do not talk with their employees about Total Rewards. If most organizations' overriding talent goals are to attract, motivate, retain and engage, the nonprofits with which I work have a more straightforward job of attracting and engaging employees than their corporate sponsors. Most of their job applicants are almost pre-approved for high engagement scores -- whether or not they are hired. Yet many of my nonprofit compensation clients have invited me to Total Reward discussions because they feel that they could be doing better in a number of employment areas.

Many nonprofits have noteworthy Total Rewards, yet they introduce employees to their new positions by explaining the salary and providing benefits forms galore. Period. Unlike corporate, nonprofits rarely have a marketing dimension to recruiting and hiring. You know, the messaging that highlights and promotes the organization's collaborative work environment, rich benefit offering, training opportunities and/or healthy work/life balance. Why take the time to point these things out when new employees are already eager to change the world?

One reason to talk in terms of Total Rewards is to be well prepared for the inevitable tough questions. So many nonprofit employees compare their salaries with their friends in corporate and come away disappointed. Of course, they typically don't have to work 65-hour weeks, shoulder production goals or watch their medical deductibles increase every year -- and because they don't think in terms of Total Rewards, these comparisons never occur to them.

If nonprofit employees come in to talk with HR about their misgivings, HR is stuck doing a form of backpedaling that can seem like double talk. After all, doesn't it seem a bit desperate to suddenly bring up retirement benefits and vacation time when they've never been a topic of conversation?

If nonprofit employees don't come in to talk with HR about their misgivings, their resentment can become overblown since "fairness" is an extremely important value to them, given their career choice.

Employees make real trade offs when they choose a nonprofit career over a corporate one, but are often acting on their feelings rather than looking at the "fine print." It's to a nonprofit organization's benefit to make their entire "value proposition" more specific from recruiting onward.

Many nonprofit organizations have Total Rewards offerings that are more valuable than typical employers -- think Defined Benefit programs, medical coverage that hasn't been redesigned in many years and regular 40 hour weeks, to name a few possibilities -- but they are overlooked or taken for granted unless a spotlight is intentionally pointed their way.

Are you acting like everything you do in compensation is communication? If you wonder why it matters, earn a career boosting ROI by investing in the popular ebook, Everything You Do (in Compensation) Is Communication @ https://gumroad.com/l/everythingiscommunication. Margaret O'Hanlon, CCP collaborated with Ann Bares and Dan Walter to create this DIY guide to compensation leadership. Margaret is founder and Principal of re:Think Consulting. She brings deep expertise in compensation, communications and leadership to topics like the CEO Pay Ratio and performance management discussions at the Café. Before founding re:Think Consulting, Margaret was a Principal at Willis Towers Watson.

Lessons from The Panama Papers

By now, I'm sure you've heard about The Panama Papers, more than 11 million leaked confidential documents spanning more than 40 years from the Panamanian law firm Mossack Fonseca. According to the New York Times, these documents "exposed how some of the world's most powerful people were said to have used offshore bank accounts to conceal their wealth or avoid taxes." 

I haven't read all 11 million documents, but I have read a lot of summaries and synopses. It seems as though there are two important - and interrelated - lessons for compensation that we can take away from The Panama Papers:

Transparency is, and will continue to be, a shaping force in our world. Transparency is about openness, communication and accountability. Growing pressures for transparency are extensions of societal trends, technological advancements and organizational evolution. Delayered organizations, team-based work environments, the rise of "Big Data", widespread access to instant information, and the channels through which we constantly communicate with one another are pushing us to demand more transparency is every aspect of life. In light of this, the increasing demand for pay transparency should come as no surprise. Organizations will be well-served to be open about their compensation policies and practices, providing potential and incumbent employees with information about recruiting ranges, minimums / maximums / midpoints of pay ranges by job category, pay band, etc., and what is expected in order to earn the next merit increase. Failure to be transparent about your compensation policies and practices could lead to an employee-sponsored exercise in "extreme pay transparency" similar to what Google experienced last summer. 

Optics matter. According to CNN, The Panama Papers reference 12 current or former world leaders, as well as 128 other politicians and public officials. The alleged activities in The Panama Papers are only that: allegations of wrongdoing. No illegal activity has been proven yet, and it may turn out that what occurred was "wrong" but not illegal at all. Addressing the leak during a press conference, President Obama said "it's not that they're breaking the laws, it's that the laws are so poorly designed that they allow people... to wiggle out of responsibilities that ordinary citizens are having to abide by." Yet the leak has led to the resignation of the Icelandic Prime Minister, and calls for the U.K.'s Prime Minister to follow suit. Why? Because of optics. It's not illegal to provide executives with very high levels of equity compensation, limo service and floor seats to Knicks games. But it "feels wrong" when top executives of Dunkin' Brands each received $2,160 worth of Red Sox tickets (which, in the broader perspective, is not that much money) while lower levels of the organization are asked to tighten their belts.

Concern over social inequality and all the various forms in which it manifests is on the rise, and the workplace is not immune. With increasing pressures for transparency, whether regulatory (think Dodd-Frank and Say on Pay Votes) or organically generated amongst workers and customers, it's time to deal with the issue proactively. Be transparent about your compensation policies and practices. And when you do, think critically about what story that information tells. Organizations cannot afford to ignore how their compensation policies and practices are perceived by their employees, their customers, and the public at large. 

Stephanie Thomas, Ph.D., is a Lecturer in the Department of Economics at Cornell University and the Program Director for the Institute for Compensation Studies (ICS) at Cornell’s School of Industrial and Labor Relations. Throughout her career, Stephanie has completed research on a variety of topics including wage determination, pay gaps and inequality, and performance-based compensation systems. She frequently provides expert commentary in a media outlets such as The New York Times, CBC, and NPR, and has published papers in a variety of journals.

(image courtesy of BBC)

Chasing Best Practices

One of the common questions I hear from clients centers on how well their people practices and budgets compare to industry benchmarks and groups of top-performers. With ever-changing trends and shrinking competitive advantage, it can be helpful to know what others are doing, and how your own company stacks up against them.

Research from the firm PayScale may help to answer at least some of those questions, with their annual analysis of compensation trends and activity. Of particular interest, they compared the practices of average performing companies to top-performing companies, where the latter are defined as those who rank highly within their industry and exceeded revenue projections in 2015.

It turns out that high performers are more likely to provide pay increases (90% compared to 84%), bonuses (81% compared to 74%), and are also likely to leverage more of a compensation mix. High performers are also more likely to adopt a mindset in which people are valued and engage in more transparent communication around compensation.

At first glance, companies that want to achieve better performance may be well advised to adopt some of these practices, and start distributing more increases and bonuses as well as explain the reasons for those investments. Yet, the question of causal directionality is an important one, as addressed in a similar commentary elsewhere.

Do these practices lead to greater performance or does performance enable companies to make these kinds of investments?

That can be a difficult question to answer with a single survey, especially given the circular influences that practices and performance have over time. I am reminded, however, of a meta-analysis examining HRM practices that may provide some insight. The research found that motivation-enhancing HR practices- which includes “competitive compensation, incentives, and rewards” - exhibit a direct effect on financial outcomes, as well as indirect effects through employee motivation and enhanced human capital.

To come full circle, there appears to be some evidence that a set of compensation practices can relate to increased performance, and it is good for clients to be aware of those as possible benchmarks. But, I think it is also important to think in terms of broad, rather than specific practices. We may be better served by looking at practices that have the ability to enhance motivation instead of just doling out raises, for example. Specific practices may also work a little differently across contexts, with each company developing a unique definition of compensation transparency vis-à-vis the local culture.

As we look at these potential benchmarks, it is becoming increasingly clear that companies that perform well tend to check the box on a number of different best practices that overlap to some degree. The shared foundation of many - like the results around increases, bonuses, and salaries mentioned above - tend to be rooted in employees’ perceptions of their value in the workplace. That’s probably a good place to start.

How do you think about the best practices that companies should be adopting?

As Globoforce’s Vice President of Client Strategy and Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. He is the co-author of "The Power of Thanks" and his articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.