Compensation Cafe

Give A Title Here, Give a Title There

An organization I've worked with in the past had developed an interesting hierarchy of management titles.  It went something like this:

•      Manager
•      Senior Manager
•      Director
•      Senior Director
•      Vice President
•      Senior Vice President
•      Executive Vice President

Quite a robust hierarchy for a small organization of only a few hundred employees.  And to cap it off, the base salaries paid out were inconsistent with that same hierarchy.  So a Senior Director was paid less than several Directors, and their EVP was paid less than a couple of the VPs.

And of course we all know that a common leadership designation (benchmark) in most commercial compensation surveys is the "senior' tag, right?  Wrong.

When I asked my client to explain how an employee gets to be designated at a "senior" level I received one of those "deer in the headlights" reactions, followed by a mumbled, "Always been that way.  That's why we called you."

They had finally realized that they had gone off the tracks with their titling, and now wanted to get out from under.  But they didn't know how.  And they didn't seem to know how to stop from making the problem worse.

How Does This Happen?

Perhaps your new hire is already a Director at their current employer and wants a bump up on the resume before they'll accept your offer.  Or perhaps you aren't able to pay some leaders enough of a differential with their peers, so you create a new level in the hierarchy.  Or to placate a valued member of management whose ego is bruised by perceived internal inequities you say "what the heck" and give them the better sounding title they desired.  You want the problem to go away, and so you rationalize that - it's only a title.

Hey, it happens.

I've written before about the infection of title inflation, where what some might consider a no cost reward when times are tough ("here's a nicer sounding title") is actually a slow drip poison for your payroll, ROI and internal equity.  It's just a matter of time before those with better titles demand to be recognized (grade) and paid more (base and incentive pay) than those holding lesser titles.  Common sense.

Getting Out From Under

So how does one go about fixing this?  First of all, you should acknowledge that the hole you've dug for yourself (the problem) is deep enough and costly enough in terms of increased payroll, internal equity complaints and damaged morale over favored treatment.  So throw away the shovel and step out of the hole.  Stop assigning "Senior" designations to your leadership.

To do this effectively though, and for any solution to last, you need a plan.  You need a rationalization to explain why Bob is called a Director and Sally a Vice President.  And why you won't / can't call Roger a Senior Director.  To create that plan you have a few options to consider.  You could use:

• Job Evaluation System: Any whole job or point factor system will be able to distinguish via job content assessment which jobs are bigger / larger / more impactful than others.  And if you use a grading structure your JE systems will tell you how far apart various jobs are.

• Market Pricing: JE systems are notoriously subjective, and if that is a problem for you, or you just don't have the time to invest in developing and administering a JE program, use a competitive marketplace analysis to tell you what others are paying for your jobs. Then slot your jobs into a salary structure (with grades) based on the market.

• Combination: It's a bit more dicey when you want to use both a JE system and market pricing analysis to determine grade, but I've seen clients do it.  Can be a bit cumbersome though, when your JE systems calls a job a grade 10, but your competitive analysis tells you it's an 11, or a 9.

But grading by itself, no matter the impetus, doesn't automatically change the titling structure.  So consider using a Titling Matrix to assist you.

Examples vary by organization, industry and even management temperament, but essentially a titling matrix uses a number of profile criteria assessments (i.e., Reporting Relationship, Management Breadth, Organization Impact, Level of Autonomy, Judgment, Nature of Supervision, etc.) to distinguish between levels / titles within an organization.

Can there be exceptions?  Of course.  But having a plan avoids chaos and establishes structure and standards for your hierarchy.  And that's a good thing.

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.

Creative Commons image,"Handout," by DianeWorth

Excessively Successful Incentives

The only thing worse than an incentive that doesn’t work is one that works all too well. Wells Fargo is just the latest company to be ethically embarrassed and financially distressed by a fiasco involving excessively motivational incentives. Thousands of employees were discharged over scandalous fraudulent practices that generated illegitimate bonuses and enriched salespeople while bilking their clients. This incident is merely the best publicized newest example of something that happens all the time, but it is important to us.

While the general public might just shrug at another set of criminal acts that can be laid at the feet of money-grubbing bankers, we in the compensation profession should take the lesson more seriously. The moral hazard problem is not industry-specific or even an issue about incentives. It strikes at the heart of our profession’s intense focus on applying rewards to generate positive output results from human resources.

Any fault lies not in capitalism but in human nature. Similar debacles involving reward system perversions occur in every kind of human enterprise in every social system on every continent. Government agencies,the halls of Congress, multinational conglomerates, non-profits, small companies, LLCs, partnerships and sole proprietorships all routinely stumble over the most basic principle of behavioral psychology: people always choose to act in ways that they perceive as best for themselves.

Any program effectively designed to generate rewards that are meaningful will tend to elicit behaviors intended to win those positive consequences. Each individual will choose:

• to perform as you desire to earn that reward,
• to ignore your offered inducement as less desirable than some other course of action or
• to take some other alternative path to attain the attractive reward.

That was simplified, of course, but you get the idea. We who do HR and compensation things are supposed to show mastery of the methodologies to create (or copy) marvelously efficient mechanisms to achieve top management objectives.  On time and under budget, too.

As others have observed, good process can enhance any final incentive product. Strategic planning sessions, communications, Beta tests, focus group studies and performance audits are all basic steps that can help improve design and implementation. Precommitment agreements with honesty pledges signed at the top rather than merely at the end will create statistically significant improvement in compliance success, as well. But the final test of a viable incentive program will be its appropriate responsiveness to how the targets of the plan balance the consequences they see inherent in the situation. Employees affected by the plan might not see what you see or react they way you hope.

In one illustrative case, a State highway patrol chief asked for comments when he announced the introduction of an innovative pay for performance plan that would involve safety criteria. Part of the future pay evaluation of patrol officers would involve the traffic safety record in their area. A veteran sergeant immediately spoke up: “If I’m going to be held accountable for traffic accidents, Chief, we really need to get a stop light at Dead Man’s Corner, where I have to call for the meat wagon at least once a week.” The Chief responded, “OK, but you have covered that section for years, Sarge. Why didn’t you ever mention that before?” The sergeant answered, “Well, it was a great place to write tickets.”

Be careful what you ask for.  You just might get it.

E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience. After every kind of corporate HR and consulting role in every industry, he was Senior Associate of pay surveyor ERI before returning to consulting in 2015. A prolific writer (author of the Performance Management Workbook), speaker and frequent expert witness, Jim testified in many reasonable executive compensation cases. He also serves on the Advisory Board of the Compensation and Benefits Review.

Image by Tran Nhat, courtesy of Creative Commons

When Incentive Pay Goes Rogue!

A friend of mine likes to say: “It’s not that incentive pay doesn’t work well, it’s that it works TOO well. It usually does exactly what it is designed to do, even if that wasn’t your intent.”

Wells Fargo just paid $185M in fines and penalties because its employees fraudulently opened additional accounting for people who were already customers. Often when issues like this arise, someone will blame pay programs. When this happens, compensation professionals usually cry foul. But that’s hard to do this time.

The Numbers

$185,000,000 in penalties and fines

2,000,000+ fraudulent accounts

5,300 professionals and managers fired

$124,000,000 “retirement pay” for the executive who ran the problem area

$0.13 per share increase in stock price when this was announced

0 executives who have lost their jobs because of this (so far)

Like any well-designed incentive compensation plan, Wells Fargo’s started with a strong company culture and a simple goal that required special effort. The culture was built on an environment where a customer could, and wanted to, do all of their financial transactions. The goal was simple. Get every customer to have at least 8 financial products through Wells Fargo. It even had a catchy name, the Gr-eight Initiative.” So far, so good.

But in hindsight, perhaps a couple things were missing. Where was the rule that made sure that canceled accounts subtracted from the success earned by opening an account? Where was the team whose counter-incentive plan was based on finding and correcting fraudulent activity on the part of plan participants? Where were the rules that made it clear that management up to the very top, would be subject to pay clawback if it was found that there was any cheating?

I often say that pay can't fix anything, but it can help support and drive decisions, behaviors and results. In this case it seems like pay may have contributed to all three. Once cheating like this happens, without immediate repercussions, it is easy for cheating to become “the way” people do things. It often starts with, “I’m not hurting anyone” and ends with, “This is just how we do it, sure its messed up, but I’ve gotta make a living.”

With the volume like this, it should have been nearly impossible for this to go unnoticed. Two million fake accounts are approximately 5% of the 40 million total accounts that Wells Fargo claims to have. 5% of anything shouldn’t invisible.

In a job market where finding and hiring good talent is difficult, Wells Fargo had to fire 5,300. Assume that their average base pay was $50,000 per year. Just finding and hiring that many people will likely cost more than an additional $53M.

But the newest information (released 9/12/2016) is the most frustrating. I do a lot of executive compensation consulting work and it’s hard to hear that no one may be held accountable for this. The executive who led this area is being allowed to retire with as much as $124M in total rewards when they leave. Wells Fargo did not admit to any wrong doing when they paid the fines and penalties. They have not yet reported that any executive will lose money or position because of this. When people at the top aren't held accountable, it sends a message that perhaps this wasn’t something that they could have controlled. I think everyone reading this article believes differently.

While a pay program contributed greatly this this debacle, blaming compensation without blaming the people in charge is a poor excuse for a solution.

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 authored and contributed to many industry resources including a recent issue brief on “Performance-Based Equity Compensation”. He has also co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and a few other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.

Implementation Planning. What's the Point? Just Check the Headlines.

It's worth pausing a minute to contemplate the fate of Wells Fargo's incentive plan. You know, the one that has caused all the oversight trouble and fines.

If you don't know the details here's a quick quote, "Regulators said the bank's employees had been motivated to open the unauthorized accounts by compensation policies that rewarded them for opening new accounts; many current and former Wells employees told regulators they had felt extreme pressure to open as many accounts as possible." "The bank has fired at least 5,300 employees who were involved." Here are links to the September 8 and September 9 New York Times articles about the actions of the Federal banking regulators.

I am a very satisfied Wells Fargo consumer and have found the bank's services to be head and shoulders over all the other banks I have used previously, so I am not writing with any agenda. But I do think there is much we can commiserate with in this story, if we look into our own Compensation hearts.

Specifically, I'm inspired to get us thinking about implementation methodologies that are often overlooked, yet immensely valuable, since misguided incentives can easily wreak havoc, as we all know. Even though we don't know the Wells Fargo incentive plan design and how it went off track (and stayed there for a few years), there are valuable implementation reminders for us in this news story.

Here's what I was I was reminded of, thought harder about and decided I'd share with you:

Beta-tests of broad-based plan designs should be a consistent part of our discipline. In many ways, it is irresponsible to put large sums of money on the table without confirming that what you imagine could happen, will. Of course, you'll never know everything that could happen, but when you try out a design with a subgroup you learn so much about what needs adjusting or fixing in your design and practices, your rollout is bound to be much more successful and financially reliable.

Measuring program results is your annual (or more frequent) responsibility. It's not enough to see improvements and assume your plan design is working. You are a trusted business advisor and if you have designed an incentive plan, you should be acting as if you have financial responsibilities for the incentive outcomes and funding. Measure results as often as data can be made available. Not sure how to rethink this part of your implementation practices? There's a full chapter of data management guidelines in the eBook, Everything You Do (in Compensation) Is Communications.

Quit giving ourselves permission to guess. Admit it, we don't talk with employees enough. What if Wells Fargo had hired a third party to conduct focus groups? (It's a valid investment when you seriously want candid insights.) Odds are, the third party would have been privy to some straight talk -- much more straightforward comments than HR would have heard doing focus groups with employees who were afraid of losing their jobs. 

Another suggestion for overcoming our proclivity for guessing -- there's much more that we can and should learn about human motivation and behavioral economics. Here's an overview of this new field that hints at how much research we have to catch up on: '"Standard economic theory suggests that as long as people understand the full consequences of their actions, they tend to act in their self interest," says [Leslie] John [of Harvard Business School]. "If they want to be healthy, and you tell them how many calories are in a burger, then they'll eat better." But behavioral economics suggest that people make mistakes in their thinking. For example, we have self-control problems that can lead us to knowingly "misbehave."'

Of course, it's not that we in Compensation didn't know that little uncomfortable fact before, but behavioral economics' research can now tell us how they'll misbehave, when and why. With a bit of due diligence, we can have these tested research findings to factor into our plan design.

What have I missed? You must have other implementation practices to suggest that will improve incentive design?

Margaret O'Hanlon, CCP collaborated with Ann Bares and Dan Walter to create the DIY guide to compensation leadership, Everything You Do (in Compensation) Is Communications. 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, performance management and compensation implementation discussions at the Café. Margaret is a Board member of the Bay Area Compensation Association (BACA). Before founding re:Think Consulting, she was a Principal at Willis Towers Watson. 

Time is Money

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

Everyone is familiar with the axiom that time is money. In its most common usage, the phrase conveys that, like everything else, time is a resource and it is generally better to act as quicky and efficiently as possible.

 

Moving At The Speed of Business

 

For business, time not used to its maximum benefit represents either additional direct costs incurred by the business or lost opportunity costs that might otherwise have been leveraged to some better advantage.

 

Rewards + Time Sensitivity = Goodness

 

As a total rewards professional, you probably don’t need to have studied at the feet of B.F. Skinner or any of the past Pavlovian behaviorists to recall that satisfaction and the positive influence of delivering rewards is notionally reinforced the closer the reinforcement delivery is to the actual behavior or accomplishment being recognized. Consequently, most organizations try to provide recognition in as close proximity to the output or event as possible, and presumably strengthen the reinforcement linkage in the belief the positive behavior will be repeated.
 
Separating Kids from the Adults

 

Okay, so we’ll acknowledge that while all organizations are filled with good intent to deliver rewards to employees as quickly as possible, we all know what the road paved with good intentions . . . leads to. But in the delivery of monetary rewards, a little delay doesn’t really matter that much to employees, right?

 

More recently, I’ve been reading Marc Wittmann’s book, Felt Time: The Psychology of How We Perceive Time, which focuses on neuroscientific research and the psychology of people and their perception and sense of the passage of time. 

 

It’s acknowledged that children have difficulty with impulse control and issues of gratification in instances where a greater reward is possible, but only after a longer delay period. This often leads to short-sighted decision-making – and a phenomenon known as temporal myopia. The reality is that adults sometimes have difficulty making rational, time-related decisions also. But what does tolerance to delayed gratification have to do with recognition and rewards and positive reinforcement?

 

Everybody Likes a Discount Or, Maybe Not

 

Turns out that our perception of the value of monetary payments decreases the longer the receipt of the actual payment is delayed.  A number of research studies have confirmed this relationship between waiting time and the perceived value of the payment.  The research findings are depicted in the graph, where the time delay is reflected on the x-axis and the perceived value is shown on the y-axis.  Consistently, the relationship between delay and perceived value is not linear, but a hyperbolic function. This phenomenon is known as temporal discounting. 

 

Waiting Too Long Will Cost You

 

So, when you combine people’s antipathy for delayed gratification and layer on the effects of temporal discounting resulting from delayed payments, you get something of a total rewards “perfect storm”.

 

Okay, so what if the interval between an accomplishment and the delivery of recognition takes a little too long?  The money still spends the same.  And so what if the perceived value of $50 is reduced to a perceived value of $10 because of a short delay?  The answer is that if you’re seeking to maximize the full spectrum of value from monetary recognition, the length of any payment delay matters a great deal. 

 

But it’s only $50.

 

Sure, but what if it were $5,000 per employee?  And what if it were delayed payments intended for 10,000 employees?  Even assuming a lesser level of “discounting” for a much higher payment (Larger Later Reward), temporal discounting at 40 percent would suggest you might as well take $20 million out behind your building – and set it on fire, for the perceived value you actually obtain from this amount of recognition (by the way . . . don’t actually do this). 

 

What Else Don’t We Know?

 

I’ll admit that I’ve always been aware of this psychological principle that the closer the timing of the reinforcement delivery to the desired behavior, the greater the likelihood the behavior will be repeated.  However, I willingly acknowledge that I was clueless that this phenomenon of temporal discounting was quite so well-quantified.  Probably just another indicator that greater use of applied neuroscientific research in the area of total rewards is long overdue. 

 

In more ways than one, apparently time is money.  

 

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

 

Chris Dobyns, CCP, CBP is currently employed as the Chief of Staff for the Office of Human Resource Strategy and Program Design for one of the largest U.S. intelligence agencies. The Office of Human Resource Strategy and Program Design is responsible for organizational effectiveness, personnel assessment, compensation and incentives, occupational structure, recognition and rewards, HR policy, human capital program design, implementation, evaluation and assessment and internal consulting. 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.

 

“Time Is Money” image, courtesy of Yury Zap and  fotolia images.

An Active Approach to Core Values

For many leaders looking to effectively manage their culture, a crucial first step is developing a list of core values.

Values help align all employees behind shared ways of thinking and acting. In a perfect world, they lead directly to competitive advantage and distinctiveness, linking employee behavior and organizational success.

More commonly, however, core values can fall a little short. This is particularly true when those core values aren’t embedded in the everyday experience of work, when they are unrelated to what drives success for the organization, or both.

One way to avoid both problems is to leverage a social recognition solution that is aligned to core values.

First, recognition allows colleagues to recognize each other on the basis of living core values through daily behavior and examples of positive performance. It takes advantage of top-down as well as bottom-up dynamics to spread an understanding of what the core values mean to the organization.

For example, leaders can effectively call attention to behaviors that embody the core values as they envision them, establishing an effective cascading process that can transmit them down through the organization. Perhaps less traditionally, but no less important, colleagues’ recognition of each other can broaden an understanding of what values-aligned behavior looks like and how core values can be applied across different areas or geographies within the company.

Both sets of dynamics establish a strong sense of ownership of the core values, as it becomes everyone’s responsibility to not only demonstrate them in their own work, but to recognize their colleagues for doing likewise.

Second, social recognition provides a valuable feedback mechanism that allows leaders to actively manage and improve how core values are being lived.

The data created by recognition moments can provide leaders and managers with insights into which core values are being recognized, how often, and how their definition may change over time or across locations. As the pace of business increases, it is vitally important to ensure that the core values remain relevant to business success over time.

If needed, core values can be re-emphasized, re-prioritized, or re-framed to align to strategic imperatives or market shifts. Corresponding shifts in the recognition data provides a pulse of how effective such initiatives are and where additional attention or communication needs to occur.

In short, social recognition provides a way for companies to realize the benefits of their core values while remaining adaptable and quickly adjusting the behaviors of an aligned workforce.

How does your company help to reinforce its core values and ensure they remain relevant to organizational success?

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.

How To Change Your World

Let's say that you're responsible for developing new or revised compensation programs for your organization.  Perhaps an audit has generated worrisome results, or the latest employee engagement survey showed a large measure of discontent.   Perhaps turnover is rampant, or you’ve just sat through an uncomfortable meeting with a boss upset over a bloated payroll. 

Something has to be done to better utilize payroll dollars, because too much money is dripping out of your company like a leaking faucet - and the rest isn't giving you much bang for the buck.

The challenge, then?  You have to change your world.

Now there are program design considerations, costing models, impact studies, external and internal analyses, even focus groups perhaps, but at the end of the day you can’t simply snap your fingers.  Your ideas, your recommendations need to be approved.  How do you make that sale?

What Not To Do

When facing senior leadership with proposals the quickest way to the exit is to tell them what they don’t want to hear.  Sounds obvious, but basic judgment errors are commonplace when you’re so caught up with the answers that you forget to focus on your audience.

A few examples of how not to sell your ideas:

      Leading with "it’s the right thing to do" is rarely a good idea.  Using an emotional, feel-good rationale is seldom a strong argument and is easily sidelined by the bean counters or anyone playing the “this is a business” card.

     “Surveys tell us . . . “ can be another weak point, because the argument that everyone else is doing something hasn’t worked in a debate since you were a kid.

      Over analysis:  The more you rely on charts, graphs and regressed formula trend lines to make your point, the more vulnerable your proposal becomes as eyes start to glaze over.  

I’ve seen senior executives feel compelled to ask detailed questions about the support calculations, just to show they’re engaged and shouldn't be taken for granted.   Don't let your proposal  rise or fall on the comfort level of decision-makers struggling through the details vs. the concept.

Principles Of The Sell-Job

Here are a few suggestions to consider before walking into that critical proposal review meeting.

     Make a business case where your recommendations illustrate how the company will win. Management’s prime directive is to act in their own self-interest, so once you have them nodding their heads at their own good sense they’ll be more easily moved to support your plans. 

     Tell a story; start with a statement of the problem, then augment with a back story to explain how things got so bad.  Illustrate the impact of inaction, then close out with your recommendation  - highlighting impact, savings, reduced turnover, whatever the goal - that solves the problem.

     Do you know the ROI?  You had better have one, as that could be your strongest argument.  Pros and cons?  Are there potential glitches?  Rarely will you have simple, uncomplicated solutions that can’t fail.  So it would be better for you to address any troublesome possibilities early on, to soften the potential "gotcha's" that could trip you at the worst possible time.

     Always have a backup plan, just in case, as all-or-nothing strategies don't work well outside of the movies.  Better to get half a loaf today and plan for more later, than crash and burn today because of pride and stubbornness.

So don't fall on your sword over concept, and be prepared to compromise.  Proprietary ownership of ideas (I want it my way) should be secondary to achieving the business goal.  Though often pride does get in the way, sometimes derailing sound concepts for the wrong reasons.  It’s not about you.

The numbers rarely speak for themselves; in fact you’re at risk if you rely on statistics as your main argument.  Instead, paint a picture with text.  Then use statistics to support the point you're making.  Strategic thinkers balance technical skills with the art of persuasion, influencing others to undertake the desired action.  They don't throw out a bunch of numbers and say, "see?"

-----------------------------------

Even when the task ahead is daunting, go ahead and take that first step.  It’s usually the hardest.  But if you’re prepared to achieve incremental gains vs. sweeping changes, if you keep your eye on the ultimate goal, you'll find the second step is easier, then the third and so forth.

"Rome wasn't built in a day" is a classic phrase, and for good reason.   Because it rings true.  So think steady progress when you try to change your world.  Just don't act like Don Quixote and run off chasing windmills.

 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.

Creative Commons image,"Salesman," by Chris Fithall

Stuff Changes

Stuff changes. That simple phrase has profound implications for total reward professionals.

The way things change over time affects almost every compensation situation. Consider some of the typical challenges that arise.

“She has already surpassed the quota demanded last year.”  Performance output objectives valid in prior periods are irrelevant going forward.

“Why was that promised raise challenged?” Ouch. The salary increase budget that won preliminary approval in January suffered substantial revision in July.

“What do you mean, the CEO bonus plan needs to be modified?”  The executive compensation formula acceptable at a small startup operation in its early days before a steady positive income flow has been established may become unconscionable later. Once the business has grown to become an established giant with multi-million dollar profit levels, that primitive simple cut of a modest sum would never pass muster from an outside objective executive compensation committee of the board of directors. Relative relationships not periodically revisited and revised can be hazardous.

“I thought I was supposed to switch my functional assignment and move into the management progression ladder this month.”  Career development paths are altered and modified whenever organizational long range staffing plans change.

“Move him up on the succession chart and double check to assure his pay trajectory is consistent with his current high value.”  This previously overlooked and historically underpaid guy was hired at a discount, but he has vastly outperformed the entire crop of supposed superstars we hired at premium rates at the same time for the same function. And make sure to slow or reverse their disproportionate base pay lead over him.

"But I've always been rated outstanding..." or "I never have been denied an annual bonus before."  Every advantage is presumed to be an infinite entitlement while any negative consequence is abhorrent and indignantly protested as an alien unfair exception. Unlike positive rewards, negative reinforcements fail to register as permanently regularly scheduled outcomes.

“Let’s just use the same approach that was so effective way back when!”  The best solution used ten years ago will not automatically remain the best option now.

“Although the competitive market rate for Noses used to match that for Tongues, the latest flavor industry surveys show the sniffers to be a lot more valuable than the tasters. If we bump one group up according to our Compensation Policy, the other bunch will demand classification parity, screaming that peer relationships are sacred and must always be maintained.”  Funny, how employees always embrace the principle of relative peer pay equity when it yields a higher figure than their market reference point. When the competitive market rate lags, they demand to be kept “whole” with their prior peers whose jobs remain highly paid. Yet, when outside demand rises rapidly for their jobs, they are quick to abandon the historically treasured peer equity relationships and clamor for the proper higher open-market rate. Well, circumstances do change with time, don’t they?

Every element of human resource management is time-sensitive. The solid practices of yesteryear fade into distant memory when better and more popular techniques emerge. What worked well once before might not be appropriate (or even legal) today.

All aspects of the reward trade fluctuate with time and circumstances. Change is continuous although its velocity generally varies. Reality itself is in a state of constant flux. No stream of water remains the same. The atmosphere is never static (sic). The only constant is change, but it very rarely takes place at a steady predictable pace, tends to follow irregular patterns and is almost never symmetrical in form.

We engage in a constant balancing act, juggling roaring chainsaws, flaming torches and sharp sabres while teetering on a freshly cut log rushing down a flume. We will never get bored, because stuff changes.

E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience. After every kind of corporate HR and consulting role in every industry, he was Senior Associate of pay surveyor ERI before returning to consulting in 2015. A prolific writer (author of the Performance Management Workbook), speaker and frequent expert witness, Jim testified in many reasonable executive compensation cases. He also serves on the Advisory Board of the Compensation and Benefits Review.

Image "Ominous" by James Loesch courtesy of Creative Commons

Cafe Classic: Goldilocks and the 3 Broad-based Stock Plans

Editor's Note:  As the cymbal-bashing grand finale to our end-of-summer Classic week, we bring you a tale of HR success in selecting an employee stock vehicle - told, as only our Dan Walter can do, from the point-of-view of a familiar golden-locked heroine...

There once was a dedicated professional who was tasked with creating a company-wide stock plan at her new company. Henrietta Rachel Goldilocks (let’s just call her “HR Goldilocks”) had years of Human Resources and Compensation experience, but little interaction with broad-based equity compensation. She searched the web and spoke to some experts on the topic. Each expert had a ton of information, but many tended to discuss general trends rather than HR Goldilocks’ very specific needs.

You see, HR Goldilocks worked at a company that had been publicly traded for many years. They had tried stock options and restricted stock in the past, but currently only used these for management-level staff. There weren’t many internal notes on why the company had stopped granting lower-level grants and awards. When she brought the topic up finance simply said “too expensive”, the CEO said “didn’t work”, the head of engineering said “worthless” and several staff members simply looked confused when asked.

HR Goldilocks knew that her company’s stock price had a history of volatile ups and downs. She also knew they depended on a purchase cycle that lent itself to periods where bonuses were strong and others when they were nonexistent. As a company that built most of its own goods and supported their own customer service center, she knew her staff was both broad and deep. As she continued her search she finally found a blog article that had a story that covered the main equity compensation issues at a high-level. The story went something like this…

HR Goldilocks stumbled upon a house in the woods that was filled with compensation instruments. Cash hung from the ceiling. Bonuses wallpapered the walls. The floor was covered in check stubs and total reward statements. And, on the massive desk in the middle of the room, there were three equity compensation plans.

She first saw a stock option plan. HR Goldilocks read how the employees recevied no compensation until they chose to exercise. They paid what the stock would have cost at grant and the company expensed the amount that was determined using a mathematical model. The staff received any gain. She also read that if the stock price went down (as her company’s often did) these grants had little retention value. However, if the stock price soared, values also skyrocketed often to unsustainable levels. These grants generally carried vesting restrictions of four or five years, far longer than some of her employees planned in advance. HR Goldilocks looked at the risks and rewards and decided that stock options were too hot for her company.

The second plan described restricted stock units. HR Goldilocks liked that they had value from the date of award. She read on to find that employees often viewed these awards as “gifts” and devalued them accordingly. She also found out that they often resulted in such small award sizes for lower level staff that communications became difficult. “Imagine,” she thought, “trying to explain a 3-year vesting of 17 shares!”. HR Goldilocks decided that RSUs were to cold for her company.

The third plan was an IRC 423 ESPP. It stated the rules were designed to support plans for broad-based participation. HR Goldilocks read that these plans require the employee participants to purchase stock from the company. The caveat was that the employee could be offered a discount of up to 15%. Even better, this discount could apply to both the start of a grant period or the purchase date. This gave the employees some value at the start and, if the stock price rose, an even better value at the end. And, this plan virtually ensured some value even if the stock price fell. She read how requiring the employees to make payroll contributions during each grant period helped them have some “skin in the game” and stay engaged.  She also liked that fact that she could structure the plan to limit the number of shares purchased by any one employee and that even the highest compensated employees were limited by the plan to $25,000 in value each year. All this and purchases could be scheduled frequently, usually in six-month intervals. This plan was flexible enough to meet her compensation needs while limiting expense to meet the needs of the company. HR Goldilocks decided an ESPP was JUST RIGHT.

HR Goldilocks worked with a consultant and her internal team to create an ESPP that was custom-fit to their needs and everyone worked happily ever after.

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 authored and contributed to many industry resources including a recent issue brief on “Performance-Based Equity Compensation”. He has also co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and a few other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.

Cafe Classic: First, You Eliminate Pay as the Solution

Editor's Note: Our end-of-summer Classic week continues here, with Jim Brennan's insightful post about the temptation (fed by leaders and line managers alike) to treat every problem as a pay issue -- and the challenges we encounter when we try to push beyond the easy/obvious to evaluate what's really happening.

My esteemed colleague Mercedes McBride-Walker signs her emails with this slogan: 

"95% of the time, the issue is something other than money. So why am I not out of a job?" 

She makes a very good point.

Most of the people I hang with are still pretty much compensation people rather than Talent Managers or Total Rewards professionals, so when they are presented with a problem, guess what gets addressed first? Their instinctive first “fix” is usually to throw money at it. It’s almost like we were politicians.

When your only tool is a hammer, every problem looks like a nail.  Those whose power and authority comes from compensation expertise tend to rely excessively on that element as the universal cure for all ills. It becomes the same old story… first you give them money … then, when that doesn’t work, you try other solutions until you finally work your way down to the real causal agent, by trial and error and at great expense of  time, effort and money. 

We are not the only ones at fault. It is all too easy for managers to assume that pay can solve any problem. Even when they are wrong, the recipient of the inappropriate largesse will typically display some gratitude and may demonstrate temporary improvement. Plus, even if higher pay doesn’t create a compression wave, the manager still gets a bigger budget. Those who correctly identify a solution that does not involve compensation face an immense amount of resistance to any fix more difficult than simply writing a check. After all, if an issue can be corrected with cash, it is not a management problem but only a cost item.

Not until I held credibility as a compensation expert would anyone believe my claims that pay was usually not the issue in any given situation. Realistically, if you don’t deal with compensation first, dispelling that as the solution, no one will listen to you; all will claim it’s simply a matter of money. 

We human resources people still have a terrible habit of prescribing solutions without ever performing a diagnosis. The seductive temptation to throw money at every problem cannot be defeated without strong and confident compensation people willing to reject inappropriate solutions.

Ironically, we need more pay experts in order to correct non-pay problems.

Do we have them? And will we continue to grow them?

E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience. After corporate HR jobs and consulting in every industry throughout North America, he was Senior Associate of pay survey software publisher ERI before returning to consulting in 2015. A prolific writer (author of the Performance Management Workbook), speaker and frequent expert witness, Jim testified in many reasonable executive compensation cases. He also serves on the Advisory Board of the Compensation and Benefits Review.

Image: Creative Commons Photo "my to do list" by koka_sexton