Compensation Cafe

An Inside Voice Is a Quiet Voice

I'm hoping that few of you, dear readers, can use this article. It would be fabulous if it doesn't apply anywhere or any time before the end of the year. Here's what I'm getting at.

Right now, I bet you and your employees are deep in it as we race toward December 1, December 15, December 25, January 1. Deadlines are looming bigger and darker. Financials are being calculated this way and that. Performance judgments are being made, reconsidered, discussed and resolved. Compensation increases and awards are being estimated, priced out, adjusted as your pile of dollars, otherwise known as your end-of-the-year budget, shrinks smaller and smaller.

Yes, this is the time of year for growing, seething pressure as the clock ticks down. Judgments and decisions can be no fun to make, especially when they affect individuals that we care about, but that's just about all that's left to do before the end of the year. And that leads to tension, and often drama, before we call it quits on 2016.

Here's the point. Emotions have been running high -- and conversation has been increasing judgmental -- in the world outside your company over the last few months. These feelings can easily have leaked in through your air vents, let alone been carried in on cellular phones and such.

As a result, your managers and employees could find talking together a bit more difficult this year during the traditional December rush on ticklish subjects -- like what I think of your contribution in 2016, for example. Difficulties may not be building up in your neighborhood or company but just in case you're missing the cues, use this article as the little nudge you need to go out and take the temperature of things.

If words seem harsher or resentment seems more apparent than you are used to, pay attention, since it will help to get out in front of things. Send reminders to managers about how to handle especially difficult conversations and/or employees whose bluntness might be uncomfortable. Consider giving managers discussion guides that they can follow to prompt a good discussion during performance management and compensation conversations. Encourage a company-wide communications refresh on the Values that your company works by and so on. You know who to check in with. You can tell whether feelings are running especially high and, most importantly, you will understand what's best for your group -- or, at least, whose advice to get.

And if you find that nothing is going awry, give thanks that you have one less thing to worry about before you hit the road once every thing you've committed to do in 2016 has been put to bed.

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 @ https://gumroad.com/l/everythingiscommunication. 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. 

 

Startup Equity: Comparing Your “Currency” to a Competitor’s (Part 4 of an n part series)

Comparing base bay is relatively easy, equity not so much. A dollar is a dollar. And, if a dollar isn't a dollar (let’s say it’s a Franc), there are published exchange rates to help convert values. But, with equity compensation, the base currency is your stock, and its value is not easily translated (or even agreed upon). This fundamental disconnect is one of the most challenging issues faced by anyone dealing with equity compensation at a start-up.

Let's start with the oversimplified example above. There are exchange rates from dollars to francs, but they are not as consistent as the prices available for publicly traded stock. Then there is the basic fact that a franc may not be a franc. Switzerland uses the franc, as do Senegal, Rwanda, and Togo. In fact, there are eight or nine different types of "franc” used by about 22 countries. You had better fully understand which franc you are converting before you give a value. This is much like the confusion around instruments like stock options and restricted stock units (RSUs), or other real or synthetic equity tools.

If you don't know what you are comparing, then you are probably going to be wrong. But, with nearly every currency, you can go to the internet or grab a good newspaper and find a fairly recent and accurate conversion rate. With start-up equity, very little is recent and very few are accurate. In fact, very little is published and what is, is very often incorrect. Even most of the least known currencies have published conversion rates. You can quickly do some research if someone offers to exchange Manat for Dollars. Turkmenistani Manat current convert at 1 Manat to 0.29 dollars. Azerbaijani Manat converts at 1 Manat to 0.57 Dollars. Not knowing the difference can make all the difference.

Exchange rates require comparable foundations. Getting 2,500 Stock options or RSUs means almost nothing. Being told that the current stock price is $0.10/share also means almost nothing. For equity compensation to have perceived value, you must understand the value of the company and the preferences of any other investors. Without this foundation, you have no idea if you have been granted a big piece of something or a tiny piece of almost nothing.

But, we're not done. If you want to understand your company's currency exchange rate to the real world, you must also understand the potential future value of the company and when that potential might be realistically achieved. It's like if someone gave you Deutsche Marks a week before the move to Euros, but told you they couldn't be exchanged for five or ten years. You would have known the current value, but even the best economist would have had a hard time predicting the success of the Euro and how inflation, deflation, the global economy and other factors would impact value in the long run. And let's be honest, the stock at your startup is not as stable or predictable as the currency of one of the largest economies in the world.

What’s all of this mean in the world of startups and compensation?

If you are a company offering equity you must be willing to share information or be prepared for your expensive and possibly hard-fought equity program to have little or no value to your employees.

If you are an executive or founder, don't expect anyone to appreciate what you have given up, if you are unwilling to communicate its current and potential value.

If you are a compensation professional, stop looking at values in surveys and expecting them to correlate to your situation.

Most importantly, ask a ton of questions before you get started and keep asking them over and over again after you get moving. The most amazing and exciting thing about currency isn't any of the above. It’s the simple fact that very few investments move faster, change more often and have greater potential upside and downside than trading money. If that doesn't sound like startup equity, I don’t know what does.

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 resources including the recent Performance-Based Equity Compensation. He has 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.

Two Types of Compensation People

Compensation people seem to come in two types: employee judges and employee advocates. Bear with me while I oversimplify about how each type distributes rewards. Follow my thoughts for a minute; then let's discuss these sweeping generalizations about this profession being divided into dispassionate adjudicators and egalitarian advocates -- more or less.

I see major dramatic (if not polar) differences in attitudes among our peers about distributing rewards. One group adamantly maintains that pay for performance is a Good Thing and rewards should be allocated to the most deserving ... whoever they are. Such "judges" believe in measuring contributions and rewarding consequences proportional to output results. Another group (which I will carelessly label "advocates") prefers to ignore individual performance distinctions and instead would confer identical generous compensation rights to all employees.

"Judges" expect employees to earn income by demonstrated performance.  "Advocates" consider all compensation an employee entitlement tied to membership in the group. While most reward "judges" agonize over applying variable pay allocation methods to individual workers, many "advocates" disregard differential remuneration approaches and want to distribute as much as they can as non-controversially as possible to virtually everyone. One group worries about what senior management will think of their decisions and the other group worries about whether it has pleased the general employee population. Judges focus on allocating what is earned and deserved according to current results; advocates focus on rights that, once granted, imply guaranteed perpetual rewards.

In our much-criticized subset of the HR community, for every penny-pinching tightwad "judge," there seems to be an egalitarian "advocate" benefactor dedicated to playing Santa Claus. The more extreme examples on either side seem to vary according to whose money is being disbursed.

Certain circumstance favor the respective attitudes of conservative allocators or generous givers.  When the cost comes out of their own pocket, managers tend to be quite parsimonious. Bonus pools that shrink when expense outflows exceed a nominal level frequently inspire fervent compliance with budget limits. If awarding workers an extra tenth of a percent increase will eliminate your year-end bonus, it becomes quite difficult to muster enthusiasm for that additional expense. One might even suspect that it would require tremendously powerful evidence and severe psychological pressure to motivate the typical manager to voluntarily accept a cut in their personal anticipated income in order to boost the wages of workers otherwise content with their pay.  Compensation managers at prosperous corporations and tax-rich government agencies, on the other hand, are more likely to be advocates haunting discussion boards seeking new ways to further enrich already well paid workers. Shop stewards and executive compensation consultants are another two occupational categories that extend the entitlement philosophy to the farthest degree possible. 

The typical total reward manager is generally caught in the middle between management and other employees, pulled by both sides.  We don't want to be either heartlessly dispassionate misers or overly empathetic softies.  Part of the problem here is the essential confusion about who we really work for.  Are we the minions of top management or the protectors of our constituent workforce?  Or both?  We HR/compensation professionals face a constant dilemma, because what is best for one party may not always be in the best interest of the other. 

Do compensation professionals truly display a basic preference between judging and advocating?  Must we always be forced to decide between responsibly managing organizational assets (like cash and human resources) or generously supplying the maximum enrichment to the lives and careers of the employee population we serve?  Unsure if there can be a balance between the two objectives or if we can achieve both simultaneously.  Please share your thoughts.

Or am I seeing things that aren't there, again?

E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience. After corporate HR and consulting roles in most industries, 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 in reasonable executive compensation court cases, Jim also serves on the Advisory Board of the Compensation and Benefits Review.

U.S. Army Garrison Red Cloud 2014 Thanksgiving Meal image, courtesy of Creative Commons

4 Reasons to Consider Crowdsourced Compensation

Are you just throwing money at your employees?

It may seem like an odd question at first, but one that is increasingly considered. Organizations are facing greater pressure to address modern employees’ rising expectations and to also achieve greater levels of performance across the workforce.

Leveraging compensation more effectively is just one area among many within HR that is coming under greater scrutiny and appears ready for transformation.

Take two recent examples. My previous post examined what can happen when a paycheck encourages “prisoner” employees, unmotivated to do much more than just show up. Now, an article in The Economist examines some of the stock-based compensation strategies used by Silicon Valley giants to “hoard” top talent and the negative impact it is having across industries.

Reports like these fundamentally challenge how compensation can more effectively drive performance. For the business, it becomes crucial to weed out underperformers at one end of the spectrum and prevent an escalating arms race for talent at the other. That can be a balancing act that is hard to maintain.

Part of the solution may be in moving compensation (or at least a portion of it) closer to performance as it occurs, helping to even out some of the issues above and more accurately reflect employee contributions in real time.

Crowdsourced compensation can make a big difference. Here are four reasons why:

1. It creates a strong connection for each employee, linking specific behaviors and accomplishments to overall group success and the broader organization. Compensation is directly tied to performance as it occurs, and comes from those who benefit from that performance, regardless of level.
2. It creates a culture of performance where the emphasis is not only on what one contributes, but also on recognizing the contributions of others. When this occurs, employees internalize the core values of the organization and become actively involved in building collective potential.
3. In addition to the focus on individuals, crowdsourced compensation is better able to acknowledge the performance that comes from teams and groups. Compensation can follow the projects and teams that form and reform throughout the year, more closely aligned to the work that is being accomplished by those teams.
4. Finally, crowdsourced compensation can help an organization attract top talent, signaling the importance the organization places on creating a human workplace and creating an ownership mentality among employees for performance.

A shift toward including crowdsourcing as a part of the overall compensation strategy can help companies realize some of these benefits. It is an opportunity to align compensation to performance in real time, ensuring that compensation dollars are used effectively.

How might your organization shift some of its compensation toward crowdsourced methods?

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.

Pay Transparency and the SCARF Hypothesis

Everything we do, every thought we've ever had, is produced by the human brain. But exactly how it operates remains one of the biggest unsolved mysteries, and it seems the more we probe its secrets, the more surprises we find.

-Neil deGrasse Tyson 

I'm continually amazed by the things neuroscience is uncovering about our brains. These discoveries are interesting in and of themselves, but many of them have practical implications for the workplace.  I revisited an article about neuroscience and performance management by David Rock, Josh Davis and Elizabeth Jones, and I started thinking about how these insights into brain function might relate to pay transparency. 

Within neuroscience, two dominant themes are emerging: (1) the majority of our social behaviors are driven by our efforts to minimize threats and maximize rewards, (2) our brains treat our social needs much the same way they treat our needs for food and water. Many of our social needs manifest themselves in the workplace, and our behaviors to satisfy these needs, maximize rewards, and minimize threats, are directly observable within organizational life.

David Rock has codified a framework - the SCARF Hypothesis - that argues five aspects of organizational life have a marked impact on we respond. The five aspects of organizational life are:

• Status - the perception of being considered better or worse than others;
• Certainty - the predictability of future events;
• Autonomy - the perceived level of control over one's life;
• Relatedness - the experience of sharing goals with others;
• Fairness - the sense of being treated equitably, especially compared to how others are treated.

I would argue that each of these five aspects is not merely an "extra" or "added bonus" that we would enjoy experiencing in the workplace, but is - consciously or unconsciously - a real need, just like our needs for food and water. 

All of our interactions in the workplace act to either satisfy or deny these five needs. Having a transparent pay process (communicating to employees how compensation decisions are made and providing them with enough information to really understand those decisions) can contribute to satisfying each of these needs:

• Status: In terms of compensation, status can be tricky. A well-designed compensation system should differentiate between employees, providing different rewards for different levels of achievement. In reality, some employees will be better performers than others when objectively measured. Pay process transparency can help to keep the focus on these objective measures, rather than on amorphous or ambiguous rankings based on (in)correct perceptions. If employees understand what objective measures your pay program rewards, then status, as a need, can be re-focused on status relative to objectively measured individual performance toward satisfying performance expectations, rather than on a subjective perception that I received a smaller merit increase than my co-worker because I am subjectively valued by the organization less than my co-worker.  
• Certainty: A transparent pay process helps to manage employee expectations and provides predictability. Having a transparent pay process means that employees understand what is expected of them in order to earn bonuses, merit increases, etc. A little bit of uncertainty can be a good thing. Mild uncertainty triggers a mild threat response and generates just the right amount of dopamine and adrenaline to pique curiosity and motivate individuals to solve problems. Too much uncertainty, however, can generate panic and lead individuals to make bad decisions. Ideally, your employees will experience mild uncertainty about how to achieve what's expected of them, not about what is expected of them or what the pay consequences are of satisfying or not satisfying those expectations. 
• Autonomy: Autonomy and certainty are intertwined; greater autonomy leads to a greater sense of certainty about the future. If your employees do not understand the linkages between performance and compensation, they may feel as though they have no control over what happens to them in terms of their compensation. Without some sense of control over what happens to them, your employees can easily slip into a "flight" response, fleeing your organization in search of opportunities that do provide them with a sense of autonomy. Being transparent about pay can help your employees to see that pay is an output directly related to the inputs of effort and performance they contribute.
• Relatedness: Ideally, all employees should be working toward the overall strategic goals and objectives of the organization. While individual goals may differ, they should all be aligned with organizational strategy to keep everyone moving toward the same things. Being transparent about your pay processes can help employees understand how they each contribute to these strategic objectives, and how those contributions will be rewarded.
• Fairness: If your employees understand how compensation decisions are made, they still may disagree with those decisions, but they are less likely to view them as unfair. Perceptions of fairness are critical; as noted by Rock, "the perception that an event has been unfair generates a strong response in the brain, stirring hostility and undermining trust." If your employees don't perceive that they are treated fairly with respect to compensation decisions, it almost doesn't matter whether you're satisfying your employees' needs for status, certainty, autonomy, and relatedness. The "flight or fight" response will be triggered, and your organization will suffer the consequences of this response in terms of retention and engagement.

Note that all of the above is predicated on the assumption that your compensation decisions are non-arbitrary and based on an articulated set of objective criteria. If your compensation decisions are arbitrary, or you can't articulate the set of objective criteria used in those decisions, you need to address this issue before beginning to think about pay process transparency. 

Taking the time to make sure your employees' SCARFs are organized and addressed with respect to compensation can go a long way in boosting - and maintaining - productivity, engagement and willingness to show organizational commitment.

Stephanie Thomas, Ph.D., is a Lecturer in the Department of Economics at Cornell University. She teaches undergraduate and graduate courses on economic theory and labor economics in the College of Arts and Sciences and in 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 media outlets such as The New York Times, CBC, and NPR, and has published papers in a variety of journals.

Cafe Classic: Don't Be Fair - Be Consistent!

Editor's Note: Today's Classic post features Stephanie Thomas speaking to question of fairness - a perennial hot button in the field of rewards - and includes a wonderful cameo by Café friend Steve Browne.

Discrimination and fairness... They're really just different sides of the same coin, right?

Or are they?

You could argue, as my fellow Café contributor Jim Brennan did, that they're the same side of the same coin. In his last post, More Discrimination Is Needed, Jim made an excellent point:

The very act of discrimination can be either bad or good, because some differences must be ignored while other distinctions should be noted.

I couldn't agree more. The meaning of the word discrimination has gone through a transformation. People automatically think of "the unjust or prejudicial treatment of different categories of people or things, especially on the grounds of race, age or sex" rather than "recognition and understanding of the difference between one thing and another". Semantics often gets in the way when the word "discrimination" comes up.

Jim goes on to say that:

Discrimination is needed to create pay equity. It not only involves comparable worth but also includes perceptions of fair treatment by all employees. 

Here's where things get complicated. "Discrimination" is objective; to use Jim's example, it's important to differentiate between "positive contributors and feckless shirkers". Presumably there's some objective measurable thing that allows us to make this differentiation (e.g., sales volume, average serving time per customer, number of calls fielded per hour, etc.). If the compensation strategy is tied to this objective measurable thing, then the strategy automatically differentiates between the "good performers" and the "bad performers". 

"Fairness" is subjective. What seems unfair to me may seem fair to you. If I'm a bad performer and you're a good performer, I may view a compensation strategy tied to sales volume, for example, as unfair. I put in the same amount of hours as you do, and I'm working hard and doing my best - just like you are. But I sell less than you do because I get all of the crappy sales leads and you get all of the good ones. It's not fair that I get stuck with the crappy leads, and it's not fair that I get paid less than you do even though I'm working just as hard as you.

Fairness depends on our perceptions, and perceptions of the same situation can vary wildly from person to person. So, rather than aiming for fairness in your compensation strategy, deciding which family member takes the dog out for her morning walk, or in anything you do, aim for consistency. Consistency is the key.

My friend Steve Browne made a great point on my podcast about fairness and consistency:

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So don't be fair - be consistent! Set your policies and procedures based on legitimate factors that don't discriminate on the basis of age, gender, race, ethnicity or other protected characteristic, and apply those policies and procedures in a consistent manner. As Steve said, if you're consistent, you end up being more fair than you ever were. 

 

Stephanie Thomas, Ph.D., is a Lecturer in the Department of Economics at Cornell University. She teaches undergraduate and graduate courses on economic theory and labor economics in the College of Arts and Sciences and in 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 media outlets such as The New York Times, CBC, and NPR, and has published papers in a variety of journals

Startup Equity: Why are VCs Getting so Stingy with Equity? (Part 3 of an n part series)

Does this familiar?

You had a great idea and turned it into a company. Somehow you got to the point where Venture Capitalists were willing to invest. You may have had less than 50 employees and less than 15% of the company committed to non-founder employees. You grew and kept innovating. Equity compensation was the currency of the day and the hope of tomorrow. Your value grew and more investors came on board. Then the equity spigot became a trickle.

What's up?

Many VC returns have shrunk in 2016. When VCs see their value melting, they react exactly as you might expect. They become more protective of what they have and less excited about the risk of the future. Many behavioral economic studies have shown that the risk of loss drives actions more strongly than the potential of reward. This is especially true when the values are large. You may not worry about losing 5% of your investment when it is worth $100, but you are very concerned about 5% when your investment is worth $1B. So, as values have risen over the past 5-10 years, the gut punch of losses feels even more traumatic.

In addition to VC’s seeing losses, there are a few other things going on right now.

• Weak IPO market. A less than stellar IPO market means investors cannot liquidate their investment even when there is a strong growth in value. When this occurs investors tend to tamp down on equity compensation. They want to be assured that their own investments will have value before they continue a steady stream of sharing more of that potential value.
• Unexpected long periods to become “IPO ready.” Many current “unicorns” and “half-a-corns” would have gone public a long time ago if the markets worked like they did in the past. Long periods to IPO have two main impacts on equity compensation. First, many of these companies have far more employees than IPOs had in the past. For companies using broad-based equity, this means far more people with equity. Second, a lot of people have had outstanding equity for a while. Keeping equity compensation fresh after a decade or more can prove difficult.
• Huge company values. Most startups use percentages or numbers of shares to determine grant sizes. With high values, this can result in grants that look to have enormous value when they are given. This is especially true with the move to RSUs. Investors look at grants that are worth tons of money on paper and start to wonder how much of that “money” is really needed.

The best thing you can do is study and prepare.

Find out what successful companies in your industry had as equity overhang when they went public or were acquired. Understand that stock plan overhang grows the longer you remain private and generally drops very quickly after you go public. This is especially true for companies who require some type of corporate action to trigger vesting. Exercises of options and vesting of RSUs reduce your overhang. Restricting these types of transactions can make overhang concerns much worse.

Learn how many employees it took to get companies to an event. There is a big difference between a company that requires 500 employees to go public and one that requires 5,000 employees to get to the same point. Here's an interesting article looking at HUGE companies.

Look at the potential value of equity awards given your business plan and its impact on company value. The values of companies going public have continued to rise. The same percentage of ownership that made sense 15 or 20 years ago may be more than needed in today’s environment. Are you looking at 10% of a $100M or is 6% of a $950M company sufficient?

Your investors will respect you more and work with you better if you have done your homework and can negotiate with an understanding of their side of the equation.

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 resources including the recent Performance-Based Equity Compensation. He has 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.

Rewards For the Right Reasons

If you have an employee working for you, why would you give them an increase to their base pay?  I'm presuming though, that there's a review program (annual?) in effect so that employees don't have to come to you, hat in hand to ask for a raise. 

When reflecting on their merit review / pay increase programs, here are the reasons I typically hear for granting individual rewards.

• Good job performance: In recognition of delivering good or better job performance during the review period.

• Tenure: Employees who have been around for a long time deserve "something" to recognize and reward their continuing loyalty.

• Peanut Butter Spread: Popular in low merit spend years (lot of those lately), the thinking is that making distinctions is not "worth the effort," so "Let's give everyone the same raise."

• Everybody wins: Part of the popularity effort by many managers is the belief that all employees should get something.   They try to avoid being judge and jury about the linkage between performance and rewards.

• They need the money:  The soft-hearted approach, when managers make emotional vs. business decisions.  An employee's personal circumstances become a pay decision consideration.  And if one doesn't need the money?  Chances are some of their portion might be shifted elsewhere.

• I don't want them to quit:  Another aspect of the manager popularity effort and a cousin of the "Everybody wins" tactic, is where a manager ignores or downplays job performance and reward distinctions to ensure an employee doesn't get angry and then decide to leave the organization.  Because a decision to look elsewhere might negatively impact the manager.  Self interest conquers all.

You'll notice that I put "good job performance" at the top of my list.  Is it at the top of yours?  Sad to say I often see that requirement placed further down the list in many organizations.  While everyone would agree that performance is important, we're talking about money here, about discriminating among employees.  So the counterargument from pay-for-performance critics is that there are other things to consider.

Basic Rule of Thumb

But what if those reward dollars were coming out of your own pocket?  What if you acted as it you owned the business, and that the merit spend monies came from you, not from off a money tree or from some other constantly renewable source?  Then the decision becomes, either give monies to "deserving" employees, or keep it for yourself.

If that was the case, might the decision making process become more objective, might focus more attention on the ROI gained for the reward monies being spent, and might you expect managers to do a better job at actually managing their employees?

A basic rule of thumb in human factors management is that job performance that has been recognized and rewarded is going to be repeated.  Conversely, employees will find little encouragement to continue unsatisfactory behaviors and performance if they realize that pay increases are not automatic, and that an accounting of some sort will actually take place.

Sit on your butt and get nothing.

Critics and Naysayers

With that vein of thinking I would suggest that pay increases granted in advance of performance is also a bad idea.  I've heard some pundits, in their criticism the performance appraisal process say, "Let's ignore the past (performance) and instead reward employees for future effort."  Doesn't that sound like a bribe?  And if the employee doesn't perform well enough to warrant the monies already given, would there be a pay claw back later on?  I don't think so.

Some other pundits (p4p criticism #2) suggest that dangling pay increases in front of an employee - as a form of motivation - is a wasted effort.  Their belief is that employees will perform well anyway, as some form of internal self-worth will propel them to work hard.

• When high achievers and Joe Average receive the same / similar increase, whose performance do you think is encouraged and will be repeated?

• How many of your employees "perform well?  100%?  Probably not.  So already this theory ignores a segment of your population.

• Well-intentioned and self-motivated employees will eventually run out of steam (think of a battery) unless recharged by recognition and reward.

• Your organizations risks encouraging a "Why bother?" mentality, which when coupled with a higher percentage of Joe Average in your workforce, is a recipe for serious difficulties.

So have a care that your reward monies go to the right employees, and for the right reasons.  Less than that is wasted money.

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,"Boba Fett Reward," by pasukaru76

Binge Watching at Compensation Cafe!

I often talk about employee communications at Compensation Cafe. Today, thought, I'll let WorldatWork do the talking for me. They have a lot to say about real innovations that you should be aware of, and I don't have to tell you that PowerPoint does not figure into the conversations.

Following are their insights into implementing incentive pay and sales compensation, with additional information on how to accomplish their recommendations. If your organization hasn't focused enough on communications in the past, have courage. Video, social media and deep insights from audience analysis are the themes. While you may not be able to invest as much money as the big guys, you can leapfrog from where you are to real improvements even without technology upgrades.

Communicating Effectively for Today's Employee Population

This six-minute video describes how ADP repaired a restructured bonus plan implementation that was running out of steam by eliminating ineffective communication tactics. Once ADP's HR realized their best efforts were faltering, they went back out. By holding focus groups they learned about the variety of employee information preferences. ADP's willingness to iterate the communications from traditional to more personalized is worth understanding, especially since it parallels an important shift in ADP's branding from formal to informal/conversational. (Remember conversations about bringing the brand inside?)

Using Personas in Effective HR Strategy Planning

If ADP's case study leaves you curious, here's deeper insight into how an analysis of your employees' choices, preferences and needs will upgrade your communications, let alone your plan design. Mercer goes beyond the popular "generational" analysis, which tends to rely on generalizations and assumptions. Instead, they ask employees to make choices and identify preferences, then use the data to cluster employees into groups of those who share "wealth," career navigation and health needs -- but who may not necessarily be in the same generation. (Sample take-away: As they say in the video, "When you've met one Millennial, you've only met one Millennial.")

And in case you want to leapfrog into a deeper understanding of how cutting edge types think about communicating with their audiences, here is a real gem from slightly outside of the HR's familiar territory. As of yesterday, Seth Godin is offering an appealing and inexpensive video course called, "A Master Class in Value Creation." Seth is a widely admired fellow blogger who thinks about the marketing of ideas in the digital age. If you want to lead real change in your organization, have a look.

Culture and Communication Are Critical Factors for Sales Compensation Policies

This article reports WorldatWork's survey findings on what it takes to achieve a successful launch of a sales compensation plan. Their analysis puts effective communication at the top of the four critical success factors gleaned from the survey.

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 @ https://gumroad.com/l/everythingiscommunication. 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. 

Tips for Applying Geographic Pay Differentials

Designing and applying geographic pay differentials is as much art as science; but certain important principles must be recognized.

Things change. Periodic re-validations and updates of geographic pay differentials are essential. Huge differences can rapidly disappear or suddenly emerge.

Measure competitive pay, not personal spending. Cost of labor is not cost of living, or vice versa. Local pay variances are not the same as local living cost differences. What any individual earns from a single job is not the same as what your entire family spends. Labor costs surveys do not match household living expense reports. Competitive pay is a subject entirely different from family spending patterns, neither measured the same nor matching each other. Pay is an set by agreement between worker and boss while living expenses reflect unique independent family lifestyle choices beyond the control of any employer.

Focus appropriately.  Only pay practices that affect your ability to attract, retain and engage competent workers should be relevant for geographic analysis. You wouldn't measure pay in France to set pay in Kentucky, would you? (Even though both feature cities named Paris.) Executive compensation patterns that are based on international or even global comparisons have virtually no effect on rank and file pay relationships. Likewise, unique State minimum wage practices in one State or Province usually have no influence on payrolls where almost everyone earns six-figure incomes. Letting bottom-level mandatory wage thresholds govern the budgets for your entire payroll can be a terrible (and expensive) mistake. Likewise, if you don't recruit from a location or have some internal equity relationship based on it, then exclude it from your RELATIVE comparison exercise.

Avoid binary ratios. Reality is not simple. Multiple polynomial formulae are much more accurate than single percentages. Patterns found at clerical levels are rarely correct for managerial jobs.

Any differential should reflect actual human talent cost variances between the relevant jobs in the respective appropriate labor market locations. No GeoDiff should ever be a fixed premium infinitely tied to a location without regard for actual competitive pay equity.  If a law wipes out a prior competitive pay variance reflected in your geographic adjustment formula, you change it rather than ignore the leveling of a previously tilted playing field (or vice versa).  Pay differentials are not absolute eternal entitlements but are short-term policy practices contingent on your unique compensation situation and your particular total reward strategy.  Actually, they are lazy shortcuts to justify treating all employees in a particular class the same regardless of precise comparisons of current individual rates for specific job titles or competency clusters.  Beware of assumptions that they are permanent rights.

When relative relationships change, methods and practices must follow and be adjusted accordingly rather than automatically repeated perpetually without any rational reason beyond just "staying consistent."  If government imposed some new rule that increased your production costs or service delivery expenses for Product A by 20%, would you automatically spend 20% more on producing/delivering Products B through Z?  Logic and purpose should determine methods and practices, especially those dealing with money invested in talent. 

Be proactive. Revise or rework your geographic differentials to reflect competitive/internal reality. Don't force the entire organization to unnecessarily expend scarce payroll dollars like shackled minions serving a rigid HR/comp practice designed for expired circumstances.   Sorry ... abandoning a prized familiar protocol is not easy, but change might be necessary for the future.  Updates also allow you to demonstrate that HR/comp is a proactive business partner who adapts with change rather than thoughtlessly dictating outdated and currently inappropriate habits.  Remember that resistance to a needed pay practice change usually means you are wastefully misdirecting funds into jobs where competent candidates are readily available for far less cost. That doesn't mean that continuing to pay a premium might not be important for your enterprise, but at least do it on purpose with open eyes rather than accidentally, based on misunderstandings.

No policy should be written in stone unless it is a basic fundamental strategic principle.  Every prescription should follow a relevant diagnosis. But you already knew all this, didn't you? So now you have an outside expert's advice to back up your usual recommendations.

E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience who conducted the initial research behind the first published study of this subject.

Population Cartogram image by Worldmapper.org, courtesy of Creative Commons

Metropolitan Statistical Areas by U.S. Census Bureau, via Wikimedia Commons