Should Your Pay Plan Discriminate?

The word "discrimination" carries with it a multitude of negative connotations and is generally viewed as an unacceptable practice.  The act conjures up images of unfair, unethical and in many forms blatantly illegal behavior and business activities.  But perhaps that term isn't always a bad idea for your Reward programs.

You're probably doing it right now.

Any organization that espouses a pay-for-performance approach to rewards already announces that they will discriminate in favor of higher performing employees.  This practice promises that better performers will get more in the form of rewards than those who do not perform as well.

Is That A Bad Thing?

If you're managing a company or even a department within, it makes sense to focus your limited reward monies where it will do the organization the most good.  Pay-for-performance isn't a giveaway, or else it really isn't a P4P plan at all.

In addition to performance criteria, those employees who have high salary range penetration may receive a lesser percentage increase than those lower in the salary range, on account of their range position.  The view is, if you're already paid above the "market rate" (usually the midpoint) your rate of increase should be less than someone with similar performance but currently paid below market (below midpoint).

Another consideration is cost.  With limited reward funds available companies have increased their focus on rewarding their higher performers first; whatever monies remain can be distributed among average (or lesser) performers.    Companies feel that they can ill afford to lose their higher performing talent (impact on results, more susceptible to poaching, hard to replace, etc.), while their average performers have fewer options to leave - and less impact if they do.

Sound harsh?  Unless you feel that you owe an employee an annual raise, that everyone on the payroll deserves a raise, the equitable distribution of limited reward monies to the deserving can be a real challenge.  If the organization rewards on the basis of ROI for individual effort, then emotional feel-good decisions (employee wants & needs, retention, keep them happy, etc.) will take a back seat.

The Debate

There are those who argue against any form of pay discrimination; those who feel that "taking from Peter to pay Paul" is a harmful strategy.  They would point out the following:

• Legal restrictions:  The prohibitions of age, sex, religion, etc. discrimination are already ingrained in the business culture.  However, even though some forms of separate treatment are legally permissible, such as pay-for-performance, some feel that any form of differential treatment is inherently unfair. 
• Equitable treatment:  Having everyone rewarded in a like manner (percentage, amounts, etc.) helps to foster the team concept.   Here the individual is less important than the group, that a single employee by themselves cannot make a significant impact.  Providing differing levels of pay for individual performance damages morale by pitting employees against each other for limited funds. 
• Ineffective performance appraisal systems:  The method that a company uses to assess and score employee performance is widely panned by many employees, and often by managers as well.  Employees are skeptical of so-called objectivity and what is passed as equitable administration. 
• Splitting pocket change:  When only limited pay increase money is available, why try to force a questionable distinction between employees that only pays out a pittance?  Is it worth the hassle?  Wouldn't it be better, or certainly easier, to give everyone the same amount?

The suggested alternative to P4P is to provide a general increase where everyone receives the same reward.  However, who among your employees would be motivated by that tactic?  The high performers you can't afford to lose, or the average performers who have fewer options and would stay with you anyway?

Let's Discriminate

For those who advocate putting their money where the performance is, here are the primary arguments in favor of pay discrimination:

• Behavior rewarded is behavior repeated:  If you want to encourage the right form of performance, offer to pay for it.  Offering a carrot encourages behavior above and beyond. 
• More bang for the buck:  Small merit budgets encourage managers to focus limited resources on higher performing employees, vs. the average (or less).
• Focus on the deserving:  Avoid the entitlement game.  General increases don't encourage performance, but reward tenure.  No one is owed a raise for simply sitting on their butt for 12 months.

These considerations focus rewards on those employees who by their personal efforts deserve to be recognized.  Because they have performed well. 

I would suggest though, that you avoid using the word "discriminate"  in your policies, procedures or even Compensation Strategy.  Before you get a chance to explain what you mean you'd likely have lost your audience, such is the immediate negative reaction to that word.  So play a little of the word game yourself and use "differentiate" or "distinguish between" instead.

We'll know what you mean.

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, "Asleep," by cell105

Comments

[Ashish Saxena]

Nicely consolidated Chuck!