Compensation Cafe

Should Employee Compensation Practitioners Care about the Economy?

The Bay Area Compensation Association (BACA) is celebrating the holidays with a keynote speech previewing the 2018 economy. Our speaker is Gary Schlossberg, Senior Economist at Wells Capital Management, so we're banking on up-to-the minute information on next year's fiscal and monetary policies, as well as worldwide market trends.

Taking a look around, many other compensation groups offer similar presentations on the economy during the year. It's clear what they offer to executive compensation practitioners, but if I'm into employee compensation or Total Rewards, why bother? I think that this is an important question to answer, so I'm going to dig in.

As the economy goes, so goes your merit and bonus budget. This is, of course, a simplification but the "optics" are accurate. Haven’t we all scratched our heads at the seemingly endless U.S. growth cycle, given its backdrop of deep-seated structural issues including the lingering effects of the 2008-09 financial “meltdown?” Nevertheless when it comes to credit, lending stays low, and so do salaries. What's that about?

As we all experienced during the Recession, when your company makes less, employees make less. If a big change is coming, you should know about it so you can help with the planning. I just spoke with a financial advisor who said a slowdown is coming in 2018. I'm expecting to be briefed on this at Gary's talk to see if the experts agree on where things are going. Using this as an example, even if you are an analyst, it helps to know that an economic shift is coming so you can help with the planning.

Your HR strategic priorities respond to economic trends. When the economy is humming, odds are your company is hiring at a good pace, including the high-priced specialists you haven't been able to afford in the past. Income getting tight? You'll be slowing down talent acquisition and perhaps looking overseas for new markets or lower cost production options.

Problems with overseas economies can seriously affect your organization, too. The terrible losses in Puerto Rico are affecting hospitals and medical device companies throughout the U.S. right now. For decades, Puerto Rico has been the source of low cost, specialty manufacturing of medical equipment. Their losses are influencing cost and availability of materials in businesses throughout the U.S., which has had a sudden effect on production, services and staffing. Over time, this situation can influence the need for certain U.S. jobs if we have to adjust to new production strategies.

It will help you advance in your career. Your executives are financial experts. Your HR executive needs to make expensive financial decisions influenced by business strategy, too. When I talk with people in these positions, I have far more credibility when I can help them plan, taking the next year's financials into account.

No matter where you are in your career, you have a shot at becoming a more trusted advisor if you understand that what is shaping the economy is shaping your company's financial and operational plans, which is shaping the company's staffing and reward plans, and so on . . .

So when you have a chance to attend an update on the economy, get it on your calendar. If my experience is any guide, these presentations can be fascinating. And if you happen to be in San Francisco on December 14? Come join us to learn about the 2018 U.S. economic and financial market outlook. There will be no dust on Gary's up-to-the minute insights -- and you'll return to work with increased confidence in your future judgments.

Margaret O'Hanlon, CCP brings deep expertise to discussions on employee pay, performance management, career development and communications at the Café. Her firm, re:Think Consulting, provides market pay information and designs base salary structures, incentive plans, career paths and their implementation plans. Earlier, she was a Principal at Willis Towers Watson. Margaret is a Board member of the Bay Area Compensation Association (BACA). She coauthored the popular eBook, Everything You Do (in Compensation) Is Communications, a toolkit that all practitioners can find at https://gumroad.com/l/everythingiscommunication.

Cafe Classic: Is Your Pay Structure On The Level?

Editor's Note:  The compensation program reviews concluding at organizations everywhere this fall reveal a labor market where salary growth continues to be dynamic and uneven.  With that, the question raised about your pay structure(s) in this Classic post by Stephanie Thomas remain important ones to consider if you do indeed mean for your ranges to be "on the level." 

Internal pay equity - and gender pay equity in particular - is a really hot issue right now. I'm sure you know that within a particular job title or job group, pay rates should be equitable and consistent. You may already be examining your pay data to make sure that it is equitable and consistent.

But have you looked at whether your pay structures are equitable and consistent across job titles and job groups?

Do you know if the difference in hourly rates between your production workers and production supervisors is equitable? What's a reasonable difference? $0.50 per hour? $2.50 per hour?

What about the difference between the annual compensation of your Chief Information Officer and your Chief Financial Officer - is it reasonable? Is it equitable?

We're somewhat used to looking for internal pay equity within a job title or job group, but rarely do we look at it across job title or job group. Making comparisons across job titles or job groups is not easy - there are a variety of factors that come into play. Things like job complexity, required skills and abilities, and even (perceived) value to the organization have to be considered.

It can seem like an overwhelming - if not impossible - task. But the Bureau of Labor Statistics does it every day. They compare wage data across occupations all the time. How do they do it? Leveling.

BLS uses the leveling process in their estimates of pay published in the National Compensation Survey. Even though you won't be publishing your own version of the National Compensation Survey, the techniques used by BLS can help you look at whether your pay structure is equitable and consistent across job titles or job groups.

The first step in the leveling process is to assign each job to a job level. Assignments are based on the duties and responsibilities of the position at the full performance level of the job, not the qualifications of the person who currently holds the job. 

The jobs are leveled using four factors: (1) knowledge, (2) job controls and complexity, (3) contacts, and (4) physical environment. Each of these four factors are subdivided into components. For example, job controls and complexity is broken down into (a) the amount and type of work directions received, (b) variations in and difficulty of the work performed, and (c) the nature of the work within the organization. Each of these sub-components are assigned point values; the higher the level of responsibility or difficulty, the higher the number of points assigned.

Figuring out how to assign point values is the tricky part. Typically, job descriptions are reviewed; discussions with supervisors and the individuals performing those jobs may also take place.

BLS uses the same set of criteria (and points) for evaluating job controls and complexity, contacts, and physical environment for every job. Knowledge is a little bit different - each group of occupations has a specialized set of criteria. You can find a listing of the occupational groups and the criteria used here.

If it seems like it's a complicated process to assess your pay structure for equity and consistency across job titles or job groups, it is. Is it worth it? It could be a very valuable exercise that will give you even deeper insights into your pay structure. Is it something you should run right out and do? Not before you have a handle on equity and consistency within your job titles or job groups... 

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.

Equity Dilution is Like Drinking Great Whisky

It is the holiday season and during this chilly time of the year many reach for a nip of whisky to create some warmth. Scotch is not a drink for everyone. But, for those who partake little else can replace it. Equity compensation is similar. It isn’t perfect for every company, or every situation, but when is done right it can be a game-changer.

Whisky and equity can be deceiving simple and decidedly overpowering. Whisky is a strong drink. It is also diverse. The best reflects their origin, the quality of ingredients and, most importantly, the intent of the maker. Great whisky does not happen by accident. No great whisky was created by copying another. Equity compensation is much the same.

It usually takes less than you would guess to create a satisfied customer. The key is not volume, but quality. A dram of great whisky can be the highlight of an evening. A bottle of bad whisky can ruin a weekend (or more).

Someone once asked me if 100,000 shares of a new startup were a “good grant.” My question was whether the startup was a “good company.” All the bad equity in the world isn’t worth a small amount of great equity.

In the end, the key to a successful whisky experience and equity compensation experience is understanding the purpose, impact, and benefit of dilution.

Whisky opens up with dilution. The dilution allows the drinker to appreciate the smell and taste of the beverage more fully. Too little and it may be difficult to drink. Too much and it might as well be thrown away. In this sense, company equity follows the same rules.

The key to giving employees equity is to open up the company and give people the opportunity to explore its depth and quality. Too little and only a true acolyte will be able to appreciate it. Too much and those who value it the most will find it useless.

The key to successful dilution is to start slowly and carefully. Begin with a few drops of pure, simple, water. At a company, this usually translates to Founders Stock.  Both the water and the stock have an immediate impact that can be measured in real time.

As you get more accustomed to the whisky, you may add a cube of ice or two. Care must be taken to ensure that you don’t add more than can be beneficial. The ice must be sufficiently cold so not to melt away quickly. It must be in big enough cubes to ensure that they last long enough to enjoy every drop in your glass. Like stock options and RSUs, the ice cubes dilute over time. The intent is to both enhance and extend your experience.

If you take too long to drink your whisky, the ice will eventually melt. The resulting dilution will require more whisky or, a new beverage. This is where companies are most frequently challenged. It takes more time (and more employees) to get to liquidity than most companies expect. Poor planning can mean there is not enough of the favorite to refill the glass (we are out of stock options, so we’re moving to RSUs.) Sometimes the cost of the favorite whisky is too high to make a refill an affordable solution (equity is so expensive that we no longer offer it to as many people.)

Dilution is the key to enjoying whisky and equity. Understanding it’s immediate and long-term impact can help you navigate a fantastic evening or total rewards program. Most importantly, what works for you, may be terrible for the person next to you, and vice versa. Success is based on worrying less about what everyone else is doing and focusing on your enjoyment.

P.S. My call to action from my “Whipsaw Lessons about Pay and Tax Reform” article garnered only a single response. Let me know if you’d like to get involved.

Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and considered a leading expert on equity compensation issues. Dan has written several industry resources including an issue brief on 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 other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation.

Let's Recognize Customer-Facing Jobs

Have you ever stormed out of a store because of poor customer service?  Or felt frustrated and angry because the company representative at the other end of the phone didn't seem to care?  Or seemed unwilling to help you?  Perhaps after enduring a bad experience at a particular establishment, you said: “never again”?

Customers react first and foremost to the employee that they're dealing with, the one they're facing, whether the transaction is financially significant or not.  To the customer, that employee “is” your company, and these buy or not-buy decision-makers will consider the treatment they receive a reflection of your entire company, for good or ill.

Business Impact Vs. Pay Level

Now consider that the person who may have just caused you to take your business elsewhere is likely one of the lowest paid employees in that organization.   Does that reward/business impact relationship make sense to you?  It would seem that the organization doesn't value the impact that their employees can have on customer relations.

Does your employer acknowledge the value and impact that these employees can have when dealing with customers?  Or is this skill set (interface with customers) a compensable factor at all? 

Many companies have long ignored the importance of the customer-facing job (non-direct sales) in determining a position’s value to their organization.  They consider education (what you know), experience (how long you have been doing something) and competitive survey data (what others are paid for a certain set of skills) in setting their pay scales.  The fact that the position also has the power of gaining or losing customers is often lost on them.

Some job evaluation systems may give a nod for those who face customers on a regular basis, but such recognition is not often viewed as a critical factor – nor does it help determine where in the salary range the incumbent is paid.

Oftentimes it's the lower paid employee or the position with the least amount of “cachet” that presents the jobholder with the opportunity to influence customer action and reaction.  As an example, the employees most commonly approached by guests at Walt Disney World are the Custodial Workers.

Is it not surprising then that these lower-level employees can have as great an impact on customer goodwill and retention as some of your executives?  Studies have also shown that having a pleasant experience when dealing with a company often outweighs price considerations and marketing glitz.

Paying Attention

That doesn't mean that you have to pay more to these employees than the marketplace suggests, but it's definitely in your best interest to ensure that they're fairly treated:

• Ensure that actual pay centers on the middle of the range or higher.  Avoid risking minimum pay scale workers interacting with your customers.  Even fast food employees could send customers to the competition, or simply to a different store.
• Hire into the salary range.  This is not a time to be cheap.  That dollar you saved today could cause you to lose a great deal more later on.   It costs a great deal more to gain a new customer than to retain an existing one.
• Modify your performance appraisal process to recognize the customer facing role; attitude is just as critical here as know-how and experience.  Your customers place great value on the smile and pleasant demeanor they receive from your staff.
• Avoid structuring these as “dead end” jobs.   Offer upward opportunities for higher performing employees.
• Listen to them; they are talking to your customers and their suggestions for process improvements – even new products and services - should be considered.

How can you monitor whether your company is vulnerable?  1) Ensure that these positions are regularly surveyed for competitive pay practices, and then 2) Create a report segmenting the actual pay of your customer-facing employees to determine the average compa-ratio and spotlight the presence of low paid workers.   Then you'll know how well you're paying those closest to your customers.

We should have a final word about direct sales, which is perhaps the ultimate customer-facing job.   Be careful that your training and recognition programs acknowledge the importance of the customer-facing relationship – beyond an immediate financial impact.  Rewards should not be only for short-term results.  An unhappy customer (post sales) can decide to; 1) not place another order, 2) limit their order and split their requirements with another vendor, and/or 3) spread a negative comment to their professional associates that reflects poorly on your company.  

Each unfortunate scenario reinforces the financial and long-term impact of the individual employee.

Such would be a hard lesson indeed.

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, "Oops," by Paul McRae

The Things in Life That Excite

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

A few months ago I won the lottery.  No, not The Lottery, as in the nine-digit super-jackpot lottery, but more like the $42 lottery – where I had the Powerball and one other number on a couple of tickets.

Despite the disappointment of having just missed the $758.7 million jackpot, I can still vividly recall the excitement I felt cashing out my “winning tickets”, as the cashier at the local convenience store counted out my pile of forty-two $1 bills.  That got me wondering once again about the influence of the physicality of cash, and some of its behavioral effects. 

The Psychological Influences of Money

A study commissioned by the Consumer Financial Protection Bureau examined the subtle (and not so subtle) effects that cash has on people’s behavior. The short version of the research study examined what happens when experimental subjects were sold identical mugs for $2, and then asked to sell them back – but where one group was told they paid for the mugs on a credit card, and other with cash.  The results showed the cash purchasers reflected a much higher perception of the value of the mugs than credit card purchasers.  Some of this influence can be attributed to endowment effect, but not in its entirety. Subjects in a different experiment felt notably more connected (psychologically, emotionally) when making charitable contributions in cash rather than with some other form of payment. 

Some of best research about the subtle influences of money, has been conducted by Kathleen Vohs, from the University of Minnesota.  In a number of these experiments the power of cash to negatively influence behavior, disrupt team-based relationships and to encourage more selfish decision-making was consistently demonstrated. More telling was that money’s ability to influence people to be less socially-sensitive was not limited only to instances of the physical presence of money, but even to the very mention of money.

Give Las Vegas Some Credit

The phrase, “what happens in Vegas, stays in Vegas”, would probably be better stated “money that comes to Vegas, stays in Vegas”.  Many, many years ago casinos began using chips because they recognized that gamblers were predisposed to take greater risks when betting chips, because we all know it’s much easier to ante up a pile of same-size, brightly-colored chips, rather than contemplate that you just bet fifty $20 bills that may represent a significant portion of next month’s mortgage payment. 

We all know that credit cards are not the same as casino chips.  Or are they?  Hmmm, providing consumers with colorful plastic cards – all of a similar size, that are essentially an opaque instrument that allows for the easy purchase of products or services, as a substitute for actual currency, does sound a lot like the use of casino chips. Ultimately, whether a personal expenditure is in the form of chips in the casino or a plastic card in the retail store, an intermediary instrument nearly guarantees our insulation from the subtle, psychic influence associated with the direct expenditure of cash. 

Separating Us From Our Money

Purveyors of products and services (including casinos and credit card companies) clearly have an understanding of people’s psychological relationship with money – with the goal of more easily separating us from our cash.  But what about social responsibility and predisposing people toward charitable giving and feeling good about that behavior? And for total rewards professionals, what about affirmatively de-conflicting the explicit linkage between money, motivation, behavior and performance?

How is all of this influenced by the move towards a cashless society, with debit cards, cashless transactions and virtual wallets using smartphone apps, with their ubiquitous near field communication capability? 

It sometimes makes me wonder whether a return to a day when employees were paid in cash, and the linkage of work to its associated outcomes and subsequent levels of motivation would be strengthened by the receipt of actual cash. Perhaps that linkage is fading, and is already being replaced by new, psychic and behavioral linkages as the workforce continues to change.

A Ticket To Ride

As is the case with most things that excite us . . . it’s complicated – mostly because it involves people.  Whether it’s a winning lottery ticket or your next paycheck, what you’re really receiving is the means to an end or opportunity – maybe best illustrated by the line from The Maltese Falcon, “. . . the stuff that dreams are made of”.

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

Chris Dobyns, CCP, CBP is currently employed as a Human Capital Strategic Consultant 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 35 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.

Original image "Lottery Cashier Window" courtesy of Chris Dobyns.

Are Humans an Asset or an Expense?

Long-time readers know I’m Irish but may not know my team is based in the U.S. Every year, the Thanksgiving holiday is a hot topic among all of us, not least because we celebrate joint Thanksgiving events in our dual headquarters in Dublin and Boston. (We do the same for St. Patrick’s Day - we’re equal-opportunity in terms of our inter-country holiday celebrations.)

In the spirit of the Thanksgiving holiday and the season of gratitude, I’d be remiss if I didn’t point you to this excellent Fast Company article. The core contention of the article is, if investments in machinery or technology hit the asset line of the balance sheet, why don’t investments in our employees?

The article calls out the lie that “our people are our greatest asset” based on two key observations. First, wages, benefits, and retirement investment have been stagnant for four decades. Second, from an accounting standpoint, employees (and investments in them such as training) are listed as expenses and not assets on the balance sheet. To quote the article, “In the world of finance, human beings have never been regarded as highly as land, buildings, and equipment.”

Sadly, the article also references a 1967 Harvard Business Review piece that commented: “No organization which handles its employees as expense items can make as wise plans or as rational allocation decisions as the one which recognizes explicitly the asset characteristics of its human resources.”

So, how do we change the perception of our humans as, well, humans and assets, not expenses? From a balance sheet perspective, that’s up to the Financial Accounting Standards Board (in the U.S. at least). But we don’t have to wait for official rules or guidelines.

There is but one step to redefine our humans as the assets they truly are – express gratitude to them and for them. That said, there are many ways to express gratitude:

• Simply say, “Thank you.” Make a point, every day, of paying attention to the people around you for both who they are and what they do. Look for ways to express your gratitude by telling them how much you appreciate their contributions and recognize how their efforts have helped you, the company or the customer.
• Offer feedback so people know how best to grow and develop. We’re humans. We know we’re fallible. We also want to learn and grow. Giving feedback on performance ranked as important as recognition for doing well for how positive employees rated their experience at work. Offering feedback also offers a path forward in our careers.
• Help people step forward in their careers by offering training and development. For people to truly take advantage of the feedback and career growth opportunities, give them equivalent opportunities to develop the skills and abilities needed to grow. And be sure to account for these training sessions as an investment and not an expense.

In all things and above all else, be sincere. We are not talking about resources or about capital. We are talking about humans who can detect insincerity easily. Sincere recognition, feedback, and growth opportunities are a critical investment in growing the bottom line.

This Thanksgiving season, I offer my sincere gratitude to you, our readers, for joining in the conversation and helping us all learn and grow.

How do you offer gratitude to your employees? How is your organization investing in your humans?

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.

A Basic Truth of Compensation Communications

Managers are the compensation communicators in your company. Not HR, not Legal, not even the CEO whose job is to explain why your compensation program makes good business sense -- but doesn't have to explain another 3%ish increase to a new parent.

You've put a big dent on every manager's calendar for the next six weeks. Do they have everything they need to make your work successful? After all, you are asking them to finish your compensation communications project for you, and you need them to do it well.

How do managers feel about being the messenger THIS year? Make sure you know or there is no way you can predict how things will turn out.

Have you invested enough time and dollars making the whole compensation communications process easier for them? They are the ones who will go eyeball to eyeball with their employees which means that, in one sense, they are going to the line for HR. Give managers discussion outlines, FAQs that will help them prepare to talk with employees comfortably, in some cases even give them scripts. If your managers get together for calibration meetings, include communications on the agenda and make it easy for the individuals to speak frankly.

How do managers feel about your company's leadership? If there are issues of trust or questions about resources, don't expect managers to hide their feelings. HR can't fix these problems over night, but you should acknowledge that they play into end-of-year discussions. Go out to talk with managers individually. Show that you can be open-minded but still hold them to a standard. This isn't an area where email communications will have any effect.

How do managers feel about your company's pay practices? Do they believe you are paying competitively? Do they know how you go about it? Even if you do pay competitively, once rumors start you can bet that it's going to be difficult to change peoples' minds. Educated managers are unlikely to give rumors any credence, plus they will be able to spot the real problems for you.

Margaret O'Hanlon, CCP brings deep expertise to discussions on employee pay, performance management, career development and communications at the Café. Her firm, re:Think Consulting, provides market pay information and designs base salary structures, incentive plans, career paths and their implementation plans. Earlier, she was a Principal at Willis Towers Watson. Margaret is a Board member of the Bay Area Compensation Association (BACA). She coauthored the popular eBook, Everything You Do (in Compensation) Is Communications, a toolkit that all practitioners can find at https://gumroad.com/l/everythingiscommunication.

Whipsaw Lessons about Pay and Tax Reform

The Tax Reform effort that is currently churning through the halls of Congress has been an eye-opener for executives and compensation professionals in the worlds of publicly-traded and pre-IPO companies. Both the original bill from the House of Representatives and the Senate included provisions under the heading of “Non-Qualified Deferred Compensation” that, if enacted, would have changed the landscape of total rewards. The bill included stock options, RSUs and, potentially, other forms of equity under the misleading heading.

The Monday after the House bill was released, November 6, 2017, I called it the Death of Equity Compensation. Within a few days, I reported that the offending provision had been stricken and Reports of Equity Compensation’s Death have been Greatly Exaggerated. Before that day was done, the Senate had once again put Equity on death row. Before I could write a pithy article, they had released it, on parole.

As of November 15, 2017, both the House and Senate bills have been amended to remove the troublesome sections on Non-Qualified Deferred Compensation.

Also, a new amendment may make some stock options and RSUs BETTER! The change may allow employees at private companies to defer the normal taxation on option exercises or the release of RSUs for five years. This requires a gamble by the employee, but it is one that many will happily take. A version of this amendment received COP support in 2016, so it may be here to stay, or not. (Learn a bit more here.)

So, we are all good, and the compensation world is back in order? Perhaps not.

Six lessons we can learn from the most turbulent week in pay in many years.

1. When it comes to legislation, read deeper than the media speaking points (quickly.)
   • None of the initial speaking points about Tax Reform included mention of equity compensation. Law firms and compensation consultants brought attention to the issue quickly.
2. A world without equity compensation is a world with crippled start-ups.
   • Venture capital investors, start-up organizations, and others quickly pointed out that without equity compensation, our start-up model could not exist.
3. A world without equity compensation is one where executive pay must be completely reimagined.
   • When investors demand a link between company performance and executive compensation, they generally lean on equity compensation. While not perfect, there is currently no other acceptable toolset to replace equity compensation.
4. Swift response can result in quick corrections.
   • The near immediate call-to-action, for a topic not even mentioned by the media, seemed to do the trick. In about a week, equity compensation went from the chopping block to maybe receiving new lifeblood. That’s impressive.
5. Massive changes to the tax code require time.
   • The idea of having less than 60 days to prepare for tax rules that would fundamentally change the most critical elements of pay seemed, and is, ridiculous. Compensation philosophies would need to be changed. Compensation Planning that is already in action would need to start from scratch. Software that supports exercises, vesting, and associated tax calculations would need to be reprogrammed. Innumerable reports would need to be updated. Even a year may push the edges of reality. Two months, during year-end, is laughable.
6. The people in Washington don’t understand equity compensation.
   • Equity compensation may have a terminal illness. Many people in politics see equity compensation as a tool for mega-wealthy to avoid paying their fair share. Others see it as a way for people to make more than they “should.” I think the more significant issue is a fundamental misunderstanding of how and why equity compensation exists and works. This gives us a unique challenge and a fascinating opportunity.

As compensation professionals, it is our responsibility to educate people about our tools. Perhaps we have been a bit complacent over the past decade. The people who represent us, our companies, and our employees have an obligation to know what makes us successful. Those of you who have tried to teach yourself about equity compensation may have found it was not an easy task. Imagine if you were a politician and this was item 133 on your priority list!

It is time we put together an educational program designed just for those who have the power to change our laws. More importantly, we need to actively reach out to our political representatives and explain the importance of equity compensation, and how easily it can be broken with what seem to be simple, and perhaps reasonable, changes. There is no real need for hyperbole, just information.

If you’re interested in getting involved, let me know.

Dan Walter, CECP, CEP is the President and CEO of Performensation. He is passionately committed to aligning pay with company strategy and culture and considered a leading expert on equity compensation issues. Dan has written several industry resources including an issue brief on 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 other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation.

Performance Pay and Job Design

Performance pay is nothing new. We're all familiar with piece-rate pay, spot bonuses, annual incentive plans, and the like. Many organizations have incorporated some form of pay for performance into their total rewards strategy. Even though performance pay is a household word, there's still one remaining mystery surrounding it: figuring out when it will work and when it won't. Despite years of research by scholars and practitioners alike, we still don't have a well-developed understanding of the contexts in which performance pay will (won't) be effective.

A new line of research, however, may hold some promise for developing this understanding. Bengt Holmström, who is not a household name (unless you're an economist!) discussed this line of research in his speech in December of 2016 when he won the 2016 Nobel Memorial Prize in Economic Sciences.  

Holmström has studied incentive contracts for a good portion of his career. His research began with models narrowly focused on pay for performance, as did many other scholars’ research programs. As noted by Holmström in his speech, the study of incentives has been somewhat oversimplified. The majority of research focuses on simple incentive schemes: a linear incentive in addition to a fixed wage or a bonus for performance above some minimum threshold. The problem with this type of analysis, he says, is that it cannot tell us why different incentives are used in different contexts.

Even more sophisticated models of performance pay fall short because, in my opinion, they are not couched in terms of job design. Too often our discussion of pay for performance is limited to contexts like organizational culture, performance evaluation and measurement, employee engagement and the like. Thinking about performance pay in terms of job design, however, is something that has been missing from the discussion. Luckily, Holmström’s research can help us with this.

In a marked departure from his initial research program, Holmström has expanded his research to encompass the design of coherent incentive systems incorporating nonfinancial instruments for complex job designs. One of the things I find most interesting about his work is the role multitasking plays in determining the (in)effectiveness of performance pay.

In the modern workplace, many employees are multitasking. The recognition of this led to a change in the focus of research; rather than figuring out how to get an employee to “work hard enough” on a single task, we now have to address how employees allocate their efforts across tasks in support of the organization’s strategic objectives.

As noted by Holmström, “[w]hen tasks are interdependent, the optimal design needs to consider [the employee’s] incentives in totality. Knowing [the employee’s] full portfolio of activities – what his authority and responsibilities are – is essential for designing a coherent, balanced solution that takes into account the interdependencies.”

This is difficult under the best circumstances, but is even more challenging when “easy-to-measure” and “hard-to-measure” activities compete for a worker’s attention. Consider, for example, the case in which an employee has two tasks: a quantitative, easy-to-measure task like sales volume, and a qualitative, hard-to-measure task like quality of customer service. Employers may be tempted to strongly incentivize quantity, since it is easily measured. However, strongly incentivizing quantity “devalues” the importance of quality, and employees may sacrifice quality in favor of quantity. Thus, reducing the intensity of the incentive for quantity can incentivize quality. The question then becomes the amount by which the intensity is decreased to strike a balance between incentivizing both quantity and quality.

As it turns out, properly structuring incentives in this two-task model is difficult enough. The difficulty compounds exponentially when tasks are added; all interdependencies must be examined and understood. Think about how many tasks you perform as part of your regular day. If you have five tasks that you regularly perform, there are 120 different ways to arrange those tasks in ordinally (from “most important” to “least important”). Imagine having to cardinally rank those tasks, quantifying how much more important one task is relative to the others... You’ll have to solve this challenge to properly weight the intensity of each incentive.

To me, this is the biggest insight from Holmström’s research. As he notes in his speech, “[b]ecause the opportunity cost of providing incentives for any given task depends on all the incentives for the other tasks, one should always consider the full portfolio of [employee] tasks when designing incentives.” I think that the key to understanding when performance pay will and will not work is when we understand the "work" itself. 

 

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.

Who Are You Talking To?

I read a movie review the other day and noticed that in the first few paragraphs there were two words that I didn't immediately understand.  The words "bifurcated" and "atavistic" were used, presumably to help readers better understand what the reviewer thought of the movie.

Well, those two words are not part of my everyday vocabulary, and upon reflection, I might be able to explain "bifurcated," though aren't sure what that has to do with the subject movie.  As to "atavistic," I think that I've heard the word before, but really don't know what it means.

Now I consider that my intelligence level may be considered a bit above average, so I have to wonder - who the heck was the reviewer talking to with their review?  I certainly didn't "get it" as far as whatever points they were trying to make.  And NO, I didn't drop everything to look up those two words.  What I did do was stop reading the review.

Who Are They Talking To?

This is especially important when considering your compensation communications.  If you want someone to hear what you have to say, to understand your message or point of view, to learn from reading your words, you have to talk to them at a level they are comfortable with.  Not you.  This is not about you.  Or at least it shouldn't be.

There's a lot of information out there, a problem for our times, some would say.  So if you want to get your message across, you need to be able to reach your target audience with as simple a message as you can.  So they all can understand, so they can repeat it to others, so that they'll remember it tomorrow.

Is your text written at the New York Times 8th grade level?  If not, why not?  Don't try to impress your audience.  It doesn't work.

Losing Your Audience

A similar experience happens when listening to a speaker at a compensation conference, a webinar or even at your local professional association meeting.  The speaker uses a word or phrase that is foreign to you.  "What did they say?"  Your mind stops listening as it struggles to identify the strange word and what it means - and then to put it in context.  Maybe you'll figure it out.  Maybe you won't.  Meanwhile, though, the speaker has kept on talking - but you haven't been listening while your mind was paused.  Now you have a struggle to catch up.  Maybe you can.  Maybe you can't.

Then it happens again.  Another mind pause while you mentally translate, "what was that again?"  And so it goes, and you never quite fully understand the speaker's message. 

That's not communication.  That's a speaker talking to a mirror.  You're incidental.

The Writer's Club

That's what I call it, to describe the majority of contributors to professional journals.  For a number of years, I was on the article review committee for one of those magazines, and I often wondered who these authors were writing to.  If perchance they were trying to educate or explain practical tactics that would assist practitioners with their immediate problems, then I'm afraid that many an article wouldn't pass muster.

That's because many articles (check it out) are written by academics and consultants, not practitioners who have dirt under their fingernails from working in the trenches.  As a result, practical advice (what can I do now?) is usually in short supply.  What we all too often get instead is conceptual "stuff" from the view at 30,000 feet, broad inspirational white papers that you just know your senior leadership won't even consider.

This isn't always the case, of course, but how many of those articles are you able to wade through before your eyes glaze over?   Not just read the words, but learn from?  Heavy stuff.  Heavy lifting.

When someone is communicating, is actually reaching you with their message, you listen, you absorb, you learn.  It's the same for me.

So talk to me, not to the mirror.

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, "Business Meeting," by freedigitalphoto.com