Compensation Cafe

Cafe Classic: How Much More is Enough?

Editor's Note: A Classic discussion on the tipping point (if there is one!) for compensation, via Dan Walter!

Many of us spent time a few years back watching the news about a man in Southern California who was wanted on suspicion of murder, including the killing of at least one police officer. Horrified and fascinated, those of us in, or near, Los Angeles were aware of what this man looked liked. And most of us wouldn’t have hesitated to contact the police if we had even glimpsed this guy’s shadow. So, what does this have to do with compensation?

First, it was announced that a $1,000,000 reward was being offered for information that would lead to his capture. You read that right, one million dollars. As compensation goes, this is not chump change. A day or two later, while I watched the evening news with non-compensation professional friends, it was announced that an additional $100,000 had been added to the reward. One of my friends said, “Why would an extra $100,000 convince someone to call when the first million didn’t?”

As the compensation guy in the room, I tried to figure out a way to explain this from a compensation / behavioral economics / carrot-stick or any other perspective. As it turns out, I had nothing except. “That’s crazy!”  These were truly insightful words coming from someone who figures out effective pay as a profession.

Later, as I worked on metrics and goals for a long-term incentive plan, this brief conversation came back to me. I had to ask myself, “How much more is enough?” If you have determined that n dollars should be enough to get someone to do what you need, but the need was not filled, is offering n+10% really going to make a difference? And, how would you know?

This is one of the most important issues in variable compensation. In the age of Say on Pay it is even more of a factor in executive compensation. At what point do more dollars simply ensure that someone keeps working, without having making a material change their behavior? Before we decide that more money is the right answers, we need to ask more “why” questions. We have to be better than simply citing survey data as our reasoning.

When carpenters are asked to solve a problem, their first solution has something to do with wood. When a hairstylist is asked how to make someone look better, they usually start with hair. When a compensation professional is given an issue, we often start with money (or its direct equivalent). The next time the opportunity to offer a solution arises make sure you have considered as many “non-money” solutions as possible before you say “add another $100,000”. Trust me, your judgment will be lauded and your solutions may be far more effective.

Tell me about a time you added more money, but got nothing new in return. Or, share a time where you decided against more money and got better buy-in than might have seemed possible.

Dan Walter is a CECP and CEP and works as Managing Consultant for FutureSense. He is passionately committed to aligning pay with company strategy and culture and is 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 @DanFutureSense.

Can the "Median Employee" Become a Useful Measure?

When the Executive Pay Ratio is in the news, you can bet lavish executive pay is the point. It certainly is for the recent "Bloomberg Opinion" that "CEO Pay Is an Underrated Risk to Stocks."

But this article, surprisingly, also addresses median employee pay levels. Let's face it, we all try to forget median pay from one year to the next. It's not because it's hard to remember, it's more likely the crummy associations with 1) what it takes to calculate it, and 2) how it influences the Pay Ratio. But what if median pay could be made useful as an analytic? Has anyone tried that yet?

I mention it because the Bloomberg article has a great graphic illustrating that, "The difference between CEO and worker pay was once a fraction of what it is today."

"The CEO-to-worker pay ratio was 20-1 in 1965 . . . The ratio gradually swelled during the three decades that followed, climbing to 342.5 to 1 by 2000. With few exceptions, it has hovered near 300 since then."

The thing is, we know why the executive portion of the ratio has become so high, but I think we have very limited insight into why the median employee measure is at present levels. We know that there is a technical reason -- it includes part-time employees which skews the number considerably in certain industries like retail. We know that increase practices since the Recession have led to relatively lower salaries. But surely there are additional reasons? Insights that would be valuable to your compensation strategy development.

For example, since the seventies, organizations have been downsized, resized, reorganized and "technologized." How has your company evolved to the organization structure you have now? What are the stages of your company's evolution over the last 30 years or so? In each stage, who would have qualified as the median employee, and what does this say about the type of organization structure your company had at that time. Is there a clear alignment between talent strategy and pay in each of the organizational structures that you identify? What has your company learned over the years?

Then there's today's issues. If part-time employees take up such a large percentage of your workforce, what does that mean about the definition of the "most valuable players" in your organization? Do a large number of employees have a greater direct impact on the bottom line than a few strategically placed high potentials? If you don't have a large number of part-timers, who are your median employees, and how have your pay policies affected them? Step back and consider whether the picture you've painted is optimal, given current business operations and results. Consider other ways the "median employee" can be used as an analytic for your company in the coming years.

What about the future? In three years, based on your projected talent strategy, what title should qualify as median employee? Is it the same job title as today? How will your pay strategies affect this evolution?

I'm guessing that this type of analysis would offer insights that would be valuable for both strategy and communications. Strategy, in that there are bound to be insights that lead to practical adjustments. Communications, in that there are bound to be details that can be helpful in explaining pay and business priorities, and how they have evolved/are evolving.

[BTW, the Bloomberg article includes a link to a really interesting interactive chart of Pay Ratios by industry, from low to high of 1,000 of (pretty much) the largest U.S. public companies.]

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. A former Board member for the Bay Area Compensation Association (BACA), Margaret 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: On Pay for Supervisors

Editor's Note:  Few things can torpedo the morale of a work team like the presence of a slacker (according to Merriam Webster, a person who shirks work or obligation).  Where does the responsibility for dealing with these "esprit-busters" lie?  Jim Brennan examines both the rules of thumb and what some "experts" have advised for addressing this Classic challenge.

The well-established principle that supervisors should praise in public but criticize in private can derail a compensation system.  An article caught my eye recently on how slackers pull down the group because the crew rarely sees the corrective discipline privately applied.  It illustrates that what keeps people productive is effective communication of the appropriate feedback that drives behavior.  That made sense, but the recommended solution sucked.

Two thoughts came to mind:  (1) just as compensation is communication, isn’t communication also compensation? and (2) why are supervisors paid if not to keep the entire staff productive?  This article will focus on the second question, because the first deserves a complete post of its own.

If a boss follows the accepted rules and keeps corrective interventions private and confidential, that apparent silence bespeaks indifference to the workgroup who do not see any improvement steps, remedial actions, reprimands, punishments or open displays of negative consequences to the slacker.  One consultant prescribes intervention by the peer workers with the offender.  Rather than getting pissed off and demotivated yourself, he suggests, you should take ownership of the issue (because you are most affected by it and therefore more responsible than the boss!) and handle it yourself.  If the boss doesn’t act, some claim the peer co-workers should step up and chivvy the culprit.

Whose responsibility is it, to maintain a productive workforce?  Nowadays, it is true, bosses may supervise remotely, having little proximate physical contact with the team and therefore frequently unaware of slackers who goof off.  Even if out of sight, however, bosses are paid and supposedly trained to handle exactly these issues.  It is their monkey. 

Should co-workers be expected to cover for the supervisor, taking up the slack created by ineffective management to “supervise from below”?  I think not.  While social pressure from peers can be wonderfully effective, most workgroups are not elite teams of highly self-actualized experts who require little guidance.  An immediate supervisor is usually PAID to manage the performance of subordinates.  The boss may be called lead person, crew chief, foreman or forewoman, supervisor, manager, director, VP… or any title under the sun, but this role of people-monitor is the sole reason they receive a supervisory title and get higher income.  Leaders don’t neglect the well-being of their followers, because that is a repudiation of their pay grade. 

Remember that supervisors frequently have a more difficult task than meremanagers.  Many people get the fancy title of manager (higher rank, pay, status, etc.) while remaining a sole individual performer, handling a project personally or administering a functional area.  Supervisors oversee people.  Managers may have no subordinates reporting directly to them, but all supervisors are responsible for the output of workers who report directly to them.  Handling people is actually a far more complex challenge than dealing with materials, administering plans, generating ideas and doing things that do not require exercising authority over people.  Instead of doing things yourself, the supervisor is supposed to delegate tasks and leverage the application of talent through others.  That is often much harder than handling issues personally as an individual contributor.

Since supervisors are already rewarded for filling that role of monitor and guide, they should be charged with the duty of fulfilling that responsibility.  It seems wrong, improper and unfair to expect underlings to enforce discipline and to maintain the productive work environment when a supervisor is neglecting their duty.  Any boss incapable or unwilling to perform that authoritative human interaction role should be demoted to a coordinatorposition where they can deal with data and things and not face supervisory challenges. 

Or am I wrong, again?

E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience in most industries.  After corporate HR posts and consulting CEO roles, 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.

Image courtesy of cafepress.com

What's Your "Comp Guy" Personna?

I’ve never been particularly good at mathematics and yet have made for myself a successful career in Compensation.  Now, why is that?  One would think that all of us compensation folks are strictly numbers people, focused on statistics, surveys and regression formulae.  On the other hand, math experts often fail to rise to the top of my profession.  Counterintuitive?  Another quandary to ponder over.

Why is it that some compensation practitioners manage to succeed (climb the specialist ladder into management ranks) while others don’t?  There may be several reasons for this, but I think an individual's persona has a lot to do with it.

Changing View of Compensation

Effectiveness as a professional in Compensation isn’t (or shouldn’t be) all about the numbers, but equally as much about the people affected by those numbers.  A successful practitioner should be able to understand their organization's business as well as monitoring the pulse of employees; those who should be treated better than figures on a spreadsheet.   When you consider the human factor as little more than tiny boxes on an organization chart, then your ability to relate to and solve human factor problems will be limited by your ignorance of the employee relations impact that naturally follows your recommendations.  Effective compensation is more than simply adding up the numbers.

Do you remember seeing the HR analyst with the pocket protector and a bunch of pens in the shirt pocket?  That would be the one walking the hallway laden down with surveys and statistical analyses.  That vision personifies the traditional view of “the comp guy."  This was the master technician who lived with the charts, graphs and regression formulae, but who failed to understand the people impact of their work.

Today, those who lead the application of best reward practices are cut from a different cloth, at least in most companies.  Compensation practitioners are no longer confined to a cubicle or an out-of-the-way office, but increasingly are stepping out among the employees, developing an understanding of how the business operates, as well as honing their ability to effectively partner with internal business clients.

Sensitized practitioners know that the process of compensating employees should be about the opportunity for rewards, and about how those rewards can influence employee behavior, for good or ill.  Therefore, the success of the solutions provider lies in being able to creatively assist managers in achieving their objectives, while at the same time adhering to equitable and consistent policies and procedures.  It's not about quoting policy with a shrug of the shoulders.

What’s the Color of Your Hat?

Something else to think about; what role does the Compensation function play in your organization?  How is the Compensation practitioner viewed both by employees and by management?

• Policeman vs. Gatekeeper:  The proper application of responsibilities is not to simply say yes or no, but to encourage an open process of ideas and practices that operate within established policies and procedures.  Nobody likes the fellow who can offer little more in the way of help than quoting from the company policy manual.  That's not making a contribution.
• Numbers vs. People:  Are your thought processes employee-oriented, or is the understanding that real people are affected by these policies and procedures lost on you?  A business-only focus that ignores the human factor in driving success is inevitably tripped up by predictably lower morale and the employee disengagement that follow such insensitivity.
• Policy vs. Flexibility:  Are you the one who quotes policy as the supposed answer to every manager’s question, or are you instead open to creative and constructive possibilities? 

When you tell a manager that the decision remains with them, that you’re only offering advice, their reaction is often startling.  You'll be able to actually see their body relax.   When they no longer feel challenged, you'll be able to reach them with helpful suggestions, because their instinctive defensive wall will be down and their minds open to possibilities.

• Analysis Paralysis vs. Solutions-provider:  Being able to make timely decisions vs. being caught up with a constancy of analysis that never seems to move toward a decision point.  Some call that phenomenon "analysis-paralysis," while others pin the label "treadmill management."  Do you have a reputation as a decision-maker or as an analyzer?

When you consider the compensation practitioners that you deal with in your organization, are they the good guys or the bad guys - the white hats or the black? 

Which are you?

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, "Friends," by S. Baker

Cafe Classic: Does Red Circling = Regulatory Red Flag?

Editor's Note: The issue of "red circled" employees is a Classic one, for sure.  It can be particularly acute when organizations create and implement new pay programs and structures, or when they update programs and structures that have fallen into disrepair.  Can it also create regulatory red flags?  Stephanie Thomas shares a cautionary post for us all.

Have you ever tried to do the right thing, only to have it end in disaster? That's exactly what can happen if your red circling policy goes wrong.

(By way of background, red circled employees are those that are paid more than the maximum of the salary range for their job)

I came across an interesting chart at Payscale.com that proposes three options for correcting red circle issues, along with eight questions to help you choose which option is right for your situation (click chart for a full-size pop-up):

Dealing with red circled employees is, I think, more difficult than simply following a flow chart approach. It's important to understand why the employee was red circled in the first place: is the red circling the result of an internal reorganization or from market forces? Is the red circled employee a long-time incumbent or a new hire? Different situations may require different solutions.

Regardless of the cause(s) and solution(s) you choose, red circling can result in regulatory red flags. As I've mentioned before, internal pay equity is a top priority for regulators right now. There are a variety of initiatives from the DOL (and OFCCP in particular) and the EEOC to collect more compensation data at the employee level. The agencies are starting the data review process with a very cursory review, looking at averages, medians, minimums and maximums by protected group status. Red circled employees - especially if they are disproportionately male, white, younger, etc. - can send up a huge red flag. On the surface, pay rates for red circled employees appear to be out of line with those of similarly situated employees. These kinds of "out of line" situations are exactly the thing that can trigger discrimination investigations.

Your chosen solution for dealing with red circled issues can also send up a reg flag. Freezing pay or providing smaller lump some increases for some employees but not others can also trigger internal pay equity questions. Remember that while we typically think of pay discrimination in terms of "men earn more than women" it is just as illegal to grant men smaller increases than women if that decision is based on gender.  

The bottom line is that regardless of the underlying reasons for and solutions to red circling, they can create the illusion of surface disparities in internal equity. They key is to thoroughly document the reasons and solutions at both the organizational level and at the employee level. You should have a formal red circle policy in place that outlines the kinds of situations that can create red circle situations, and how red circle situations will be addressed. Once that policy is in place, it should be consistently applied to each and every situation. In the event that an employee is red circled, it's critical to document the reason(s) and proposed solutions in the employee's file and maintain that documentation so that you can support your decisions down the line. 

There's not much you can do about red circling creating the illusion of surface disparities in internal equity. But if you have the documentation to back up your decisions, you can stave off further regulatory investigation and avoid compensation discrimination litigation.

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. 

Do Your Incentive Plans Motivate Choking?

Could it be that we are designing and communicating incentives for our highest performance all wrong? A recent study titled “Reappraisal of incentives ameliorates choking under pressure and is correlated with changes in the neural representations of incentives” appears to show that the fear of losing a reward allows people to perform at the edge better than the desire for earning more award. This study specifically looked at the impact of incentives on motor and neurological performance in high-pressure situations. While this may not apply to an average broad-based plan, it seems to have possible application in the high-stakes game of executive compensation.

On its surface, this seems counterintuitive to me. It feels like having money to lose would be more pressure inducing than having money to gain. Perhaps middle and lower levels of achievement are motivated by upside potential, but higher levels of achievement require different psychology.

I remember reading an academic paper years ago that detailed how CEOs took fewer and fewer risks the more money they were paid, or had built into outstanding equity compensation. The authors believed that this was due to individuals not wanting to risk their own sizable stake for the sake of trying to earn even more. (yes, I am still trying to find a link to it…) Essentially, executives became afraid of striking out and stopped hitting home runs.

The real question should be what this may mean for future incentive plan design. For most companies, probably nothing. For companies that perform at the very highest level, it may mean a reevaluation of their programs. Perhaps instead of a Minimum-Target-Maximum, we need All of It-Less of It-Even Less of It-None-of-It. Maybe the “All of It” level would be linked to a 25-30% probability of achievement, rather than the current practice of setting the Maximum to a 10-15% chance of success.

The supporting communications would be focused on everything you will lose if you don’t perform. This seemingly depressing and negative approach would clash with nearly all of most companies current messaging, which tends to be focused on all the possibilities if you do even better. Imagine a presentation starting with “Don’t suck, because you’ll lose it all!” The researchers even suggested that their approach to communication may have had some impact on the results.

…we found that loss aversion did not significantly interact with the appraisal condition to influence task performance. One potential explanation for this is that in both conditions of the present study, and unlike in Chib et al. (2012, 2014), participants were explicitly instructed to reflect on the consequences of gaining and losing the incentive presented on each trial. By encouraging this approach, as opposed to allowing for differences in cognitive strategies to manifest as a result of individual differences in incentive sensitivities and loss aversion, we may have reduced any intrinsic interindividual effects of loss aversion. 

Of course, this is just one more datum point in the ocean of information covering performance, motivation, behavioral economics, personal psychology and no much more. It is too soon to use this data to change everything, but it is long past time to evaluate your incentive plans and try some innovative new ideas. Perhaps we all need to come to work with a bit more of a “what am I going to lose” attitude and see if our performance ticks upward.

Dan Walter is a CECP and CEP and works as Managing Consultant for FutureSense. He is passionately committed to aligning pay with company strategy and culture. Dan is 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 @DanFutureSense.

The End of Compensation, Rewards, and Human Resource Management

Editor's Note: Today's post comes to us courtesy of guest contributor E. K. Torkornoo.

In spite of all the progress we’ve made over the years and decades, a troublesome fissure still persists in approaches to Compensation, Rewards, and Human Resource Management (CRHR) in many organizations. The massive divide relates to a preoccupation with means, versus the end.

THE ARMS RACE

For far too long, too many of us have been talking (and acting) about Attraction, Retention, Motivation, and Skill development (ARMS) as if they are the reason for our existence. We flaunt our ARMS in matters of strategy, policy, performance, and achievements. We parade ARMS on stage in many professional conferences, workshops, and forums. We do so in professional and academic publications. We ask our consultants and researchers to supply the latest artillery to help our troops stay well-ARMED (‘E’ for Engagement; ‘D’ for Development). We define, measure, and report how well we’re doing by proffering numbers, fancy graphics, and storylines about the state of our ARMS.

Unfortunately, ARMS and being well-ARMED are not enough for the organization. Necessary, yes; but NOT sufficient. 

THE END

Organizations exist to deliver RESULTS. RESULTS are the highest level in the hierarchy of performance. RESULTS are, generally, the ultimate state of desired outcomes for owners and shareholders. Indicative measures of results include Total Shareholder Return (TSR), profitability, share price, market share, etc. In the case of non-profit organizations, RESULT measures refer to the ultimate state of socio-economic well-being for target populations served (to the extent that the organization clearly identifies and focuses on this group separately from its internal stakeholders).

RESULTS are the real end; all else are means to an end.

In CRHR, too many organizations still have a troublesome preoccupation with old silos. Too many have rather inward-looking complacency. Too many are afflicted with the need to hunker down in their bunkers, drill into (often meaningless) numbers, do more and more about less and less, etc. Generating fancy statistics and graphics about micro organization characteristics may be nice and impressive, but do they ultimately demonstrate strong connections to RESULTS?

MANAGING CHANGE

For the many organizations that need to change, it helps to remember that:

• Grave dangers await those who succumb to the seduction of relying on ‘intuitive links’ between what they do in CRHR, and the RESULTS of their organizations;
• Functional areas like CRHR exist to support the delivery of RESULTS: not for their own sake;
• It is imperative to align everything they do in CRHR with the delivery of RESULTS;
• There are increasingly more tools for demonstrating (and testing) CRHR contribution to the delivery of RESULTS other than by waving ARMS up in the air, and chanting (as if we do not care) the tentative, tired, and troublesome refrains of old.

In too many organizations, too many efforts at change in CRHR have been relatively cosmetic. We have witnessed lots of restructuring, reinventions, re-engineering, transformations, … in CRHR that are little more than changes in functional area designations with new job titles. All the fancy new names and titles notwithstanding, they fail to deliver sustainable and deep changes in attitudes, behaviors, and contributions linked to the ultimate of delivering RESULTS.

For major improvements in CRHR, many organizations need, among other things, fundamental, far-reaching changes in:

• Strategy, models, modes, measures, metrics, men & women, and more;
• Attitudes, behaviors, and contributions demonstrably linked with the delivery of RESULTS;
• The lexis and structures of the language of CRHR;
• Sourcing and leveraging structured, multi-level hierarchies of performance that clearly distinguish among successive levels for Inputs & Attributes, Throughputs, Intermediate Outcomes, And Results;
• Differentiating between means and ends;
• Differentiating between indicators of intermediate outcomes, versus those of the organization’s ultimate RESULTS.

PLACE AND PRESENCE OF CRHR

The sustained presence of CRHR at the table in the highest corporate circles of decision-making depends on our ability to make far-reaching changes that demonstrate clear and measurable relevance and contributions to corporate RESULTS. Otherwise, CRHR functions and people get relegated to the fringes and/or buried elsewhere.

At the end of the day, the real END of Compensation, Rewards, and Human Resource Management is NOT the waving of ARMS or being well-ARMED, however measured. We need measurable positive contributions and links of CRHR to the ultimate reasons for the existence of the organization. The real END of CRHR is the delivery of target RESULTS.

E. K. Torkornoo is a Certified Compensation Professional and International Consultant who has served as Director, Manager, Consultant, and Specialist in Compensation, Total Rewards, HR, & related functions. His work spans multiple sectors, and includes regular and consulting roles with Big 4 Consulting, FTSE 100, Fortune 500, Fortune Global 2000, Forbes 100 Arab World and other organizations. E. K. has worked in North America (18 Years), Europe, The GCC (Middle East), Asia, And Africa. His background includes graduate studies at IESE (Spain), The London School of Economics (UK), and the Carlson School Of Management, University of Minnesota (USA). Currently based in Tema (Greater Accra), Ghana, E. K. Torkornoo is open to regular and consulting opportunities globally. Reach E. K. by email at [email protected],  or connect with him on LinkedIn.

Creative Commons image "business results" by limogirl5