Compensation Cafe

Cafe Classic: Do We Need a Pay Structure?

Editor's Note: Many organizations - particularly but not exclusively start-ups, fast growing and founder-led enterprises - feel structure around pay weighs them down unnecessarily.  Maybe so.  At some point, its a smart move to understand the pros and cons, the risks and rewards around the structure decision.  Chuck Csizmar explores this Classic question.

Once an organization reaches a certain employee population it's been typical practice for the Human Resources department to replace their ad hoc compensation/reward processes with a more structured program.  A key element of that program development is the establishment of a base salary (pay) structure.  Here you will have an ascending hierarchy of grade level designations (your position is a grade "x," mine is a grade "y", etc), coupled with ranges that indicate a minimum-to-maximum value (pay) for each grade.

While distinctions in design can vary amongst organizations the central point of having a uniform structure is very much commonplace in both for-profit and non-profit organizations.

You probably see the "but" coming, don't you?

Startups And Small Businesses

Just the other day one of my clients, a young and fast growing high tech company, explained to me that they didn't use grades or salary ranges.  They didn't have a pay structure.  They felt that they didn't have the time to develop a standardized reward program. "We're moving too fast," the CHRO told me, and "We don't have the time, people or money to focus on an HR project."

That's a common response for start-ups and small businesses.  The feeling is that there aren't yet enough employees to start building an HR infrastructure.  Everyone knows everyone else's first name and the company Christmas Party could be held at a restaurant.  Also, business leaders are too engaged in more important endeavors: getting the business off the ground, developing products and services and setting up mechanisms to sell their offerings.

Therefore these first generation employees are usually paid on the basis of:

• Whatever the individual employee could negotiate
• Whatever the company felt it would take to get chosen candidates to join, or
• Setting of fixed rates for everyone in a particular job

Little thought is given to pay relationships (equity) or even the short term impact on payroll expense.  The focus is lock set on creating a business, of getting the ball rolling.  Even job titles become an afterthought, with resultant title inflation slowly infecting the organization, and most no one has a job description.

I get that.  That's the reality of getting a business off the ground.  HR takes a back seat.

But it can't last.

Paying The Piper

Eventually, these poor compensation practices will start to cause real pain within the organization, similar to how too much sugar inevitably causes tooth cavities in children.  Payroll gets out of hand (too high), inequity amidst the staff starts to cause employee relations issues and managers begin to see valued employees becoming disgruntled and heading for the exit.

By the time management starts to realize they have a problem, not only have the problems grown serious and disruptive, but those pay practices that no one cared about earlier have now become ingrained in the small company's culture. Now it's not going to be so easy to change course.  Now management risks angering some employees even as they try to steer the ship away from the reefs.  Some of those employees could be valued contributors.

For example:

• Disconnecting inappropriate job titles is sometimes easier said than done.  Employee egos and self-identification have been blown out of proportion, but to make someone take a step back is difficult.
• Dealing with outliers who either pop out the top of a salary range or fail to meet the minimum level.  When faced with a competitive pay structure to replace the ad hoc and laissez faire suddenly some employees are found to be overpaid, while others are underpaid.
• Facing the cost implications of the above.  Raising someone to the minimum value of a pay range is an easy decision, but what if many employees are affected?  And if an employee has been with you for awhile, raising them to the minimum can still be perceived as a slap in the face.
• Setting grade assignments that reconcile a job evaluation system, competitive market pricing results, and internal equity.  Think of a juggling act where everyone is a potential critic.

So do yourself a favor.  Pay attention to germinating pay issues even as the business passes through its stage 1 and stage 2 development.  Then, when it's time to standardize and structure your reward programs you will find the road ahead all the smoother for your efforts.

Chuck Csizmar CCP is the 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 "Structure" by Gunnar Wrobel

Cafe Classic: Pay Communication -- Avoid the Parent Trap

Editor's Note:  Too often, we fall into "parent speak" when responding to employee questions and challenges around their compensation.  Margaret O'Hanlon shares ideas on how to avoid the Parent Trap and other pay communication pitfalls in this Classic Capstone to her series on how to be a better communicator!

We all know the parent mantra:

• I understand this situation far better than you do
• Do what I am telling you, you'll find out it's the best way
• I don't want to hear about it (shorthand for, "You'll realize I'm right once you've done it")

Parents resort to these tactics when time is short and everyday tasks are at hand. However, so much of HR-speak comes off that way, too. And then we wonder why HR communications are unpopular -- a reaction that is especially unnecessary and undermining when it comes to compensation communications. You'd think that we'd get the benefit of the doubt, since the topics that we are talking about are money and rewards, but it's not the case.

Here are some suggestions to break the "parental tone" habit.

Brainstorm a new topic -- what's on employees' minds -- instead of assuming that you already know everything you need to know. Imagine how much you could learn and how much these insights could help everyone prepare for planned HR activities if you held a meeting, invited the right people (including a line advisor, maybe), and free-formed the teams' ideas on today's employees' and managers' thoughts, perceptions, attitudes and challenges. Then break what you find into subgroups -- this Division vs. that; this product area vs. that; new managers vs. experienced managers; and so on. It's easy to see how much richer your communication and implementation plans would be as a result of this conversation. Of course, free forming isn't often a compensation professional's strength, so mix up the group with those who can help you get going.

Recognize that your compensation and performance management software annoys a small or large subset of your employees and managers. It's just a given. Stop acting as if the programmed instructions are enough, thank you very much, that's what we paid the provider for. Admit what the tough spots are and add information in your reminder emails that can help people find their way around them. If you don't know what they are, ask a few managers.

Push your communications one or two notches up higher on the transparency continuum. Again with the meetings! But today, this really can't be overlooked. The HR team should create this challenge for themselves, develop a contract among themselves to make real progress and determine a measure or two to hold themselves accountable.

What is the hardest thing that you're asking managers to do this year? Even if it hasn't changed from last year, plan how you can support them better, so they will be more successful and/or less stressed this year.

Has anyone ever used a hotline during performance review or compensation discussion time frames? I know it sounds dicey, but in the right circumstances and by promoting it as a coaching option, it could be considered as a way of diminishing the "I don't want to hear about it" tone to HR's performance management and compensation end-of-year activities.

You know you're good, but are you a great communicator? This is Episode 5 in a series on improving employee loyalty through better, uncomplicated end-of-year compensation and performance management communications
Episode 1 = Expect More (From Yourself) This Year
Episode 2 = Value End-of-Year Implementation--How to Make It Important, Worthwhile and Useful to help you get started
Episode 3 =Tips for Improving Manager Meetings to give you new strategies
Episode 4 =The Tip That Will Change People's Minds

Margaret O'Hanlon brings deep expertise to discussions on employee pay, performance management, career development and communications at the Café. Her firm is re:Think Consulting. 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 everythingiscommunication.com. She is a member of U.S. Masters Swimming.

Cafe Classic: Aligning Incentives, Performance Metrics and Strategic Objectives

Editor's Note:  What can an experiment involving singing, dancing and posing teach us about performance pay?  Plenty ... as this Classic from Stephanie Thomas reveals!

How clear is the line of sight between your performance pay programs, strategically linked performance metrics and the organizational strategy? Do your managers see these performance measures as they really are (imperfect proxies for larger, intangible strategic constructs), or do they focus on the performance measures themselves as the ultimate goals?

Let's say that one of Company X's strategic objectives is to maintain its market share. This strategic objective is translated into tactical goals, one of which is retaining current customers. Assessing managers' performance in supporting the overall strategic objective of maintaining market share can be done different ways, but let's assume that Company X focuses solely on the tactical goal of retaining current customers and evaluates managers' performance through a customer satisfaction survey. Managers will receive bonuses tied directly to their survey scores.

Will Company X's managers see through the survey scores, understanding that the overall strategic objective is maintenance of market share, and ensure all their decisions are consistent with this objective? Or will managers act exclusively to maximize survey scores and paychecks, losing sight of the overall strategic objective of the firm? 

If managers focus solely on the metric, they exhibit what is known as surrogation. Choi, Hecht and Tayler describe surrogation as the situation arising when managers "fail to fully appreciate the fact that [performance] measures are merely representations of the true constructs of interest, ultimately acting as if the imperfect measures are the constructs of interest"("Lost In Translation: The Effects of Incentive Compensation on Strategy Surrogation",The Accounting Review, Vol. 87, No 4, pp. 1135-1163). Surrogation can hinder managers' ability to make decisions and take actions that are consistent with organizational strategy. 

Unfortunately, using performance pay linked to a strategically linked performance metric increases managers' propensity to exhibit surrogation. The way in which performance pay affects performance is complex and there are a variety of mechanisms in play. However, a substantial amount of research suggests that incentive pay has attention-directing effects that influence an employee's experience with performance measures. In their paper, the authors explore these attention-directing affects and address the question of whether using multiple compensated performance metrics, rather than one compensated metric, will reduce the problem of surrogation and help keep the organizational objective clearly in managers' view.

The authors design an interesting laboratory experiment to examine these hypotheses. Graduate students at highly ranked U.S. business schools were asked to create a virtual character in the computer game Spore according to the following instructions: design a creature that can socialize with other life forms such that it will become the dominant species on the planet. 

Within the game, four "traits" influence a creature's ability to socialize: sing, dance, charm and pose. Participants were informed that all four traits were equally important in a creature's ability to socialize, and were asked to keep this in mind when designing creatures.

All participants received compensation based on a post-experimental assessment of their creature's ability to achieve global domination via socialization. The top performer received $20, the second-best performer received $18, and so on. In addition, a bonus was awarded based on specific performance metrics. One group of participants (single-measure-compensation participants) received a bonus based on the creature's ability to sing: they received an additional $2 per level of "sing ability." For example, a creature with a sing ability of 4 would generate an $8 bonus. The other group (multiple-measure-compensation participants) received a bonus based on the creature's ability to sing, dance and charm" they received an addition $1 per level of sing ability, dance ability and charm ability. For example, a creature with level 3 sing, dance and charm abilities would generate a $9 bonus.

The results of this experiment are not surprising. The single-measure-compensation participants constructed creatures with higher levels of the sing ability, at the expense of the other, equally important, socialization abilities. Their creatures were less successful in achieving the overall objective of domination via socialization. This is exactly what we would expect if the participants were engaging in surrogation. Surrogation among the multiple-measure-compensation participants was statistically significantly less than among the single-measure-compensation participants, and their creatures were more successful at achieving domination through socialization.

At the end of the day, this experiment empirically confirms what many of us already know: people do what you pay them to do. When designing performance pay systems, make sure that the attention-directing effects of incentives are directing attention to the achievement of the overall strategic objectives of the organization, not just to singing, dancing and charming.

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. 

Image courtesy of Electronic Arts

Cafe Classic: Price is Only an Issue in the Absence of Value

Editor's Note: Dan Walter's Classic post is a great reminder to us, especially we pay professionals buried in our price data, that there is another (sometimes more qualitative but no less important) measure out there that impacts employee retention, and that is the value of the jobs we offer.

The title of this article is not something I invented. But, the smart person who first said it seems to be lost to history, so I am borrowing it. But, that’s not the point.

As compensation professionals, we worry an awful lot about prices. Value is something we often put on a back burner while trying to build a better benchmark. The secret that the best businesses and salespeople know is that pricing loses its power when the value is properly understood.

It’s such a simple premise that it can be hard to believe fully. But, study after study confirm this simple fact. When something has value to a person, the price they put on it is higher.

Are your employees leaving for an additional $0.25 an hour? I recently spoke to someone who told me just that. While pay for these roles must be evaluated and possibly corrected, there is something deeper serving as the cause of this issue. The company knows it. The individual knows it. But neither have been able to put their finger on it. Identifying, defining, and building the perception of value is not always easy.

First, you must be able to create the feeling of value from the perspective of the individual. It doesn’t matter one bit whether you see value in the offer. You probably helped determine the details, so you probably see some value.

You need to understand what is valuable to the individual. Don’t guess. Don’t assume. Don’t tell them. Ask them.  Listen and confirm. Then get to work building or communicating that value to the individual. Don’t do this as some defensive counter-offer to someone who has said they are considering leaving. Be proactive.

Work on learning what people in the problem area find valuable about their jobs and in life. Work on showing them how your solution builds on that value. Show them new ways to find value in what they do. If you can effectively do these things, you may find that minor pay differences are no longer an issue.

I can already hear some of the negative Nellie’s saying that this is too simple and it won’t work for everyone. You are right! It won’t work for everyone, but it will work for a bunch of someones. This is a purpose-built approach to dealing with people who are “leaving for better money.”

Think about it this way. Diamonds are made exclusively from one of the most abundant elements in the universe. They are incredibly expensive for something so abundant. But, they have great value to people purchasing and receiving them. They have come to represent something of significance between two people. They represent commitment. They represent the fact that you are doing well enough in life to own that shiny bauble. But, make no mistake, they are expensive!

The value they deliver exceeds the price required to obtain them. Spend the next two months figuring out what your people value and how your company can deliver it. If you do it well, you will find that prices are only an issue in the absence of value.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is a leading expert on incentive plans and equity compensation issues. He has written several industry resources including a resource dedicated to 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.