Compensation Cafe

Cafe Classic: Hammers, Nails and our Compensation Biases

Editor's Note:  We all have our "best way to fix a compensation problem" biases. We work better (and produce better results) when we are aware of them.

It's called the law of the instrument.  The concept is said to have originated with philosopher Abraham Kaplan, who said "I call it the law of the instrument, and it may be formulated as follows: Give a small boy a hammer, and he will find that everything he encounters needs pounding."  The more popular version comes from Abraham Maslow's The Psychology of Science (1966) and is typically presented as "if all you have is a hammer, every problem looks like a nail."

Sound familiar?  It ought to.  The law of the instrument is alive and well in the field of compensation, compliments of the biases we all hold.

Let's start with the more general bias, that compensation is the fix for every organizational challenge.  Turnover an issue?  Pay them more!  Engagement a problem?  Pay them more!  Employees not meeting performance standards?  Put in an incentive plan (a.k.a. pay them more ... but on a variable basis)!

Never mind taking the time to understand and clearly define the problem so that we can ascertain the best solution.  Pound that hammer and move on!

Sometimes the general bias is ours.  Whether through lack or experience, maturity or confidence, we simply respond to situations with the tool we have most readily available.  Other times, we encounter bias in the leaders we are trying to serve or advise.  They want the quick fix; they don't want some HR or compensation professional digging around in their area for information or answers.  Backs up against the wall, we give them what they want.  And when it doesn't work, they rail against us for our lousy pay plan, which fails to fix a problem that had nothing to do with money in the first place.

Then there are the more specific biases we have toward a particular compensation approach or choice, either because we've had great success with it in the past or just because we find it intellectually appealing.  It may be a particular affection for broadbands, for group incentives or for skill-based pay.   It may be a specific metric that we believe belongs in every sales compensation plan, regardless of the circumstances.  It may even be that we think 360 degree feedback is always the right, or always the wrong, thing to do.  It may be a smaller, more finely tuned hammer, but we swing it just as indiscriminately.

Bottom-line, we all have our biases.  The trick is to be aware of them, be open to understanding the unique business and people reality in every organizational challenge, and be willing to explore other possibilities beyond pounding something with our favorite hammer.

That's what I think.  You?

Ann Bares is the Founder and Editor of Compensation Café,  Author of Compensation Force and Partner at Altura Consulting Group LLC, where she provides compensation consulting and survey administration services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and enjoys hiking, reading and hanging out with family in any spare time.

Creative Commons image "Hammer" by homespot hq

Cafe Classic: Compensation Practitioners Should Be Skeptical of Economic Forecasts

Editor's Note: Stephanie Thomas provides us with a Classic primer to guide us in our review and incorporation of economic forecasts into our work in designing and administering rewards.

In a recent post, my Café colleague Margaret O'Hanlon made a strong argument about understanding broader economic trends: "you have a shot at becoming a more trusted advisor if you understand what's shaping the economy shapes your company's financial and operational plans, which is shaping the company's staffing and reward plans, and so on..." She encourages readers to stay up-to-date on the economic outlook.

I completely agree; you should stay up-to-date on the economic outlook. But it's easier said than done. When there are so many voices in the forecasting space, how do you know which one to listen to? Who should be your trusted advisor?

In truth, it's hard to know. In his 1974 Nobel prize acceptance speech, Friedrich Hayek stated that "[i]t is often difficult enough for the expert, and certainly in many instances impossible for the layman, to distinguish between legitimate and illegitimate claims advanced in the name of science." Hayek describes how the scientistic error - economists' propensity to present their findings with the certainty of scientific language - led to some of the "gravest errors of economic policy." He provides a dismal commentary on the dismal science: "[w]e have indeed at the moment little cause for pride: as a profession we have made a mess of things."

I don't mean to throw my profession under the bus, but Hayek isn't wrong... When sorting through all of the prognostication that is certain to come, like it always does at the end of every year, it's hard to know who to trust. We, as economists, don't have a great track record. To try and clean up the mess we've made, I've put together a quick guide to critically evaluating some of the key economic indicators that may be coming your way.

Employment

What It Is: Employment is seen by many as the most important indicator of the health of the economy. The U.S. Bureau of Labor Statistics releases a jobs report on the first Friday of each month. The jobs report indicates the current unemployment rate and how many jobs gave been gained or lost in the economy.

Why it's important: Consumers make up nearly 70% of economic activity in the US. The employment situation of these consumers has a strong influence on the level of economic activity. The basic idea is that when people are out of work, they cut back on their purchases, which affects corporate profits.

What to consider: Employment statistics depend heavily on definitions. For example, the unemployment rate tells us the number of individuals who are "actively seeking work." It doesn't tell us about the number of discouraged workers, the number of workers who are part-time and would prefer full-time work, the number of workers who are underemployed (in terms of their skills and abilities), or where (industries or occupations) job losses or job growth will take place.

Where to learn more: Projections Overview and Highlights, 2016-26, Bureau of Labor Statistics, U.S. Department of Labor

Inflation

What It Is: Inflation measures changes in prices. The Consumer Price Index (CPI) measures changes in consumer prices and attempts to measure the degree to which life is becoming more expensive for the typical consumer. The Producer Price Index (PPI) attempts to measure changes in the prices of producer goods. I

Why it's important: Again, it comes back to the consumers. Increases in the CPI mean that because things are more expensive, consumers are more likely to cut back on their purchases, which affects corporate profits. Increases in the PPI mean that companies are more likely to pass these price increases to consumers, which further fuels increases in the CPI.

What to consider: Different measures of the CPI and PPI include different "baskets" of goods from different industries. The food and energy industries are known to be particularly volatile. If these industries are included in the "basket" of goods, the resulting metric may be more volatile. Consider looking at baskets excluding food and energy. Additionally, there is a "sweet spot" when it comes to inflation; too much inflation is bad, but deflation is bad too. Deflation can lead to decreased revenues for companies, which may translate into layoffs.

Where to learn more: Consumer Price Index and Producer Price Index, Bureau of Labor Statistics, U.S. Department of Labor

Consumer Confidence

What It Is: Consumer confidence is the degree of optimism regarding the state of the economy that consumers are expressing through their spending and saving activities. The Consumer Confidence Index (CCI) looks at consumers' opinions on current economic conditions (40%) and expectations about future economic conditions (60%).

Why it's important: Yet again, it comes back to the consumer. The basic idea is that when consumers feel confident about their future economic prospects, they are more likely to spend. When they feel less confident, they are less likely to spend. When consumers don't spend, corporate profits are negatively impacted.

What to consider: Some economists consider the CCI to be a leading indicator, or a predictor of future economic activity. Others, however, view it as a lagging indicator, or a measure of what has already happened. The argument here is that it takes time for consumers to respond to economic events. Increases in spending today may be the result of an economy that recovered several months ago. Decreases in spending may be adjustments to a recession that started several months ago. The CCI doesn't tell us what's going to happen; it tells us what already happened and if it can be expected to continue.

Where to learn more: Consumer Confidence Index, The Conference Board

The bottom line is caveat emptor - be skeptical and ask questions. Just because it sounds like science doesn't mean it is science.

Stephanie Thomas, Ph.D., is a Lecturer in the Department of Economics at Cornell University. She teaches undergraduate and graduate courses on economic theory and labor economics in the College of Arts and Sciences and in Cornell’s School of Industrial and Labor Relations. Throughout her career, Stephanie has completed research on a variety of topics including wage determination, pay gaps and inequality, and performance-based compensation systems. She frequently provides expert commentary in media outlets such as The New York Times, CBC, and NPR, and has published papers in a variety of journals. 

Cafe Classic: Performance Pay for Gig Workers?

Gig platforms are everywhere now. If you need something done, whether it’s a simple microtask or a complete overhaul of your marketing strategy, chances are there’s a gig worker on a platform somewhere that can do it for you.

Gig workers aren’t just for small start-ups anymore. In a recent report from the University of Oxford’s Internet Institute, more and more Fortune 500 companies and multinational enterprises are incorporating platform sourcing into their business models. According to this report, platform sourcing is gaining in popularity because of (1) easy access to scalable sources of labor, skills and expertise, (2) reduced start-up and transactions costs, and (3) the elimination of conventional hiring barriers.

For many of us, the gig economy is something that’s indistinct and difficult to wrap our arms around. There isn’t a lot of reliable data about this growing piece of the workforce. Well... we think it’s growing, but we don’t know for sure. The last time the U.S. Bureau of Labor Statistics surveyed the contingent workforce was in 2005! (a new survey is in progress, but results won’t be available for a while…)

If you’re thinking about tapping into the pool of gig workers, you need to think about how you’re going to pay them. On Mechanical Turk, most microtasks are paid at a fixed rate; if you complete the task successfully, you earn a few cents. Over the course of a full day, Turkers can earn an average $6.00 to $12.00 per hour. Workers on other platforms, performing more complex tasks, can earn hundreds or even thousands of dollars per month.

Regardless of the type of task or platform used, compensation is typically output-based: the pay that gig workers receive is based on the success or failure of the gig. This is fine if the outcome of the gig can be categorized as “yes, you did it” or “no, you didn’t do it.” It doesn’t work so well for gigs where the quality of the output matters.

One of the unique features about the gig economy is that workers have discretion over how much they work. But just like the non-gig economy, workers also have discretion over how much effort they put into that work. As the tasks gig workers perform become more complex and mission-critical, employers need to consider that discretionary effort, just like they do for conventional employees.

There's some interesting new research-in-progress examining performance pay for gig workers (for example, Sebastian Butschek, Patrick Kampkötter and Dirk Sliwka, "Paying Gig Workers", unpublished) and I'm excited to see what this new avenue of research will reveal. In the meantime, here are some easy and practical suggestions for paying your gig workers based on performance:

• Early delivery bonus: If the timing of deliverables and/or hard deadlines are critical to your project, consider offering an early delivery bonus (assuming quality standards are satisfied). For time-sensitive tasks, a small early delivery bonus could be the little extra incentive your gig worker needs to make sure things are wrapped up on time.
• Cost control commission: Cost control is always important. But if cost savings are make-or-break to your project, consider offering your gig worker a percentage of the cost savings she generates for you. This little commission could motivate your gig worker to find alternative suppliers who provide the same quality inputs at a lower price and be a win-win for everyone. 
• Rubric-based quality bonus: Quality bonuses can be tricky. It's hard to know how good is good, and how much better than good really good is. Rubrics can be useful here. A rubric is nothing more than a document that articulates the expectations for an assignment by listing the criteria (what counts) and describing levels of quality from poor to excellent. If you can all agree on what constitutes "poor" through "excellent" quality, you can offer a 0 / check-minus / check / check-plus bonus scheme.
• Retention / repeat worker bonus: If you have a really good gig worker, you need to actively try to maintain that relationship. According to a study by JP Morgan, one in six online platform workers is new in any given month, and more than half of platform participants quit within a year. If you find someone who does a great job and is a great fit for your organization, you might want to incentivize her to continue to accept your future gigs.

There are numerous ways to incorporate performance pay into your compensation structure for gig workers; these are just a handful of ideas to get you thinking.

Performance pay is not going to be a component of your pay strategy for all of your “gigged” tasks. But for more complex tasks, those that are time sensitive, or those that require a little more than “standard” effort, you should consider the possibility of paying for performance. I'm sure you can find a gig worker to help you think it through...

Stephanie Thomas, Ph.D., is a Lecturer in the Department of Economics at Cornell University. She teaches undergraduate and graduate courses on economic theory and labor economics in the College of Arts and Sciences and in Cornell’s School of Industrial and Labor Relations. Throughout her career, Stephanie has completed research on a variety of topics including wage determination, pay gaps and inequality, and performance-based compensation systems. She frequently provides expert commentary in media outlets such as The New York Times, CBC, and NPR, and has published papers in a variety of journals.

Cafe Classic: Lights! Camera! Action!!

Editor's Note:  Classic advice from Chuck Csizmar on presenting to senior management and why a picture is worth a thousand words!

When you’re trying to grab the attention of Senior Management, remember that they like a good story, especially one with pictures. 

If you’re addressing your organization's single largest expense, the employee pay programs, then those pictures become charts, graphs and other visual aids that illustrate the presentation points. 

Visuals capture attention and build stronger connections and memories than text or even the spoken word.  Show a picture and the image is locked in, while relying only on text becomes a risk.  The drone of dry prose can grow tedious and is liable to lose the attention of all but your strongest supporters.

Attention grabbers that work: 1) speedometer style formats that graphically indicate the current situation against the target; 2) the green light, yellow light, red light approach, again to colorfully illustrate current status against objectives; 3) pie charts, tables, even regressed lines that illustrate a story; and even 4) stick figures or other "folksy" characters that integrate humor with your message.

People remember images because they capture the imagination.  They'll have a harder time recalling (and taking to heart) whatever you said or whatever you wrote.  So concentrate on your supportive imagery.

Make the story a short one.  I once worked for a CEO who thought that any compensation proposal could be reduced to a single piece of paper, including plenty of white.  “If you need more than that,” he would say, “it’s not such a grand idea.”

You Need A Plan

However, before you settle on the visual format best suited to sell your case you should focus on the data points necessary to make that case.  Remember the old adage that a dream without a plan is only a fantasy?  If you don’t take action steps to convert ideas to reality, what you’ll be left with is smoke & mirrors – an illusion - with little results to show for your efforts.

For those of you who have ever been on a successful diet, you likely treated the effort like a planned project.  Experts advise that participants write down everything they eat, have goals to strive for and milestones to gauge progress.  It helps to have a plan and to keep score - to know where you stand and where you’re headed.

T o accomplish this you should create quantifiable metrics that will collectively illustrate the well-being of your compensation program(s) - and then establish baselines (current state) and targets for each performance indicator.  This key step will help you understand whether your costs are being contained, whether the ROI on employee rewards is at the level your company requires, and where your problem areas are.

Commonly Used HR Metrics:

• Average salary/wage

• Compa-ratios (comparison of pay to a salary range midpoint)

• Count of employees per segment (hourly, non-exempt, professional, management)

• Average performance ratings (latest cycle)

• Average annual pay rise granted for each performance rating

• Count and average of promotional and “equity” increases

• Voluntary turnover (employees who decided to leave)

• Average employee age and length of service

We could go on and on, but you get the point.  Refine these and any other quantifiable factors by further segmentation - per salary grade, employee group, male/female, etc.  Make sure each metric is measurable because guesses don't count.  A compelling argument demands accuracy.

To make these metrics work for you, and to avoid a series of make-work arithmetic exercises that do nothing more than capture minutiae, be certain to measure what's important to your business – not simply what data you can capture.  Make sure the importance of the metric is clear to management (or can be made so).  Management needs to grasp the importance of success, to understand why a metric is important and what achievement would mean.

Once you have the right metrics established (collectively called the “dashboard”) and a baseline in place, you'll readily see where the problems lie.  Then set specific targets going forward to improve on these weak areas, and create a series of milestones to mark your progress. 

What To Look For

Every organization has different pressure points.  However, if your metrics data indicates any of the following situations, management should be informed.

• Average performance ratings that exceed how the business itself was rated

• A workforce where key segments are approaching retirement age

• Promotion and “equity” or pay increase "adjustment" activity that overwhelms the merit budget

• Low compa-ratios that indicate you're not paying your salary ranges

• Any figure that is an unpleasant surprise

When you’re telling a story to management, make it compelling – with facts and visuals that feed off the critical metrics analysis that forms the pulse of your business.  Put a picture in their head. Then bring home the sale by showing how to solve these challenges – with practical strategies designed to end your story on a happy and successful note.

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 "Lights Camera Action" by Maranda Ripperger