Compensation Cafe

Cafe Classic: Merit Pay and the Tragedy of the Commons

Editor's Note:  What wisdom can Aristotle offer those of us who endeavor to make merit pay work?

In a conversation about pay-for-performance a number of years ago, one of the participants drew a comparison between the challenge of making merit pay work and the classic dilemma the Tragedy of the Commons.  It was a great point, one I've borrowed countless times over the years.

A little background.  The theory underlying the Tragedy of the Commons dates back as far as Aristotle, but it was popularized in modern times by the essay of the same name written by Garrett Hardin for Science.  Essentially, it describes the dilemma that occurs when the short-term interests of individuals are at odds with the long-term interests of the group or, as Aristotle puts it "... what is common to the greatest number of people gets the least amount of care..."

I like Wikipedia's summary of Hardin's article:

This story describes a group of herders having open access to a common parcel of land on which they could let their cows graze. It is in each herder’s interest to put as many cows as possible onto the land, even if the commons is damaged as a result. The herder receives all the benefits from the additional cows but the damage to the commons is shared by the entire group. Yet if all herders make this individually rational decision, the commons is destroyed and all will suffer.

As Hardin and others point out, the "tragedy" plays itself out in a wide range of modern day "commons" - beginning (but not ending) with our use of resources such as water, parks and wetlands, fish stocks and oil.  The point made by my colleague during the aforementioned discussion is that we often see a similar dynamic at work among managers when it comes time to assess their subordinates' performance and hand out merit increases.

The actions of many managers would suggest that they see their role and their primary objective in the merit pay process to be getting the highest possible increases for each of their reports, however that might be accomplished.  If gaming the pay system is the most expedient way to get there, then so be it. 

The outcome of this behavior is that the ability of the group (the organization) to pay for performance, to differentiate and reward the employees who truly go above and beyond in their roles, is compromised in favor of the individual manager trying to maximize the pay levels of his/per particular group of employees.  Peformance-based pay ultimately fails.

Addressing this "tragedy" requires more than simply training managers in the nuts and bolts of how the performance management and pay systems work.  It requires directly dealing with the definition of what it means to be in a management role.  I would submit that the role of a manager is one of stewardship; of being good stewards of the organization's resources - both human and economic.  Stewardship involves actively balancing the needs of both employees and the organization.  What it isn't is putting the short-term interests of their reporting employees above the longer-term interests of the larger group.

Until and unless we hold managers accountable for their roles as stewards, we may be unable to conquer this particular Tragedy of the Commons and our pay-for-performance efforts will suffer accordingly.

Maybe Aristotle's got some ideas for us...

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 "Grazing Cow" by Matthijs Meeuwsen

Cafe Classic: Motivation 101 (or, Pass the Motivation, please)

Editor's Note: Motivation is a key objective for many of the plans and programs we devise.  But how well do we really understand and work to appreciate the variations and complexities of motivation?  Jim Brennan share some insights and conclusions in this Classic post.

No one can motivate anyone else.  People already come with their own motivations. As an employer, you must deal with the actual people who do your work rather than artificial stereotypes stamped from an identical mold formed by the creative imagination of some speechwriter.  All you can do is offer reinforcements and consequences that hopefully align with the actual motivations of your employees.

Herzberg's refinements of Maslow's hierarchy of needs is a starting point, but individual motivations run the gamut. The starving poor need basic necessities and money; the prosperous rich have the luxury of pursuing other goals like affiliation, recognition or self-actualization. What works best with a particular group depends on what they need and want.  One cannot generalize that cash is always superior to other rewards nor that individual recognition will always create more productive output results than group awards.  In the immortal words of the ancients, it depends.  Motivation is a diagnostic process rather than a universal lever that can be quickly identified and easily pressed for instant results. You don’t inject motivation into your people like a serum; they already have their own, thank you.

The most effective managers are those who know the actual key motivations of each of their subordinates and therefore customize their contacts, output consequences and reinforcements to the actual motivations that drive each individual. Those who believe "everyone is just like me" are gambling on a broad oversimplification. They will find occasional success with their clones but will experience failure with the majority of people who have different circumstances, different priorities and different motivations.  Research has proven that the most effective supervisors are those with the best understanding of the motivations of their individual subordinates, not those whose direct reports have the exact same motivations as the supervisor. 

A boss motivated by status can’t safely expect a crew of workers desperate for money to want the same rewards he wants; their decisions are driven by different desires.  A supervisor who wants to Do Good For Mankind better not project her motivations onto her starving subordinates who are struggling to make ends meet; their enthusiasm is currently best excited by cash.  In academia, where the subjects studied are comfortable in regard to their hygiene factors, the forces that motivate behaviors are quite different than those operating among twenty-somethings with growing families to feed.  There is a wide disparity of motivations encountered in a typical work group, and the effective supervisor needs more than one tool in his or her kit.

Bottom line: your employees will determine which consequences are more effective with them. Personal responses depend on the preferences of actual individual persons and cannot be reduced to a binary choice between A or B, cash or non-cash, personal or group, individual or team, intrinsic or extrinsic, etc.  Life is more complicated than that.  Actually, the ideal situation is to offer some of all:  the most effective total remuneration systems encompass both cash and non-cash elements in a tremendous variety of forms. 

Universal prescriptions tend to be specifically ineffective.  There is always more than one way to skin a cat.

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.

Cafe Classic: Reviving Your Compensation Plan

Editor's Note:  Jacque Vilet shares a Classic story and example for bringing new life to your compensation plan.

I’ve been reading a lot lately about what Compensation will look like in the future and I remembered a project that I had once worked on. It was in Hong Kong --- the Asia Pacific headquarters of a global company. 

Word was the employees were not happy with their pay package.  Some wanted more salary, some more medical, some more vacation, etc.

For example, one single man told me it wasn’t fair that the company decided everything about his package and didn’t ask him what he wanted/didn’t want. He wanted more vacation and would take less salary in order to get it.

I couldn’t see anything unreasonable about his request.  Yes, some companies offered flex benefits --- but this situation included cash compensation as well.

Most companies continue to design traditional programs based on a one-size-fits-all approach. Instead of this, what if companies changed their approach?  What if they handed over control to employees to configure the amount of their own benefits, perks, and cash compensation --- creating a package unique to their own personal situations.

I talked with a random sample of employees --- young, old, single, married with/without children.  This was a diverse group and I could see why their needs/wants might be different.  The recurring theme was that they would like to have some say in how their pay package was structured.

Long story short --- the regional Controller and I calculated the total cost of each employee’s current package.  Then to keep things simple, we gave each one a pie chart with sections apportioned for each pay component and its percentage of the whole pie as well as the cost of each one.

Employees then drew their own pie charts reconfigured to show components they wanted in the future as well as the percentages of each to the total package.   Since they had the total cost of their current package, the total of their new package had to match it. The company wanted employees to have at least some medical and life insurance coverage so there was a minimum level for these benefits that had to be included.  Everything else, the employee decided.

As we went through this process we saw several positives that we hadn’t anticipated.  Getting employees involved accomplished several things:

1)    Employees became aware of the total cost of their package --- not just the cash portion.  Traditional “benefits statements” are fine, but this was different.  Just seeing their package was not as good as knowing they could change it.

2)    They talked at length among themselves about the ramifications of choosing greater/lesser amounts of each available component they could “flex.”

3)    Compensation and benefits became transparent and employees gained a better understanding of how Compensation worked.

The result?  The best communication of compensation and benefits the company could ever have hoped for.

Unsophisticated?  No doubt --- but it was a start. Administrative burden?  The Controller was willing to take on the extra work.  It helped that the number of employees was only ~40.   Best practice?  This became the best practice for THEIR company.

I’m not aware of any formal research that's been done on this approach but is that really important?  If it works, isn’t that the real test?  Besides research studies can’t keep up with the pace of business today.  Companies have to be nimble and quick to change course.  Compensation needs to be too.  Waiting for research to tell you if a practice is OK will leave you behind in the dust.

We have an increasingly diverse and young workforce that has different values and work-life issues.  Getting free Friday lunches is great, but some employees would rather work through lunch in order to leave the office early to spend more time with family.

With that said who can argue with giving employees more control and at the same time making Compensation more transparent and better understood?

What do you think?

Jacque Vilet, President of Vilet International, has over 20 years’ experience in Global Human Resources with major multinationals such as Intel, Texas Instruments and Seagate Technology. She has managed both local/ in-country national and expatriate programs and has been an expatriate twice during her career. Jacque has the following certifications: CCP, GPHR, HCS and SWP as well as a B.S. and M.S in Psychology plus an MBA. She belongs to SHRM, Human Capital Institute and World at Work. Jacque has been a speaker in the U.S., Asia and Europe, and is a regular contributor to various HR and talent management publications.

Creative Commons image "Revived" by Scott Price

Cafe Classic: Hey Startups! Tomorrow IS too late!

Editor's Note: Dan Walter shares his Classic advice about the perils of waiting too long (startups, we are looking at you) to get your compensation act together.

We’ve all heard the phrase “It’s never too late.” I am sorry to tell you that everyone has been wrong. As it turns out when it comes to compensation issues, today may not be too late, but tomorrow almost always is.

One of the most consistent and pervasive issues that I deal with is helping companies fix what they didn't do (or what they didn't do correctly.) This is especially true with small companies who often don't have a dedicated compensation professional. The problem may come to light when a key employee is lost, but it is often identified far earlier then lost in the shuffle of focusing on day-to-day business.

If you haven't gotten started on your compensation philosophy, structure and long-term incentives, please get started when you finish this article.

The repercussions of waiting can be expensive, time-consuming and distracting at the exact time your company is hitting its stride. First, every company should understand its approach to compensation, often referred to as a “compensation philosophy.” Your philosophy should define why and how you plan to pay people.

If your goal is to align your employees to investors through equity compensation, you need to act immediately. If you make promises or even suggestions regarding equity that are not formalized concurrently, you are likely to find yourself delivering compensation that meets no ones expectations. Even worse you may find expectations so high, that satisfaction borders on impossible.

It no longer surprises me to have a group of 8 or 10 key employees earnestly explain how each should receive 15% of their employer’s stock. It no longer surprises me when an owner or founder believes that they are doing something great by rolling out a new program only to find out their staff was imagining something far greater. I have seen companies lose great employees. I have seen companies pay huge mediated settlements to staff members whose understanding differed from their employer’s. I have seen companies deliver compensation programs so late that any chance of gains were lost before they got started.

Are you still reading? Have you made a note to get started on fixing your compensation today?

I know you have incredible employees that are passionate about the success of your company. I know they have bought into your vision of a successful future. What I also know is that they expect things to be formalized, finalized and actualized. Every day you wait, your employees’ passion and hard work will build value in their minds faster than your company can keep up. While it may “never” be too late to get started, I promise you that “never” refers only to today. Tomorrow IS too late.

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.

 

Cafe Classic: The Innovator's Dilemma, Reward Plan Edition

Editor's Note:  A salute to the late, great Clayton Christensen, the academic and management consultant who developed the theory of "disruptive innovation." 

Think that premium employment brand and strong reward package are going to help you succeed in the age of disruption?

Think again.

In his revolutionary bestseller The Innovator's Dilemma, the late Harvard Business School professor and innovation expert Clayton Christensen explored the dilemma behind innovative, well-managed companies who seem to do everything right and yet encounter a dive in their market share or even disappear entirely.  In fact and most disturbing of all, Christensen's research showed that the things that bring and secure an organization's initial success can often become the most powerful reason behind its failure.

In their chapter within the Oxford University Handbook on Organizational Climate and Culture, Mercer consultants Richard Guzzo, Haig Nalbantian and Luis Parra tell the story of a company that experienced the reward plan version of the innovator's dilemma.  Organizations -- the authors note (and many of us know from our experience) -- often become what they reward, and pay is considered a critical expression of an organization's culture.  When a company's culture, which has been a key reason for its business success, becomes an impediment to necessary change, the reward system may be a primary culprit.

The authors share the example of Digitt, a global technology and information services company.  Digitt was renowned for a strong culture that emphasized innovation, teamwork, employee participation in decisions and performance-based pay.  In studying Digitt, the authors took a "big data" dive, conducting an internal labor market (ILM) analysis that drew on up to 10 years of employee data in order to statistically measure, model and ultimately understand the most important drivers of workforce outcomes.  In addition to other findings, the analysis revealed the following two characteristics of the company's reward program:

• Digitt had a strong internal labor market that was insulated from outside labor market dynamics.  Talent was built from within, with the most successfu employees entering the organization right from school and advancing internally.  Mid and late career professional hires were infrequent.  Most open positions were filled internally through promotion or transfer.
• Because Digitt's performance rewards were predominantly group-based, pay variations reflected business unit performance much more than individual performance.  As a consequence, an employee's tenure and business unit location were the biggest drivers of pay.  There was little variation in the level of rewards flowing to the lowest performers versus the highest performers.  (In fact, the authors concluded that close to $100 million a year in rewards flowed to lowest quartile performers when all elements of "performance-based" pay were added up.)

Digitt, in the face of rising competition and technological change, found itself in a place where it had to transform both its business model and its product/service offerings -- a transition that had enormous implications for the skills and capabilities of its workforce.  It needed, in essence, to renovate its talent base. Unfortunately, the company's cultural reality, driven substantially by its reward practices, threw some substantial roadblocks into its path:

• Being handsomely paid based on their tenure and their position in declining yet still profitable business units, there was little incentive for those with outdated skills and capabilities to leave.
• In contrast, newer employees with more relevant skills and experience were disadvantaged pay-wise by a system that rewarded tenure and reflected their placement in newer business units that were still ramping up and not yet profitable enough to reap the rewards of existing incentive and profit-sharing plans.
• The problems above were exacerbated by the insulation of Digitt's internal labor market and the lack of market-sensitivity in its reward programs.  As the authors noted:

Internal labor market signals about relative value were telling lower-performing analog engineers to stay at Digitt, even as external labor market signals would have communicated depreciation of their value...

The lesson is this:  When business conditions change, as they now do at an ever quickening pace, the very culture and reward programs that created success could now be an obstacle to sustaining that success ... or even surviving.  That speaks to a level of vigilance that I suspect few of us are keeping.

I'll bet some of you are living your own version of this innovator's dilemma. 

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 "Oops - Part II" by Kyle May

Cafe Classic: Don't Use Pay as a Babysitter

Editor's Note:  In this post, Chuck Csizmar addresses this Classic problem practice, a favorite of ineffective managers.  I'd wager that many of you have your own pay baby-sitting stories to share...

Have you ever used a babysitter?  This is when you have someone else assume your responsibilities while you take a break and focus on something else.  The babysitter stands in for you, is you during the period of your absence. 

Typically we think of babysitting when there’s a dependent child involved, but in the workplace it’s not uncommon for ineffective managers to use the same concept when dealing with their employees.  These managers seek to use the pay that their employees receive as a surrogate for leadership – for keeping those workers complacent, retained and generally “in line.”

The practice of manipulating rewards presumes that the employee will chase the money, and will be happy with their lot, while at the same time will not require much in the way of supervision, periodic direction or even meaningful conversation.  The thinking here is that, if I provide you with enough reward you will act as desired in order to not jeopardize those payments.  The goal is to place the employee’s attitude and performance on automatic pilot while the manager is engaged elsewhere.

So far, so good.  Not necessarily a problem.  The red flag goes up the pole when you consider whether these monies are warranted by either performance or business need, or are they simply bribes?

What are we talking about?

Scenarios where pay is used in lieu of actual management are easy to spot.

• The Grand Giveaway:  Where managers try to give away as much money as they can to as many as possible, not worrying overmuch with distinctions between individual performances.  The key is to build an employee's appreciation of their manager’s largesse.

• Title inflation: The promise of bloated and meaningless titles that distort organizational structures, for the prime purpose of rewarding employees in lieu of cash.

• Over rated performance:  Playing the good guy by over-rating performance during salary reviews.  Culprits are often seen rewarding activity over results.  So look busy!

• Assured compensation: Take the risk out of rewards and encourage an attitude of entitlement.  Everybody receives an annual merit raise, everyone earns a bonus. 

• Counter-offers: “Let’s make a deal” attitude to keep resigning employees from actually leaving; a dangerous practice that increases costs and lowers morale.

What’s the cause of this behavior?   Managers typically receive inadequate training (if any) on how to use their company’s pay programs, so many use pay as a crutch.  Spending the company’s money effectively and efficiently isn’t on the radar screen.  They use pay like a club to get an employee’s attention.  And once they have it the manager is off doing something else – with the presumption that pay will substitute as supervision and motivation while the manager is absent – kind of like a babysitter.

Weak and ineffectual managers don’t actually manage their employees, in the sense of performance direction, leadership, setting good examples and decision-making.  Instead, they want to be liked.  They want to avoid conflict and they don’t want anyone to quit.  They want employees to get along, and to help foster a friendly team atmosphere they try to manipulate pay in support of their efforts.

It’s really kind of a bribe.

So what is “managing” to these people?  It’s not about making hard decisions.  Too often it’s trying to get the most for their employees, deserved or otherwise, whether the organization gains in the process or not.  The manager is focused on their own interests, and is using someone else’s money to fund their behavior.

Why it doesn’t work

Relying on pay as a replacement for management has a short effective life cycle.

• Employees see arbitrary same-same pay treatment as de-motivating to high performers.  Why bother extending yourself if you’re going to receive the same reward as the guy doing crossword puzzles?

• Employees resent favored-son treatment and those who benefit for non-performance reasons will always become known.  There goes your morale.

• No amount of money replaces the value of honest performance direction and feedback.  Those with an interest in learning and growing appreciate the help.

• Absentee managers lose the respect of their employees, who know what’s going on.  Remember that employees leave managers, not companies.

For managers who need a crutch to help motivate and retain their employees, to help them do their jobs, the above cautions likely won’t make a difference.  Their goal is not to manage, but to get-by, to be liked by their employees and to avoid disruptions to their routine.  This is not leadership, but administration.

But for those managers who wish to make a difference, who understand that managing employees is a challenging and rewarding role, abrogating responsibility through babysitting is not an option.  They recognize it as the opposite of management, a damaging practice that will not enhance anyone’s long term career prospects.

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.

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: Broadbanding in the Age of Equity and Analytics

Editor's Note: It is interesting to watch concepts that came into play and popularity during an earlier era be "rediscovered" (and sometimes even "repurposed") by the profession.  Ah, the arc of history.  Case in point today: broadbands.  

WorldatWork, in its glossary of reward terms, provides us with an appropriately succinct definition.

Broadbanding: A pay structure that consolidates a large number of pay grades and salary ranges into much fewer broad bands with relatively wide salary ranges, typically with 100 percent or more difference between minimum and maximum.

On its surface, the appeal of this is easy to understand.  Fewer "grades," coupled with wider ranges sounds like less structure, less bureaucracy, less administrative work and more flexibility.  In theory, that's true.  In practice, it can be a little more complicated.  The complications arise because broadbanding, at least as it was originally conceived, wasn't designed to support the traditional job-based work and pay program designs that are still the norm at many (perhaps even most) organizations.  It was meant to support more broadly-defined roles, to support and reward lateral growth and career development. 

When you collapse a pay structure into fewer, wider salary bands, at least in the "pure" sense of broadbanding, you effectively give up the control point (market reference or midpoint) of a traditional salary range.  Which makes perfect sense if you've moved away from job-defined work and pay, and are no longer concerned with setting and managing salary opportunity based on the attributes and value of a discrete job - if you are moving instead to managing pay opportunity by the skill, competency and/or performance of individuals within more broadly defined classes of work.

The issue with - and my personal objection to - broadbanding is when it is chosen simply as an easier, more flexible way to manage job-based pay by organizations that have not invested in the processes required to manage individual-based pay.   A pure broadbanding approach leaves these organization with a very wide band of salary possibility, now less a meaningful control point. They've removed the guard rails that control by job used to offer, made the margin for error now alarmingly wide, and created a system whereby effective salary management demands an ability to define and defend how individuals should paid within that wide range of possibility without the necessary support systems.  They encounter issues in areas like career advancement, when expectations born in the age of traditional jobs bump up against the new broadbanding realities and things like promotional opportunities vanish.  And yes, I know that many organizations will address this by adding a series of control points and sub-bands within their broad bands, to provide more guidance and control to salary decisions.  To which I say:  Gosh, that starts to sound a lot like a series of traditional salary ranges.  

Here's the thing though.  As we get better and more sophisticated in HR analytics, in understanding and measuring how employees create value in their work, perhaps we'll have a new data-grounded, person-based valuation foundation to pair up with a broadband approach.  Perhaps an alliance between rewards and analytics will lead us to a new renaissance in banding, featuring rigorous approaches to measuring how people grow in value across a broadly defined work class.  A BroadBanding 2.0 (or 3.0 or 4.0...  this cat's had a lot of lives).

Or perhaps the precision and rigor of analytics, as it gains a stronger foothold in rewards, will lead us in the opposite direction - to more narrow and precise salary opportunities.

Your thoughts?

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.

Cafe Classic: Eternal Sunshine of the Spotless Mind

Editor's Note:  There are several versions of the famous quote "Those who don’t know history are destined to repeat it" and it is attributed to individuals ranging from British statesman Winston Churchill to Spanish philosopher George Santayana.   Regardless of its roots, this statement is as true in the sphere of reward programs as it is in any other, as Dan Walter explains in his Classic post.

In the world of pay, we are almost always looking forward to the upcoming year or more. We often operate with little or no reference to our histories. If we are going to measure our success, we should probably understand the path that got us here.

I often work with companies who can provide very little information on how and why they are in their current state. They can speak in broad generalities, but the details are hard, or impossible, to grasp. None of these people are dummies. To the contrary, most are smart professionals who work hard to make the best decisions every year. How well can you explain your past decisions and actions? 

What did your survey data look like three years ago? How did pay for each position align to it? Do you have these details and do you communicate them in any reasonable way?

How about your LTI plan? What were the specific "asks" and "expectations" five or six years ago How well did you meet these objectives and did you ask your employees or executives how effective the plan was in motivating them to those achievements?

Things in the past get fuzzier over time. This is especially true for tasks that require complex decision-making and involve discretion. We make hundreds of small decisions like this every time we benchmark compensation, determine incentive pay levels, set goals, and decide on merit increase minutiae. When we look back even a couple of years, the drivers of our decisions are often difficult to explain or defend. In a data driven world, our eternally spotless minds will prove to be an insurmountable obstacle.

A growing best practice is building regular reporting summaries at critical decision and measurement points. These summaries often include pictures or easy data visualization because our brains are best at remembering images. These summaries become a diary of our past. At their best, they also include the "why" of each decision. This approach to remembering history is seen in things like "Facebook memories" and old family videos but is very new to the world of total rewards.

Imagine if as you started planning each year you could quickly review the key decisions, failures, and successes that brought you to your current position over the past several years. While there are all kinds of tools that can help with this, a simple solution is a series of slideshows. 

Build a template for each program or process. Every decision cycle, usually annually, but more often for things like sales plans, create a quick set of charts representing your current state and desired state. Put together a bullet point of why you made key decisions. Then each following year, add new slides linked back the prior slides. As time progresses, you will easily be able to track whether you’ve been delivering real value (or not).

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.