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: 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.

 

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: 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.

Cafe Classic: Can Quantum Mechanics Make Your Pay Programs Better?

Editor's Note:  One of our favorite things to do at the Cafe is to step outside the familiar confines of our jobs and look at the things we do through the lens of another field. 

Today we're going to reach out into the strange world of quantum mechanics for insights on pay program design and implementation.

Quantum mechanics, as briefly defined at LiveScience.com, is...

...the body of scientific laws that describe the wacky behavior of photons, electrons and the other particles that make up the universe. Quantum mechanics is the branch of physics relating to the very small. It results in what may appear to be some very strange conclusions about the physical world.

That, it turns out, is an understatement.  Quantum theory (which underlies the field of quantum mechanics), when it emerged a hundred years ago, turned our understanding of reality and the classic world of physics upside down.  Niels Bohr, one of the theory's pioneers, liked to say that "Anyone who is not shocked by quantum theory has not understood it."  A century after its birth, now being used daily in applications that range from MRI scanners to solar cells to DVDs, it is still considered a puzzle.

What can the murkiness that quantum physicists discovered at the heart of the atomic world possibly offer to us, who practice in human resources and compensation?  I think it is encapsulated briefly and beautifully by Italian theoretical physicist Carlo Rovelli, author of the bestsellers Seven Brief Lessons on Physics and Reality is Not What it Seems:

Reality is only interaction.

Quantum theory holds that things, at the atomic level, don't always exist.  They exist only when they are observed by or when they interact with someone or something else.  The controversial finding at the heart of quantum mechanics is that there is no objective reality independent of whoever happens to be reacting with whatever.  As Rovelli likes to put it, the things of the world can be better compared to a kiss - which only exists when it happens - than a stone.

You think of your new salary structure, that incentive plan you developed in collaboration with your cross-functional design team, as things that exist as their own independent and objective realities.  But what if that isn't true?  What if your pay plans only exist, only become real when managers and employees interact with them?  What if their reality is solely the experience that managers and employees have when they encounter the plan in their work lives.

The problem is that we often go about our jobs believing that our pay plans are like stones.  We create them, we set them neatly in their place, we write a memo or hold a communication session (maybe even several communication sessions!), and then we step back and wait for the magic to happen while we turn to our next initiative.  And we try to understand why they don't drive the changes and produce the impact we hoped for.

How would we do our jobs and plan our priorities if we considered the interaction that people have with our pay plans - rather than the plans themselves - as the product of our work?  What might we do differently if we focused our ideation, design and implementation efforts on the "kisses" - those moments when managers and employees observe and interact with our pay plans?  If we envisioned the result of our work as the net of interactions that builds over time around them instead of the content of the written plan materials?

Could this make our pay programs and our work better?

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: Compensation Work and Having Skin in the Game

Editor's Note:  Is our profession, are our jobs truly designed for success in the age of continuous disruption?  What are your thoughts on this Classic question?

Some fascinating work is being done around navigating human capital risk and uncertainty.  I think it could raise some interesting questions about how compensation jobs and functions are defined and organized. 

Success for businesses increasingly hangs on their people and the structures they create to guide and support their work.  The problem, of course, is that industries and markets can shift quickly and unexpectedly.  Your company might respond with changes in pricing, product offerings, branding or its "go to market" approach -- but how quickly can it transform its workforce to deliver on these changes?

How quickly could you (compensation professional) get your head around the differences in skills, practices and behaviors needed?  How well could you pinpoint the gaps between what you've got going on today and what is needed tomorrow (or this afternoon)?  And how efficiently can you identify the obstacles that your current reward programs -- base pay delivery, incentives, benefit plans and programs -- will toss into the path of the workforce transformation that must now happen?

It's classic Innovator's Dilemma stuff.  And I'm thinking about it today relative to the way we structure compensation roles and work.  

There's a lot to be said for growing and refining your HR analytics capabilities so that they can tip you off to the make-up of and trends in your workforce, and help you identify and respond to the risks that might exist in the people part of your value proposition.  Hopefully we in the compensation profession, as the original data nerds in HR, are taking the necessary steps here.

But I think there's also the reality of how well our compensation jobs allow us to see and understand the day-to-day reality of the work people are doing.  The eyeball-to-eyeball, ear-to-ground reality.  Skin in the game.

To have skin in the game essentially means that you have some share in the costs and benefits your decisions and actions create for others.  Do we?  Should we?  Should our functions and roles be defined to create some sense of it?

How is the compensation function in your organization structured?  Do you -- like some -- have a centralized compensation function that is tucked away in "corporate" where you must rely on HR generalists and advisors to be your eyes and ears on the ground?  Or do you -- like others -- have compensation professionals embedded in the different business units where they have more direct contact and a front row seat to the action.  

Will this become a bigger deal as the pace of change continues to accelerate and navigating human capital uncertainty becomes both more challenging and more important?

Nassim Taleb -- the guru of risk and uncertainty whose books on the topic include The Black Swan and Anti-Fragile and of whom I am a big fan -- feels so strongly about the notion of skin in the game that it is the topic and title of his next, soon-to-be-published book.  I don't have the answer to the question I raise above, but as food for thought I'll leave you with this principle of skin-in-the-gameship courtesy of Mr. Taleb, who holds that skin in the game only happens in decentralized systems.

Principle:  It it always vastly easier to macro BS than to micro BS.

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 "hands group" by Safe.Homes.Rape.Crisis.Coalition

Four Compensation Predictions for 2022

This is the thirteenth year I have written a post during the last week of the year. I seldom make predictions for an upcoming year because compensation generally evolves so slowly that any real changes take several years to come to fruition. As we head into 2022, I am going to break that tradition and make a few predictions. I think we have a unique opportunity in front of us and many compensation professionals will relish the challenge.

1. Base pay increases in many industries will be far higher than we have planned.
   if you have planned a 4% budget for 2022 and use a lag, or lead/lag, strategy, please expect to lag from very early in the year. The market is unlikely to cool. Executives are being held to high standards when it comes to growth. Investors have put a ton of money into the market. All of these will factor into increases that will continue to rapidly outpace what has become the 3% norm for the past decade and beyond.
2. Survey providers will be pressured, and perhaps forced, to address the inaccuracy of LTI data in surveys.
   This is especially true in private company data, but expect to see more demand for global granularity, award details like vesting and performance criteria, and better explanations of how values were determined. This is a weak point in the world of compensation and companies are rightfully impatient to see better data.
3. Survey providers will begin categorizing positions into “onsite”, “hybrid”, and “remote”. Survey data without this level of specificity is putting every competitive company at risk. Expect to see the first “pulse” or “spot” surveys on this topic before the end of Q3. Expect this to be a normal part of survey submissions before the end of 2022.
4. Expect to see more companies visibly break the Base/STI/LTI paradigm that has dominated compensation philosophies for 15 or 20 years. At some point, you cannot differentiate your offers with just a bit more base pay. Short-term incentives will likely become shorter to address that speed with which pay is changing. LTI programs are already changing. Leading-edge companies explored more new vesting schedules and LTI plan design elements in 2021 than in any year in recent memory. This information will become more well-known and inspire hordes of other companies to move away from the lock-step adherence to stock options with a 4-year vesting schedule or RSUs that are similarly designed. If the long-time programs worked as advertised our ability to attract people would be higher and our turnover would be lower. It’s time for a change.

I am sure we will see other changes, just like I am sure at least one of the above will prove to be completely wrong. 2022 is sure to be another interesting year. In 2020 we just did our best to react to a world that became almost instantly unfamiliar. In 2021 we weathered a push for hiring unlike any year in recent memory. In 2022, we will get our feet underneath us, gather up our balance and leap forward into a new approach to pay that may provide a foundation for the next 10 years. There is no reason to wait. The future is yours to create.

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: Compensation isn't Rocket Science... it's Harder!

Editor's Note:  In this Classic post, Jim Brennan shines a light on the challenges of rewards work and the surprising discovery that awaits many compensation pros who choose the field in an effort to escape the squishiness of other HR specialties and immerse themselves in quantitative certainty.  Not so much, eh?

Those who grew up during the Space Age are familiar with the adage, “this isn’t rocket science.”  The phrase is used to denigrate a task as not particularly complicated.  Well, those who labor in the area of Total Rewards soon learn that their challenges are a lot tougher than those experienced in rocket science.

The hard and fast rules of engineering and science don’t exist in human resource management or the total reward field.  Industrial/organizational psychology involves less precision, fewer immutable laws and a definite shortage of clear principles subject to exact definition and full control.  Any two rocket scientists can cross-check calculations, compare instrument test readings and reach complete agreement on the demonstrable facts of their project.  Any two professionals in the Total Rewards field looking at the same situation are highly unlikely to agree on much of anything.  The Heisenberg Uncertainty Principle that limits the precision of measurements in some technical issues involving the physical sciences can’t hold a candle to the variations encountered in the arcane semi-scientific and occasionally bizarre quasi-artistic area of human relations.

Compensation is harder than rocket science.  The facts of any compensation case are rarely as clear. The views and biases of the observer have stronger effects on inferences and conclusions.  Verification of input information is far more complex and problematic.  There are similarities, however, because compensation plan launches can also fizzle or blow up.

Outcome results from compensation systems are harder to forecast reliably because compensation deals with particularly unpredictable subjects.  Total Reward professionals operate on agents who behave according to the Harvard Law of Behavior.  Allegedly formulated by the graduate students of B.F. Skinner, it says, "Under carefully controlled experimental circumstances, an animal will behave as it damned well pleases."

Human behavior is very difficult to pin down, much less harness and direct by schemes to attract, retain and engage.  Engage seems a better term to use than “motivate,” since you can’t simply pump motivation into someone like gasoline (petrol, for our UK readers).  People already have their own motivations.  Engagement supplies the link between what we so hopefully dangle as a consequence of behavior and the response of the employee who embraces whatever tasty element of our smorgasbord most effectively appeals to them.  There is an obvious parallel to olfaction, where the ability to smell something seems to depend on the operative odor receptors that accept and sense material that fits into them like a lock and key system.  Without the sensor, you won’t get the signal.

Rules of human behavior are far more complex and variable than the rules of engineering and math.  No matter how hard we try to create consistent systems of uniform rules to impose on a workforce, they remain basically arbitrary and will not work with equal effectiveness on everyone.

Maybe this is why HR seems necessarily heuristic.  Much Total Rewards tradecraft is based on aversion theory, painfully evolved by avoiding what clearly does NOT work in your unique environment and eliminating all the myriad less desirable alternatives until a few options acceptable to top management are reached.

It has been said often, about HR and TR:  “This would be a great field if it weren’t for the people.”  Bottom line:  it is those very people with their quintessential combinations of variety and commonality that create the surprises and challenges of this tradecraft.  If it were simple, it would be boring. 

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 isitrocketscience.com