Compensation Cafe

Cafe Classic: Rewards and the Disruptive, Uncredentialed Misfit

Organizations that are unable to innovate and evolve will likely not survive - let alone prosper.  Few inside and outside our profession would argue the point.  What role can rewards play?

I had the opportunity to hear a great presentation on strategic thinking a few years ago and came away with interesting ideas and an intriguing book on creative invention:  The Medici Effect by Frans Johansson.  The book presents the case that new discoveries -- those that have real impact - will no longer come from within disciplines and established fields of expertise, but will instead spring from situations where ideas from multiple fields and points of view come together.  That is the Medici effect, named for the Medicis, a wealthy banking family in fifteenth century Florence.  The Medicis used their wealth to bring together and fund the work of creators from a wide range of disciplines -- from sculptors to scientists, from financiers to architects.  This diverse group of people who converged, beckoned by the Medici family, on Florence ignited one of the most creative eras in history, known today as the Renaissance.

We've discussed before how deep, specialized education in a field can potentially limit an individual's ability to think creatively.  Innovators are often self-taught (think Steve Jobs, Thomas Edison) or have pursued a broad learning experience that crossed many fields.

Johansson shares the story of Charles Darwin and John Gould as one example.  Darwin was a below average student who (to his father's chagrin) wandered around the English countryside pursuing various botanical interests and meeting with a range of scientists.  He enrolled to become a physician, then a minister, then finally decided to board a boat for a five year trip around the world to study geology on his own.  Along the way, he collected and wrote notes about birds from the Galapagos Islands.  Because they were of little interest to him, he gave the collection to John Gould, one of the most prominent zoologists of the time.  Gould, an accomplished taxonomist, assessed the collection and reported his rather interesting findings back to Darwin: that the birds were a single group of finches yet also reflected 13 distinct species -- one for each of the 13 islands.  Gould, the expert, stopped there.  Darwin went on to use this information to propose a radical notion that became a new theory of evolution, considered to be one of our most significant scientific theories.

In a more recent example, successful venture capitalist Paul Maeder discusses the important role that disciplinary outsiders, often people without formal training, play in generating innovations. For him, identifying these individuals can help pinpoint the entrepreneurial teams worth betting on.  Johansson recalls a conversation with Maeder:

"Take this guy Stan Lapidus," he told me one day.  "He doesn't have an M.D. or a Ph.D., but he has come up with an amazing way of analyzing stool samples for colon cancer pathology.  Put it in a blender, mix, and you can spot cancer with hardly any false positives.  It's really an amazing invention.  Now, why did he think of this?  Because he's not a doc."

Back to us and the organizations we serve.  Many have cultures and embedded practices that inadvertently (or perhaps by unacknowledged design) discourage, punish, even expell the uncredentialed, disruptive misfits.  Because everything we do in compensation is communication and organizations often become what they reward, I believe we have a potential role to play here -- if we can get out of our own disciplinary silos.  A nfew of questions come to mind, including:

• Could linking rewards and promotional opportunities too directly to formal education and credentials create a barrier to those who may have followed a different learning path but could bring a valuable perspective to the table?
• Are our performance management/career development/succession planning processes designed to recognize those with expertise gained in non-traditional ways as well as those who may be counter-cultural and disruptive in a way that's ultimately beneficial?
• Can we do a better job of using non-cash rewards like high visibility assignments, the chance to work on key projects, and the opportunity to participate in exciting product/service development efforts to recognize the potentially valuable "misfits" and encourage a healthy convergence of different ideas and viewpoints.

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.

Image "Leader Holding Multiple Color Umbrella" courtesy of hin255/FreeDigitalPhotos.net

Cafe Classic: Compensation Philosophy... It's Not What You Say, It's What You Do

Swiss psychiatrist Carl Gustav Jung once famously said "You are what you do, not what you say you'll do."  

With this in mind, I always smile when someone says: "We've never had a compensation philosophy."  The fact is, they've always had one, since the very first time the organization paid an employee.  They just haven't committed it to writing yet.  Or, perhaps more likely, owned up to the truth of it.  But it's there.

Even better is this: "We've never communicated our compensation philosophy to employees."  You don't need to, friend - they know what it is.  Or at least they think they do.  The question is ... do you?

Your compensation philosophy isn't what you say.  It's what you do. 

Like many a politician, it can be easy for us to get caught in the trap of falling for our own rhetoric.  We allow ourselves to believe that the act of saying something makes it true.  We lose sight of the messages that our organizations' actions are sending.  Your employees may or may not know the words in your compensation philosophy, but they are watching it in action and drawing their own conclusions.

Here's one of the lessons we can take from this reality.  Whether "creating" a compensation philosophy or reviewing an existing one, it's a smart move to start the process by taking a good look at what's really going on.  What is the reality of your compensation plans and practices, particularly as perceived by your managers and employees?

To answer the first, you may want to do some traditional compensation benchmarking and analysis.  How competitive are your pay structures, plans and actual practices against the norms of the labor market(s) where you compete for talent?  Does your competitive reality match your competitive intent?  If not, better get a good sense of where it falls short.

Next, it might be wise to get some data on perceptions.  Some of this may be captured in a regular employee survey effort.  Or it may be worthwhile to convene a few manager and/or employee focus group sessions (or engage an outside facilitator to do so on your behalf).  The purpose of this is to understand how managers and employees experience your compensation philosophy, on the ground every day.  What do these groups believe are the top priorities of the current compensation program?  What should they be?  What do these groups believe are the organization's competitive goals for pay -- and how well are those goals being met?  What gets recognized and rewarded?  What should get recognized and rewarded?

A lot of work?  Yes it is.  But a reality check like this can be critical if you want your compensation philosophy to have any hope of credibility.

Actions speak louder than words, as they say.  We all know that employees understand the difference.

Image "Cinema Clapboard" courtesy of renjith krishnan / FreeDigitalPhotos.net

 

Image by DejaVu Designs on Freepik

Cafe Classic: To Innovate in Rewards, Get Outside the Rewards Profession

There appears to be general agreement among reward professionals that the compensation approaches and protocols which have dominated practice for the last few decades are more than ripe for reinvention.  That disruptive change in the field is necessary and inevitable.

I also sense an assumption that we will be the change that we have been waiting for.  That we will lead the revolution, just as soon as we get those year-end budgets and incentive plan changes completed and find the time to get our innovation game on. 

Will it pan out that way?

A while back, Derek Thompson had an interesting article (which continues to pop up in conversation online) in The Atlantic,  Why Experts Reject Creativity, which takes a close look at the bias we all have against new ways of thinking.  Thompson asserts that not only are our brains hard-wired to distrust creativity, but that the more knowledge and expertise we have on the subject, the more hostile we are to new approaches.  And he highlights a number of research studies that support his claim.

In one study, 142 world class researchers from a leading medical school were randomly assigned to evaluate proposals for research funding.  Sometimes the faculty were experts in the subject matter being considered, sometimes not.  The experiment was triple blind, so that evaluators didn't know submitters, submitters did not know evaluators and evaluators did not talk to one another.  What the researchers found: New ideas -- those that "remixed information in surprising ways" -- got the worst scores from everyone, but were particularly punished by experts in the subject matter.

Thompson goes on to demonstrate that, in reality, most of us dislike new ideas, regardless of what we say or believe about ourselves. Ouch, right?  Read on.

Another study found that teachers who claim to enjoy creative children don't actually enjoy any of the characteristics associated with creativity, such as non-conformity.  Research conducted by organizational psychologists at Cornell University examines our bias against creativity and why people desire but reject creative ideas.   The authors of the study, in discussing their findings, note that "Because there is such a strong social norm to endorse creativity and people also feel authentic positive attitudes towards creativity, people may be reluctant to admit that they do not want creativity; hence, the bias against creativity may be particularly slippery to diagnose."  They further state that "If people hold an implicit bias against creativity, then we cannot assume that organizations, institutions or even scientific endeavors will desire and recognize creative ideas even when they explicitly state they want them."

Which means that disruptive change, innovations that move the field of play and introduce new reward management ideas, tools and solutions, might likely originate outside our profession.  It could happen out at the edges and beyond, outside the perimeter of "professional" reward practice.  And so I propose that our mission, if we choose to accept it, will be to discover, devote attention to and learn from what is happening outside the core of our field.  And then to bring those ideas in, adapting and piloting them in our own organizations.

To paraphrase the wisdom of Gordon MacKenzie, author of Orbiting the Giant Hairball: A Corporate Fool's Guide to Surviving with Grace (and IMHO one of the best book on business creativity every written!), we won't be able to truly push the boundaries of practice until we figure out how to escape tMacKenzie's Hairball -- our entanglement with the policies, assumptions and practices of the past.  Orbitting -- escaping the gravitational pull of the Hairball enough to observe and embrace original ideas and lessons -- will require that we read and interact outside the boundaries of our profession. 

A closing thought.  The fact that the events of the last few years have pushed so many of us not only outside our on-site offices but outside our comfort zones in many ways may position us for escaping our own professional "entanglements."  Does this up our odds of taking the steps to reverse any bias against creativity ... at least as it exists in our own field?

What do you think?

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 "Lightbulb in Malta" by Mark M.

Cafe Classic: Checks on the Chalkboard

Editor's Note:  Compensation and HR staff are spread mighty thin these days.  In today's Classic post, Dan Walter asks: Is everything you do necessary?  Is everything you do making it easier to get important work done?  

Is everything you do necessary? Perhaps, I should ask the question differently. Is everything you do making it easier to get everything done? Today’s post is about the practical. It’s so practical that it applies to just about everything, including compensation.

I was working with a client recently, and a lesson from a long-ago teacher came to mind. She called it “Check on the Chalkboard.” She had each student do a series of basic math problems. She then created a team of the fastest students and a team of the slowest.

The teams raced each other in a relay-style format. You got up from your chair, did a math problem and went back to your chair. In the first race the “fast team” won easily. It seemed patently unfair. The rules changed for the second race.

In the second race, the “fast team” was asked to put a check mark on the chalkboard after they correctly answered each question. The checkmark had to be placed in a numbered box (I believe there were ten boxes, representing the members of the team).

The fast team answered questions like lightning. They sprinted to the green chalkboard (it was a LONG time ago) and made a messy check in their assigned box. It seemed to take very little time even as it added an element of excitement and chaos to the race.

When the dust settled, the “slow team” was the clear winner. Burdening the “fast team” with a simple additional task slowed them enough to lose the race. The checkmarks had no purpose other than to change the outcome of the race. Each checkmark was insignificant. When they were combined, they changed the game.

After I remembered this lesson from my youth, I started seeing checkmarks in the processes followed by nearly every company. Most of the checkmarks are tiny things. Many are performed because the supporting systems have not been set up to their full capabilities. Some are a result of out-of-the-box features. Most are unique to a specific company and have no known origin. They are done, simply because “things have always been done that way.” They offer no upside. They support no known purpose. They seem to exist simply to slow things down.

In our haste, we often forget to ask why we do things. We are so consumed with getting things done; we do more than we need to. All of this can keep us from doing more important tasks, like evaluating the strengths and weaknesses of our programs and making improvements where needed.

Compensation departments are increasingly asked to do more with less. Our jobs can be complicated and our customers are every person in the company, and often many people outside it. All of those people are going to add checkmarks to our processes. It is essential that we do our best to avoid any of our making.

The best way to police your processes is to ask yourself why twice. The first thing you need to ask is: “Why am I doing this?”. If you have an answer, the next question you should ask is: “Why is it important?” If both answers make you feel warm and fuzzy, then carry on. If not, you may have just identified a “checkmark” on your chalkboard.

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: 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: 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: 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