Compensation Cafe

COVID, Mission Critical Skills, the Haves and the Have Nots

It can be, in my experience, a tough-to-swallow fact that not all skill sets are equal in the eyes of the labor market.

It may not be a happy reality, it may not seem "fair" to some, but it's a reality we have to acknowledge and navigate through in defining and executing on our reward strategies.  Organizational success in our fast moving, knowledge based, technology driven and disruptive world will require and become more dependent on certain types of human talent and competencies.  Those who invest in attaining and developing those capabilities will command a premium price for their skills.

Related to this is a concept that is pushing to the forefront of base salary management.  It is the idea that base salary decisions can no longer hang simply on the traditional merit matrix variables of individual performance and position in range, but must increasingly reflect the need to invest in talent that is critical to the success of the organization's mission.

My discussions on the concept of mission critical skill in presentations and client meetings usually generate a lot of questions.  Some of these focus on the approach and process for figuring out which skills are critical for a particular organization; others reflect concern about the impact of this delineation on the workforce.  What about the "have nots" who still do important work for the organization?  Won't they be demotivated to learn they've been excluded from a category defined as "mission critical"?

I think this is an important talent management question going forward, particularly in the wake of our collective COVID experience.  The market is going to keep doing what the market does: acting as our arena of exchange where supply and demand work to drive up the price of skills and competencies that are the most critical to the most organizations.  We must figure out how best to respond to this from the standpoint of our organizations' talent needs, but we must do so in a truthful, forward-thinking and compassionate manner.

I believe we owe our employees an education in how the talent marketplace works, and the impact it has on compensation practices and opportunities.  Employees need this information and understanding to make the best possible decisions about their own careers and livelihoods. 

But more than that - wouldn't it be in everyone's best interest if we took it a step further?

What if we not only identified and tracked the skills and competencies critical to our organizations - today and into the future, but also communicated this regularly to our employees?  What if we regularly shared specific information on the kinds of education and certification steps it would take for employees to retool in these areas?  What if we tailored our tuition reimbursement and even flexible work options to support an employee's pursuit of these credentials?  Offered internal apprenticeship or mentoring connections to help them along that path? And made this a part of every performance management discussion?

This so that every employee who complains about the unfairness of not having and being paid for mission critical skills could be pointed to a coordinated set of resources to help them make the necessary investment in themselves to get there.

Wouldn't that, in fact, be a very smart investment for the employer as well?

I'm certain that there are forward-thinking organizations out there already on the cutting edge of this practice.  We'd all love to hear from and about them!

Ann Bares is the Founder and Editor of Compensation Café,  Author of Compensation Force and Managing Partner of 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 reading in her spare time. Follow her on Twitter at @annbares.

Can You Depend on Solid ROI for Expensive Elite University Hires?

If you were hiring for an entry-level position, how much more would you pay for someone who had graduated from Harvard? How about Cornell? Would you be willing to pay as much for that candidate as the one from Harvard for the same job?

These are useful questions to ask yourself if your recruiters and execs are fond of hiring from the top universities in the country. Though a more important question is, "Do you get your return on investment for these hires?" Or, "Are you overpaying them for their full tenure with your company -- and spending more than necessary?" Employment discussions involve Compensation, front and center, so insights into the impact and cost of these employment decisions would be worthwhile.

Is there predictive data that can guide us? If the most recent research published in Harvard Business Review (HBR) is any indication, the answer continues to be not so much. This report talks about "nominal" differences in groups, but that word just helps them communicate what they've found and sidesteps the fact that the data may not be either robust or predictive. Nonetheless, the data does suggest a few valuable analytic opportunities if you read between the lines.

1. What do you want the candidate to do? Sounds like the perfect no-brainer, but there are opinion leaders who believe that college performance doesn't translate to company performance. One thing the HBR data points out is that there IS a performance difference in the following new hire competencies, with the elite university grads coming out on top: Knowledge in field; technical and business writing; team leadership and coordination. So if the position that you are sourcing prioritizes any or all of these, an investment in an elite university hire should pay off. On the other hand, what if you're hiring for an entry-level position with a tall career ladder over it? You may be in danger of overpaying if you consistently seek out elite university hires and pay them a premium.
2. Who are you hiring? It's likely, given the small number of new graduates from elite schools, that you will hire an "average" student from a top school. Will her/his performance be better than a top student from an "average" school? Face it, you risk missing out on real talent (at a lower salary) if you keep your recruiting pools too restricted. While bleeding-edge technical knowledge may be critical to some organizations, knowledge and skills customized to the company -- and thus, only learned on the job -- are becoming more and more important to companies that differentiate on product knowledge and/or customer service.
3. How good are you at this? Does your company have a reliable career development infrastructure? Do you use career levels to price jobs? If the answers are no, there will be few ways to rebalance total compensation as employees move up in the organization. If you are under pressure to over pay, study your practices to see if they hold up. Did those highly paid recruits of the past reliably provide exceptional performance? How did their performance trend over time? Most importantly, how does the trend line compare with other new hires in comparable positions? These metrics will provide useful insights into your practices, as well as discussion points when the time comes for the next expensive hire.

Margaret O'Hanlon, CCP brings deep expertise to discussions on employee pay, performance management, career development and communications at the Café. Her firm, re:Think Consulting, provides market pay information and designs base salary structures, incentive plans, career paths and their implementation plans. Earlier, she was a Principal at Willis Towers Watson. A former Board member for the Bay Area Compensation Association (BACA), Margaret coauthored the popular eBook, Everything You Do (in Compensation) Is Communications, a toolkit that all practitioners can find at https://gumroad.com/l/everythingiscommunication.

The Squeak of the Hamster Wheel

Round and round it goes, where it stops, everyone knows. Lately, I have been wondering what it will really take to change things in the world of compensation. It would seem that we have more than enough motivation to result in real changes to compensation practices that have been ineffective, or worse, seemingly forever. There seem to be enough incentives to create more successful companies and pay people in a way that allows them to have better lives. A large number of Human Resources and Compensation professionals seem engaged enough to give them the push to make materials improvements. But the hamster wheel keeps squeaking.

Recently released data and articles imply that 2021 compensation budgets will look much like 2020 budgets (and those from 2019 and 2018). Those same sources indicate the mix of pay elements at most companies is not expected to change. This is true even though there is plenty of evidence that most of what we have been doing with the basics of base pay, short-term incentives, and equity compensation have had limited impact on employee attraction, motivation, retention, and engagement.

Topics like Diversity, Equity, and Inclusion have been concerns for at least a couple of decades. We still regularly see unintentional bias in both base pay and incentives. Pay data may be generic, but its application continues to be unequal. And yet, the majority of companies have either no plans or no funding to make the often easy changes that would truly improve these problems.

Our new focus on remote-work has given rise to questions about long-held practices regarding the productivity of employees when working away from the office. Evolving remote-work practices have also directly impacted the breadth and depth of talent markets and legacy assumptions about the cost of labor. We continue to apply old school recruiting tactics to an already-changed modern workforce. Companies also apply oddly local geographic differentials to employees who can be hired by companies anywhere while delivering their effort and expertise from anyplace.

The use of equity compensation plans at most companies remains much the same as it was decades ago. This is despite the fact that companies are far larger than ever, and retention has fallen in industries that use equity heavily as a “retention” tool. Most plans have the same vesting, termination, and expiration periods that have existed forever. Nearly all pre-IPO companies still grant early equity as if they plan on going public with 250 employees in five or six years, despite many IPOs having a thousand or more employees. Most investors control pre-IPO dilution like they are aiming to get 20% of a $250-$500 Million company, even though the average tech IPO is north of $1 billion dollars.

I can, of course, go on, but I will stop and offer a few potential solutions.

• What if we started our decision making process by determining what we wanted to accomplish, rather than what the “market data” says?
• What if we acknowledged our past limitations and created approaches to pay that took a path less-traveled, and perhaps more likely to provide better results?
• What if we stopped applying “what we already know” and started figuring out what we should know?

Correcting things will not be easy, but it’s got to be easier than looking back in a few years and realizing we are squeaking along on the same old hamster wheel. In the comments please tell anything you believe compensation does so well that there is no room for real improvement. Also list anything that you passionately believe we can, or must, address in the upcoming year.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He is a “Compensation Futurist” who works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including the only 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.

Pay Transparency Check-In

Wondering whether there's been any progress on pay transparency? Mercer just compiled research from a number of sources. Their short report is something you'll want to check out. Here are a few highlights that are top of mind.

Are you worried that your company hasn't made enough progress? Only 14% report achieving significant or extreme transparency, so odds are you're in good company. 46% report achieving moderate transparency, which is like being sort of . . . Well, you know . . . but it does indicate that transparency is the goal of about 60% of the study participants. A hefty number that signals employees will start comparing your company's pay transparency practices to your competitors' soon.

The report provides a good working definition of pay transparency: " . . . establishing and communicating pay practices that help employees understand how their salary is set in the context of market and business realities. The goal is to build employee confidence in the fairness of that process." 

Pay attention to that wording -- the definition refers to both "establishing" AND "communicating." To begin any work on pay transparency, you'll want to give your programs an honest assessment. Odds are your program could use some updating to improve alignment with your pay philosophy. Don't let that work stop you cold. Instead get yourself started by recognizing that a program refresh will be stage 1 of your pay transparency project, followed by the communication strategy.

An interesting finding: HR professionals tend to confuse "pay transparency" and "pay equity." Pay equity is studied through metrics that illuminate your practices. The outcome of a pay equity study is an analysis of what causes pay inequities and plans for fixing those identified. So, pay equity work may or may not be part of your preparation for pay transparency improvement, depending on your current status.

The report points out that the only time employees have detailed conversations about their pay is when they are being recruited, and even then there is limited transparency about pay practices. Plus, the rest of the time, it's still just a quick 15-minute, once-a-year chat. A missed opportunity, if not a real trust-buster, given employees' growing expectations about pay transparency. If you want to change these practices at your company, the report offers further research findings plus practical advice.

Ready to get started on communications? Check out this series on Compensation Cafe: What pay transparency means, where to start, how to talk it over with executives, and deciding how far to go.

Margaret O'Hanlon, CCP brings deep expertise to discussions on employee pay, performance management, career development and communications at the Café. Her firm, re:Think Consulting, provides market pay information and designs base salary structures, incentive plans, career paths and their implementation plans. Earlier, she was a Principal at Willis Towers Watson. A former Board member for the Bay Area Compensation Association (BACA), Margaret coauthored the popular eBook, Everything You Do (in Compensation) Is Communications, a toolkit that all practitioners can find at https://gumroad.com/l/everythingiscommunication.

You Can’t See the Forest for the Trees

As we move into the compensation planning season, I thought it was time for a quick reminder to focus on keeping things simple. Over-complicating the basics of pay, can make it impossible to successfully accomplish the most complex things. So many small and mid-sized companies work so hard to make base pay “perfect” that they have no time or energy to build effective short-term incentive plans or rational equity compensation plans. This complexity may be driven by a slavish adherence to a flawed compensation philosophy. It may be driven by a desire to parse and define roles until nearly everyone in the company has a unique job title. Simplifying the basics of your pay programs is often the first step to a more robust approach to total rewards.

Let’s start with an important set of facts. It is important to get base pay right. It isn’t possible to get base pay perfect. Some companies are on the hunt for the perfect compensation data set. Others are focused on targeted some unachievable perfectly equal targeted pay level. Pay data is not exact. It is averages and ranges driven by a stew of data submitted by survey participants and aggregated by survey firms. The 50^th percentile is a rough guess that depends on how you pulled the data. A good motto may be “close enough.”

A good compensation philosophy should drive decisions not dictate pay amounts. Your pay levels should reflect your needs. Of course, it is important to have a goal for consistent pay, but straying from the norm to get the talent you need is a perfectly acceptable approach. Every decision must be made with both the current candidate or employee and the view of the entire company in mind. When you “go outside the lines”, make sure you take a step back to understand the impact on the picture as a whole.

Market pricing does not mean that every person is a unique snowflake who should have a special title and unique pay amount. I like market pricing, especially for smaller companies. But it seems like many people start with a pay amount in mind and cherry-pick data until it shows the desired outcome. This is crazy. If you think someone should be paid $84,500 and the data says they should be paid $81,000 adjust your opinion, not the data.

Simplifying pay does not mean the creation of broad pay bands, nor does it mean creating traditional pay structures that may not reflect the nimbleness your company needs to compete for talent. Perhaps it’s better to look at it like impressionist art. The goal is to communicate the total picture, not the specificity of each brushstroke. With a less didactic approach, you will spend less time on the basics, giving you more time to build and communicate other elements of total rewards.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He is a “Compensation Futurist” who works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including the only 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.

Insiders Vs. Outsiders

Have you heard this complaint?  “The Company would rather pay more to a green outsider than give one of us insiders a decent promotion”?

The complaint is that, when considering two individuals for the same job, someone on the inside oftentimes will receive a lower salary than if the company went outside to hire a stranger.  To compound the insult, it is not unusual for managers to ask insiders to train and orient the new ‘wunderkinde” as to how the company operates.

Aggrieved Employees

Aggrieved employees feel that an insider already knows the company, the people, the products/services as well as the policies/procedures.  That knowledge and experience is an advantage, they say, shortening any learning curve and cultural orientation.  Taking on the role and responsibilities of the new position and not being paid the “going rate” seems unfair – a penalty for being an insider.  It’s as if the company realizes they don’t have to pay as much for an existing employee, that the time spent in the company somehow reduces their market value and limits a willingness to pay a competitive wage.

Some insiders may feel that the technical experience they have gained in their current job could be used in the new position, so in effect they have already prepared for the new role.

However, prevailing practice seems to be that, when a company looks to the outside recruiters will be instructed to search for someone who already meets all the qualifications of the job; an experienced candidate who has already performed the job, whose only learning curve would be a short term acclimation to the new company’s policies and procedures.  Outsiders are free of “baggage”: no biases, preconceived notions or social network, and are thus considered more likely to become agents for change within the company.

You should also note: if someone already has performed the subject role the chances are good that they are already being paid about the competitive or going rate.  If that is the case, then the company would be forced to pay a premium to attract such a qualified person.  They would likely have to pay above the going rate (or above the midpoint in some companies).

Another office complaint is,“I’d be paid more money if I quit and the Company rehired me.”

Unfortunately, there is some truth to this gripe.  Over time the external marketability of good performers is rarely matched by annual performance awards within the company.

Merit increases averaging 3.0% may not keep pace with competitive wage growth, especially for in-demand skills.  Over time a company would find the prevailing wage greater than what they are already paying experienced people.  And if you must hire an experienced person you would likely have to pay more than the going rate, thus potentially creating internal equity issues.

You can do the math; if market pay increases at a faster rate than annual performance rewards, employee pay will fall behind.  At some point this will become a serious problem.

What Can You Do?

First, let’s look at promotions.  How can you best position yourself for the inevitable comparison with an outside candidate? 

You should compare yourself against the description or requirements of the new position and try to be as honest as you can with your internal assessment.  Can you perform this job from Day 1, or how much of a learning curve will you need?  Are there aspects of the new responsibilities that you haven’t experienced before?  The results of this assessment will give you an opening for your talk with HR.  They will push the “we’re giving you an opportunity” angle, and you both know they could always go outside for likely a better qualified candidate.  In fact, an advantage you have is that you are likely a cheaper choice for the Company.  So do not push the pay issue too hard, or you risk throwing the baby out with the bathwater.

When you’re doing your self-assessment, remember this checklist: 1) Are you already familiar with the company policies, procedures and personnel? 2) In your present role have you already demonstrated an ability with the technical side of the new position? 3) Remember that internal promotions look and sound good to other employees, and managers know this; 4) Can you develop an inside track with the manager (the all-important “fit); and finally 5) Reality is that you are likely a cheaper option than hiring from the outside.  Use that fact to your advantage.

The cumulative impact of annual salary increases is a harder issue to resolve, in that all employees are likely being reviewed at the same time.  Special treatment for you might create equity or precedent challenges for managers – both of which HR would have warned them against.  You want them to rock the boat, so you’d best come prepared with an argument for why your salary is not reflective of your worth to the company.

Don’t be afraid of compromise.  Your plan should be to gain visibility for your performance and value, though it may take some time for a positive result to work its way through the bureaucracy.  No matter what you gain from your initial conversation (short of complete victory!) suggest a follow-up salary review in three months.  Managers know they’d have a better chance of getting an adjustment approved after the general employee review, when it’s more likely an exception would be approved.  A manager who agrees to that review (and who will be thankful to avoid a contentious meeting) is already halfway to approving an adjustment down the road.

By being aware of the restrictions your managers are operating under you may be able to help them help you.  Don’t beat yourself against the wall of bureaucracy, but plan for your next step; use your internal knowledge to your eventual advantage.

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 "Value Dice," by Stuart Miles

Cafe Classic: Google's Big Data Insight... People Should Make People Decisions!

Editor's Note:  Well here's a golden oldie (circa 2014).  Does Google still stand by this conclusion?  In age of AI and machine learning, do we?  

As we in the rewards field move forward to better understand and embrace the promise of data and analytics, we do well to heed the lessons of the forerunners in this field.  Who better to learn from than Google, famous for making all manner of decisions based on data crunching?

In an address at the company's re:Work conference, Google's VP of People Analytics and Compensation, Prasad Setty, shared the story of a very instructive failure that his team faced.

Setty noted that when he first joined Google in his role (7 years ago), one of the first exercises he was involved in was creating a rallying cry for the new People Analytics team.  The result, a mission statement of sorts for the team, was as follows:

All people decisions at Google are based on data and analytics

"We wanted data to spit out our people decisions," Setty says.

Fast forward to what has historically been one of Google's most important rituals: a twice annual summit built around making promotion decisions for software engineers.  Promotions are a big deal at Google, a critical reward element - particularly for this core group of employees.  Two times every year, hundreds of the firm's most senior engineers from around the world come to the Bay area, where they camp out at the Santa Clara Marriott for several days of meetings and small group conversations.  A complex process involving nominations, appeals, appeals of appeals, etc. that Setty likens to the Supreme Court.  The outcome of this very people-intensive proceeding: decisions on which software engineers should receive promotions.

In light of the enormous amounts of time and energy being invested in this process, the People Analytics team decided to step in and help their "engineering brothers and sisters" find a way to make these decisions more efficiently.  Using the available data on promotions and analytics, they developed an algorithm, a decision-making model to determine which employees should receive promotions.  Here it is:

The People Analytics team was excited.  Their model showed 90% accuracy in predicting about a third of the promotion cases, and their testing showed it to be reliable and stable across multiple promotion cycles.  They thought that their engineering cohorts -- people who lived in the realm of search and ad algorithms all day long -- would love it.  But they didn't.  Not, according to Setty, one bit.

Why?  Setty explains:

They didn't want to hide behind a black box. They wanted to own the decisions. They didn't want to use a model to do so.

While the promotion committees, unwilling to use the model for decision-making, did find it useful in examining and understanding the decisions they made, Setty took another lesson from it for himself and his team, what he refers to as his "Homer Simpson Doh moment."

He elaborates on that lesson and the impact it had on his team's work going forward:

People Analytics wasn't going to be in the business of developing algorithms to substitute for or replace human decision makers.  Instead what we were going to be all about was to arm these people with much better relevant iformation so that they can be capable of making better decisions.

Makes a lot of sense to me.  How about you? 

Watch Setty's entire re:Work presentation here.

Got your own data analysis/AI/machine learning failure/successes/lessons to share?

Ann Bares is the Founder and Editor of Compensation Café,  Author of Compensation Force and Managing Partner of 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 reading in her spare time. Follow her on Twitter at @annbares.

Time for a Termite Inspection!

I live in a house that is more than 100 years old. It was maintained well over the years but, like all old homes, it needs regular maintenance. My neighborhood is filled with many homes built around the same time, and a few homes built very recently. A few months ago, a house a couple of blocks away just disappeared. One day I walked by and it was sitting there, looking resplendent in its new coat of paint, with a “for sale” sign out front. The next week I walked by and there was only an empty lot. It was jarring.

If you have ever bought a home, you have probably experienced the anxiety of a termite inspection. Oddly, this is something that we seldom do when we have been living in a home for several years. It’s as if we believe that termites will respect our ownership and focus only on neighboring houses. This attitude usually prevails right up to the point where something crumbles, or the insects start crawling out of the woodwork. In the case of my neighborhood's missing house the inspection showed that the house was mainly made of paint. The termites had eaten everything important and there was no way to save the structure.

Every compensation professional who has started a position at a new company has experienced their own version of a termite inspection. You get your bearings and immediately dig into everything the prior person did or did not do. You make a list of trouble spots and determine if you can solve the issues with a little bit of targeted work or a bigger process. Sometimes all you find is a nice paint job. Maybe it's a well-written compensation philosophy or handbook, but no real foundation or structure to support the pretty documents.

There is really never a great time to do a termite inspection. But it is far better to do one before the issue becomes unfixable. Like a long-time homeowner, we seem to think that our presence alone is enough to ward off the destructive pests. In reality, the pests do not care if you or I exist. They are only focused on what they need. Our objectives do not factor into their lives. Without regular inspections, we may find we live in a house made of paint.

Luckily, we can build these inspections into our regular compensation calendar. We can even do partial inspections on different elements of pay at different times of the year. The reason for this post now, while you are swamped in COVID-19 response and recovery, is simple. If you look closely, right now, you may see the early signs of an infestation. Maybe your pay programs are not flexing well to remote work. Perhaps your legacy equity grants are no longer useful, or maybe your grant leveling methodology has been exposed as inefficient or ineffective. And, of course, there are the more obvious issues like short-term and sales incentive plans.

Now is the time to evaluate your programs like a new homeowner. The “new normal” is likely to be newer than planned and far, far less normal than desired. Getting ahead of things now may prevent having the house disappear unexpectedly in the future.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He is a “Compensation Futurist” who works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including the only 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.

Mark Zuckerberg is Wrong About Remote Pay

It has always been inevitable. Remote work was always going to become a major piece of the success of many companies. The current situation has just pushed many into the future sooner than they had planned. There is a lot to unpack with a remote workforce (perhaps something for a future series of posts). For right now, let’s just talk about compensation. A couple of weeks ago Mark Zuckerberg not only announced that many employees would be able to work remotely, but they should also expect their pay to be adjusted according to their remote location. GitLab uses a formula to adjust the pay of their workers according to their remote location. A recent article says Canadian employees should expect the same. My question is: Why should this be the case?

The prevailing thought seems to be that we pay people not based on what they do, or how they do it, we instead pay people based on how much it costs for them to live. This is the only conclusion one can reach from pay adjustments because a remote worker moves from somewhere pricey to somewhere inexpensive. Based on this stream of thought someone might think you should pay those who save and scrimp less than those who spend and waste.

Do you currently pay people who live farther away from headquarters less, simply because they wanted to save a little money on housing? Companies apparently believe that people will only move to cheaper locales and therefore allow the company to save some money on pay. If they were remote, who you also adjust their pay upward if they move from Queens to Manhattan, or Gilroy to Palo Alto (please take a moment to imagine your own proximate locations with lower and higher costs.

Let’s imagine a different world. This is a world where three individuals deliver the exact same quality and work productivity. Let’s call them Avery, Blair, and Cameron. They all live on the same block, just a mile from the home office, but they work remotely. Each year they receive the highest performance rating offered by the company. Every year they hit all of their goals. In year three Blair moves 60 miles away to a rural town where the cost of living is lower, and schools are better. How would you adjust their pay?

Does Blair get a cut in pay? Do they stop getting raises at the same rate as the other two? What if Avery then moves to the most expensive nearby suburb. Their partner is the CEO of a publicly-traded company and covers all the bills. Should Avery be paid more?  Less???  No Change? Do you need to learn first if Avery is a male or female? Do you need to know if they really “need” a raise? Is there any rational way we can support this type of system? No. No, there is not.

It isn’t often that compensation professionals get to truly change the way businesses do business. This is one of those times. Some or all of your business will be challenged by this issue soon, perhaps immediately. You need to get to work documenting the pros and cons and your recommended approach to addressing all of them. We all need to get to work on defining the best path(s) forward on this issue. If we wait for some non-compensation person to “lead” and create the best practice for us, we will surely regret it in the future.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He is a “Compensation Futurist” who works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including the only 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: Want Results? Prove It!

Editor's Note:  Do we objectively test the results of our reward plans and programs to see whether they delivered what we planned (or assumed) they would?  Dan Walter explains why that should be part of our annual cycle and, frankly, our jobs as professionals in this Classic post.  

Most compensation professionals I know are very earnest in their desire to pay people as well as possible. They attend presentations, watch webinars, and review the latest article and the smart ones even read the Compensation Café. But, many of these same professionals admit a critical flaw that often makes all of their efforts useless. This problem is so common that it no longer surprises me when people cop to it. In fact, I am really only surprised by the small number of individuals or teams don't have it.

Getting compensation right is hard. You have to get a good handle on the company and individual objectives. You need to know the rules. You should probably understand what the market has to say about pay levels and the best pay elements for specific purposes. Then you have to put all of this together into something that reflects the complexity of the company and staff, while still being simple enough for everyone to approve and understand. Once you are through all of that, it is time to rollout the program and make sure it is managed effectively.

Then you take two or three days off and spend a week fixing minor problems and before you know it you are back at the beginning, getting ready for another year. This is what it feels like for many people in our industry. You are special, but you are not alone. This process is missing something so critical that if you were an educator you'd be laughed at for missing it. It is so essential that if you manufactured goods or software you would be deemed a failure without. Even people as diverse as scientists and artists can’t skip the step that an overwhelming majority of compensation professionals never ever take.

In virtually any profession, you are expected to prove that the work you are doing is achieving the desired results. Imagine a doctor who said, “trust me” rather than “here are the studies that show you’re getting better”. Would you go to a restaurant where you were only allowed to look at the food, but no one ever took the time to taste it? Who cares if it looks great, it might as well be made out of wax like the restaurant displays in Japan.

We ask other people to make decisions, or trust the ones we made for them. But, many of us haven't objectively measured the results for the last set of decisions and communications. We may be making adjustments on “trends” or on things that “feel” good or bad. With the exception of evaluating survey data, we almost never test our prior decisions by linking what actually happened to what was planned (or hoped for.)

Without this step, it is difficult to make the case that others should take your work seriously. With this step you move quickly from a tactical “wonk” to a strategic partner. It isn’t always easy. How do you prove results are linked to a specific program? How do you make the time when you only get two or three free days a year? Those are questions for another article. For now, I will leave you with the following questions. I look forward to your responses.

Do you objectively test your compensation decisions? What percentage of your compensation programs do you fully test each year? How has this testing led to specific decisions? Has it resulted in better support from executives or employees?

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He is a “Compensation Futurist” who works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including the only 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.